2012 (3) TMI 58 - AT - Income Tax

Capital OR Revenue Expenditure - Collaboration Agreements for Electric Rice Cookers and Mixer Grinders - Payment in Lumpsum and Royalty - Amount Capitalized and depreciation claimed - AO disallowed 25percent royalty after treating it towards cost of acquisition of the capital asset - Held That - In view of Apex Court CIT vs I.A.E.C.(Pumps) Ltd. (1997 -TMI - 5672 - SUPREME Court) - Collaboration Agreement for Mixer Grinders amounts only to licence fee and not the price for acquisition of a capital asset. Payment to be treated as revenue expenditure . Deduction under 80HHC - Sale of Scrap, insurance claim received, provisions written back - Held That - Sale of scrap would be a part of the income from business for the purpose of computing the eligible deduction u/s 80HHC. 90% of the receipts from sale of scrap would be required to be deducted from the profits of business in terms of clause (baa) appended to section 80HHC

Issues Involved:

1. Classification of payment to Matsushita Electric Industrial Company Ltd. (MEI) as revenue or capital expenditure.
2. Disallowance of royalty payment for Electric Rice Cookers.
3. Restriction of claim of deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Classification of Payment to MEI:

The Revenue challenged the CIT(A)'s decision that the payment made by the assessee to MEI under a collaboration agreement for mixer grinders constitutes revenue expenditure. The Revenue argued that the assessee acquired a valuable right for manufacturing mixer grinders, which should be considered a capital expenditure. The CIT(A) had treated the entire payment as revenue expenditure, but the Assessing Officer had treated 25% of the royalty payment as capital expenditure.

Upon review, the Tribunal found that the technical know-how provided by MEI was capitalized by the assessee in its books of account. The royalty payments were based on sales and were claimed as revenue expenditure. The Tribunal noted that the decision in CIT vs Southern Switchgear Limited was not applicable as the facts were distinguishable. The Tribunal referenced the decision in CIT vs I.A.E.C. (Pumps) Ltd, which held that payments for technical know-how that do not transfer ownership of the technology are revenue in nature. Thus, the Tribunal upheld the CIT(A)'s decision, treating the payment as revenue expenditure and dismissing Revenue's grounds on this issue.

2. Disallowance of Royalty Payment for Electric Rice Cookers:

The Revenue also appealed against the CIT(A)'s decision to restrict the disallowance of royalty payment for Electric Rice Cookers to 25%. The CIT(A) had invoked the decision in Southern Switchgear Limited, sustaining the disallowance as partly capital in nature.

The Tribunal found that the clauses in the collaboration agreement for Electric Rice Cookers were significantly different from those for mixer grinders. The agreement allowed the assessee to part with the technical know-how in the form of a sub-license, subject to mutual agreement and government approval. The Tribunal concluded that the payment for Electric Rice Cookers should also be treated as revenue expenditure, similar to the payment for mixer grinders. Consequently, the Tribunal allowed the assessee's appeal on this issue and dismissed the Revenue's grounds.

3. Restriction of Claim of Deduction under Section 80HHC:

The assessee challenged the CIT(A)'s decision to restrict the claim of deduction under section 80HHC. The assessee argued that certain receipts, such as sale of scrap, insurance claims, and provisions written back, should be included in the business income for computing the deduction.

The Tribunal found that the receipts from the sale of scrap should be considered part of the business income but should be reduced by 90% as per clause (baa) of section 80HHC. The Tribunal also noted that the receipts from provisions written back and insurance claims did not have a direct nexus with the export turnover and thus could not be allowed under section 80HHC. The Tribunal upheld the CIT(A)'s decision on this issue, dismissing the assessee's grounds.

Summary:

The Tribunal dismissed the Revenue's appeals for assessment years 2004-05 and 2005-06, upholding the CIT(A)'s decisions on the classification of payments to MEI and the disallowance of royalty payments. The Tribunal partly allowed the assessee's appeal for assessment year 2004-05, treating the payments for both mixer grinders and electric rice cookers as revenue expenditure and restricting the claim of deduction under section 80HHC.

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