9911796707
TMI Blog2010 (10) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... 20% which is sufficient to exercise overall management and control over the assessee company. However, that is not a relevant consideration for the issue involved in the instant appeal. 3. Here, we are concerned with the assessment year 2001-02. For this year, the respondent assessee had filed return declaring income at Rs. 14,77,51,457/-. During the assessment proceedings, the Assessing Officer noticed that the assessee had deposited Rs. 371.60 lacs on technical know-how fees. In addition, the assessee had also made payment of Rs. 77,03,487/- for the knowhow taken as part of the plant and machinery. The break-up of the entire know how fee paid is as under:- "S.No. Nature of payment Amount Remarks 1. Acquisition of know how 3,08,14,000 Being 80% of total know how fees payable for acquisition of know how. 2. Supply of technology 63,46,000 for supply of technology for of the existing products TOTAL KNOW HOW FEE DEBITED 3,71,60,000 TO P & L 3. Know how taken as part of 77,03,487 Being 20% of the total know how payment taken as part of the plant and machinery but no depreciation charged" The assessee had treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible for depreciation. The instant appeal filed by the revenue was admitted on 6.9.2010 on the following substantial question of law:- "A. Whether the ITAT was justified in law in holding that the amount of Rs. 63,46,000 paid by the assessee for acquiring technical know-how was allowable as revenue expenditure? B. Whether expenditure incurred by the assessee for acquisition of technical know-how was a revenue expenditure or a capital expenditure eligible for depreciation under Section 32 of the Act?" 5. As the counsel for the parties were ready to argue the matter finally at a short date, the case was listed for arguments on 14th September, 2010 on which date the arguments were heard and judgment reserved. With this background, we proceed to decide the questions of law so formulated. From the brief narration of facts disclosed above, it clearly transpires that for acquiring know-how by the assessee from M/s Denso Corporation, Japan a substantial amount by way of payment was given i.e. Rs. 3,08,14,000/- and Rs. 77,03,487/-. This amount was treated by the assessee itself as expenditure which was capital in nature. In addition, payment of Rs. 63,46,000/- was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make new design (s) or carry out new application work regarding such products on behalf of DNIN. Now, therefore, the parties hereto agree to the following terms and conditions: Article 1: Definitions For the purpose of this Agreement, the following terms shall have the following meanings: (1) "products" shall mean products which are manufactured or to be manufactured in future by DNIN specified in Annexure 1. (2) "Application works" shall mean the modification or application or design works regarding the products, or works for planning manufacturing process and/ or lines or other work, which are required to make the basic underlying technology compatible with the Indian conditions and customer specific requirements, and which, upon request by DNIN, will be performed by DNJP for and on behalf of DNIN with respect to the manufacture of the products at DNIN. Article 2: Consignment of Application works 2.1 During the terms of this agreement, DNIN hereby consigns the Application Works under this Agreement, including the following information: - Technical requirements of the customer; - conditions for performance calculation; - cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng manufactured by Telco at the time of the collaboration agreement. Telco was up to the time of this collaboration only making locomotives and for its new proposed activity, namely, for the manufacture of trucks, it set up a new factory after obtaining know-how from its German collaborators, which collaboration was being considered by the High Court. In principle, it would seem to make no difference between a case where an existing company undertakes a totally new line of activity for which it has to establish a new factory, and a case where for manufacturing a new product a new company is constituted or formed. What we have to consider is whether the payment has been made for acquiring an asset of an enduring nature. If know-how has been acquired unrelated to secret or patented processes or the right to use the trade name or trade mark then the acquirer of that know-how - since that phrase was repeatedly used or emphasised would seem to acquire no asset of an enduring nature. If the know-how acquired relates to the setting up of the plant or machinery, then perhaps it may have to be held to be capital in nature, although we are not called upon to decide that question in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll that the assessed received was technical assistance in the manufacture of the products. There was no transfer of technology or knowhow etc. which would enable the assessed to set up its plant and machinery.. In Gannon Norton Metal Diamond Dies Ltd. v. CIT [1987]163ITR606, the Bombay High Court held that if the knowhow acquired relates to the process of manufacture, then any payment made for this purpose would have to be considered as a revenue expenditure since the acquirer does not obtain any asset of an enduring nature it is more in the nature of a payment for consultancy. In so far as the present case is concerned, we find that the only service that was rendered to the assessed was in relation to the process of manufacture. Even assuming that this would give the assessed an advantage of an enduring nature, but as held by the Supreme Court in Empire Jute Co. Ltd. v.CIT [1980] 124 ITR 1, it is not every advantage of an enduring nature that can be classified as a capital expenditure. One has to take a pragmatic and commercial view of the matter and if that is done, there can be no doubt that the assessed acquired technical knowhow to enable it to manufacture the products and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uliar kind of asset. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form, as it grows, in the shape of formulae, drawings, patterns, blue-prints, specifications and so on. The material form it takes not only facilities preservation, collation and ready reference, but also makes it perceptible and visible and easily capable of being transmitted to others. The books, which one consults to inform one's mind and thereby uses them in the course of one's business or provision, are expressly included within the meaning of the word "plant", there is no reason to exclude from the wide range of its meaning objects of similar nature as drawings, patterns, designs, specifications, etc., which also like books are the embodiment of know-how and serve the purpose of teaching at long range. We are of the opinion, therefore, that having regard to the clear legislative intent to give a wide meaning to the word "plant", material record of know-how (even assuming that know-how itself is intangible) is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f drawings, designs charts, plans, processing data and other literature falls within the definition of 'plant' and therefore a depreciable asset." 14. The meaning of the expression "plant" was also examined by the Apex court in the case of Scientific Engineering (supra) and it was, inter alia, held as under: "that "documentation service" comprised of drawings, designs, charts, plans, processing data and other literature, etc., and can be treated as "plant" and depreciation can be allowed thereon. That being the position, an obvious answer to the question is in the affirmative, in favor of the assessee and against the Revenue." 15. There is a clear fallacy in the aforesaid line of argument advanced by the learned counsel for the revenue. The attempt is to cover the payment under Section 32 of the Act and then to assert that it qualifies for depreciation. There from, the learned counsel wants to draw the inference that the payment is capital in nature and not revenue. This kind of "reverse engineering" in our view is not permissible. 16. As per the Scheme of the Act, we have to first determine the nature of expenditure, namely, whether it is of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, by providing depreciation in respect of capital expenditure incurred on know-how, patents,. copyright, trade mark etc. This also becomes clear from the memorandum explaining the provision in the Finance (No.2) Bill, 1998, reported in 231 ITR (St.) 28 at page 243 which reads as under:- "Depreciation to be allowed on intangible assets Under the existing provisions, depreciation is allowable when building, plant, machinery or furniture is used by the assessee for the purposes of his business or profession. It is proposed to widen the scope of this section so as to provide that depreciation will also be allowed where intangible assets are owned wholly or partly by the assessee and are used by such assessee for the purposes of his business or profession. Intangible assets, such as know-how, patent rights, copyrights, trade m arks, licences, franchises or any other business or commercial rights of the assessee will form a separate block of assets. As and when any capital expenditure is incurred by an assessee on acquiring such intangible assets the amount of such expenditure will be added to the block of intangible assets and depreciation will be claimed on the writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the Licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
