9911796707
TMI Blog1987 (9) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... how agreements and to ascertain the amount of deduction to be granted on account technical know-how fee for the assessment year.1982-83. 2, Thereafter, the Income-tax Officer passed a fresh order giving effect to the appellate order of the CIT (Appeals), on 25-11-1985. In this order, the Income-tax Officer determined the total income of the assessee at Rs. 7,03,090. While passing this order, the Income-tax Officer held that the assessee was not entitled to any deduction on account of technical know-how fees payable to the two West German Collaborators DEMAG and Weyhausen in the present accounting year and that further, the payments made by the assessee were capital expenditure. 3. Aggrieved by this order, the assessee again filed an appeal objection to the disallowance of Rs. 8,12,095 by the Income-tax Officer. The assessee contended that this amount paid by it for acquisition of technical know-how two German Companies was admissible as a revenue expenditure. The expenditure so claimed by the assessee consisted of the following two amounts : (1) Amount paid to a West German DM 50,000 in West German Company called DEMAG BAUMACH currency equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) held that according to note 10 of the 'notes on accounts,' the assessee did not produce even a single items of' Hydraulic self propelled loaders ' in this accounting year. According to him, it was quite clear that the company did not start manufacture of wheel loaders in accordance with agreement even till 26th April, 1982, on which day the Directors submitted the company's accounts to the shareholders. After referring to the Directors' report, the CIT (A) held that it was quite clear that as on 31-12-1981 and even as on 26-4-1982 the assessee only received the drawings and designs from Weyhausen, but that the assessee did not start even trial productions, not to speak of commercial production of the wheel loaders, which are also known as Front End Lorders, or as Hydraulic Self Propelled Loaders. The CIT (Appeals) next pointed out that according to the case system of accounting, the payment, of DM 50,000 made to Weyhausen pertained to the assessment year 1981-82 and the payment of DM 1,00,000 pertained to the assessment year 1983-84 and that neither of these payments pertained to the present assessment year 1982-83. He further held that even according to the appellants own mercan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the accounting year ended 31-12-1981 when the appellant-company commenced production of this AR 61 Loaders and that it had become it liability under the scheme of payment specified in article 7 of the said agreement. Shri Balasubramaniam submitted that the first amount of DM 50,000 paid by the appellant in September 1980 could not have been claimed by the appellant in the earlier years since the said amount was an advance liable to forfeiture if the agreement was prematurely terminated. He further submitted that the second and third instalments of DM 50,000 each would go together by virtue of the agreement and the conditions imposed for these two payment were fulfilled in the accounting year. According to Shri Balasubramaniam, the documents containing the complete set of manufacturing drawings were handed over to the appellant in February 1981 and that the appellant had commenced production of this product in October 1981 as could be seen from the issue of materials to the shop floor. He pointed out that the copies of the vouchers for the materials issued from the stores on 22-10-1981 and 29-11-1981 at page 23 of the assessee's paper book clearly established that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement entered into by the appellant with Weyhausen, the appellant was entitled to claim this deduction in this year, as the liability to pay this amount had arisen under clause 7 of the agreement and that the CIT (A) ought to have accepted the appellant's claim in this year for deduction in this year. He contended that the finding of the CIT (A) to the contrary and to the effect that it would come up for consideration in a future assessment year in the hands of the amalgamated company, was erroneous and that the same should be reversed. 8. The learned counsel further submitted that so far as the present item of end-product to be manufactured, there was no trial production involved and that it was regular commercial production, where the cost of the Front End Loader manufactured was nearly Rs. 5 lakhs. Shri Balasubramaniam submitted that such a trial production was not possible or feasible in the present case. He submitted that the decided cases related to cases of setting up of a new business or commencement of a new business and therefore would be of no help in deciding the issue in the present case. He submitted that the release of the drawings and designs and the raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same should be upheld. The learned departmental representative further pointed out that the facts referred to by the CIT (Appeals), namely the change in the accounting year of the appellant, as well as its amalgamation with its holding company as on 1-1-1982 were all very relevant and materials facts in the context of the present claim of the appellant and that the CIT (Appeals) had rightly referred to the same. He further submitted that in the view he had taken on the facts about the allowability of the appellant's claim in the year under appeal, the CIT (Appeals) had not examined the appellant's claim for deduction as a revenue expenditure on its merits, as this amount has been disallowed by the ITO on merit by treating it as capital expenditure. In case the Tribunal came to the conclusion that the appellant is entitled to make this claim for deduction in the year under appeal, the learned departmental representative submitted, then the matter may have to be sent back to the CIT (Appeals) for further examination of the appellant's claim for deduction on its merits as to whether it is revenue expenditure or capital expenditure. 10. We have carefully examined the contentions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be enough to show that the assessee had begun to manufacture or produce articles. The manufacture or production of articles must be in some commercial sense." After referring to the decision of the Bombay High Court in CIT v. Hindustan Antibiotics Ltd. [1974] 93 ITR 548, their Lordships held as follows at page 168 : "The test as propounded above shows that it is not necessary to find out as to when the assessee commenced manufacturing operations as such, but to find out as to when the assessee began to manufacture or produce the articles as such. The mere manufacture of proto-type may have resulted in commencement of operations, but that would not be enough, as the actual commencement of manufacture or production of the articles is the test. The passage quoted above makes it clear that the articles contemplated are articles of finished products for whose manufacture and sale the undertaking has come into existence. We are in complete agreement with this view." 11. When we examine the facts of the present case in the light of the aforesaid ratio of the decision of the Madras High Court, we have no hesitation in coming to the conclusion that the CIT (Appeals) has rightly rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly after receipt of necessary components imported from Weyhausen. Marshall shall not be entitled to the return of the sum if for any reason this agreement should be prematurely terminated. Marshall is obliged to secure payment of this DM 50,000 by a corresponding bank guarantee issued by a bank of the Federal Republic of Germany at date of second payment which is due at handing over a complete set of manufacturing drawings. Remittance shall be made to one of Weyhausen's accounts in the Federal Republic of Germany." onsiderable stress is laid by the learned counsel for the appellant on the words "the commencement of commercial production an assembly of the product" in this Article 7, which we have quoted above, to contend that since the assessee had commenced the production of this product by the issue of drawings and some materials to the shop floor in October/December 1981, the assessee is entitled to make this claim for deduction in this year. The assessee further relies on the placing of the order with the German company in December 1981 for the import of the component parts. But all these facts admittedly do not establish the complete production of the final product, namely A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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