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TMI Blog2010 (9) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Income Tax Appellate Tribunal, Delhi Bench D‟ (for short the tribunal‟) pertaining to the assessment year 1994-95. The revenue has raised the following two questions as questions of law: "2.1 Whether learned ITAT correct in law in holding that the expenditure incurred by the Assessee on account of design and drawing fees as Revenue expenditure instead of capital expenditure? 2.2 Whether learned ITAT erred in holding that the fees paid to the foreign technician for imparting training to Indian technician as Revenue expenditure instead of capital expenditure?" 2. The basic facts which are requisite to be stated are that the assessee - respondent is engaged in the business of manufacture of shock absorbers used in automobile vehicles. It incurred expenses on travel and stay of foreign technical personnel of M/s Showa Corporation, Japan and also on design and drawing charges payable to M/s Showa Corporation, Japan. The assessee treated the same as deferred revenue expenditure in the accounts but while filing the return claimed the entire expenses as revenue expenditure. Originally, the assessing officer allowed the claim on the basis of entries in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and machinery with LICENSEE fund -3. Installation of facilities -4. Design and construction of factory -5. Technical advice and service for start-up of facilities and factory." 5. Article 7 dealt with "Technical Assistance", Article 14 with "Maintenance of Secrecy", Article 17 with "Industrial Property Rights" and Article 19 with "Consideration". The same, being relevant, are reproduced below: "Article 7. Technical Assistance LICENSOR shall, subject to the payment by LICENSEE of the consideration pursuant to Article 19 below, provide LICENSEE with the following license, technical information, assistance and services necessary for the manufacture of the Products and the Parts to be procured in the Territory of the extent that LICENSOR shall does necessary advisable after consultation with the LICENSEE. 1. License to use the Industrial Property Rights. 2. Following technical documents in English in LICENSOR‟s standard form (by reproducible copy plus two printed copies). a. Parts drawing b. Parts list c. Materials list d. Process control sheet e. Quality inspection standard and procedures including those for bought-out parts. f. Operation standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ex-factory sales price of the Products invoiced by the LICENSEE." 6. The tribunal, after referring to the said terms of the agreement, came to hold that the assessee was merely granted licence to manufacture the products as per the drawings and designs provided by the licensor. The drawings and designs merely enabled the assessee to manufacture the shock absorbers. Due to change in the model of the vehicles, the assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required and the same also required training of the assessee's personnel. This training was provided by the licensor's personnel. The amount that was paid by the assessee only enabled the assessee to facilitate the manufacturing process but he did not acquire the proprietary right in such drawings and designs. Thereafter, the tribunal referred to its order passed in DCIT v. Bharat Seats Ltd. in ITA No.2394/Del of 2004 wherein the tribunal relied on the decision in ACIT v. TEI Technologies P. Ltd. in ITA No.5079/Del/04. The decision rendered in TEI Technologies P. Ltd. (supra) travelled to this Court and the same was given the stamp of approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." 9. In the case of Jonas Woodhead And Sons (India) Limited v. Commissioner of Income Tax, [1997] 224 ITR 342 (SC), the Apex Court, after referring to the decisions in Empire Jute Co. Ltd. v. CIT, [1980] ITR 1, CIT v. Tata Engineering and Locomotive Co. P. Ltd., [1980] 123 ITR 538, Alembic Chemical Works Co. Ltd. (supra), CIT v. CIBA of India Ltd., [1968] 69 ITR 692 (SC), CIT v. Lucas T.V.S. Limited (No.1), [1977] 110 ITR 338 (Mad), CIT v. Sarada Binding Works, [1976] 102 ITR 187 (Mad), and Agarwal Hardware Works (P.) Ltd. v. CIT, [1980] 121 ITR 510 (Cal), held thus: "It would thus appear that the courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one or dependant upon certain contingencies, the right to use the technical know how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical know-how in the setting up of the plant and machinery but the payment was only to enable the assessee to manufacture the products. In other words, the technical support was in the form of technical advice rather than sharing of any technical know-how, designs, drawings, etc. The tribunal concurred with the view expressed by the CIT. On a further appeal being preferred, the Division Bench referred to the decision in Gannon Norton Metal Diamond Dies Ltd. v. CIT [1987] 163 ITR 606 wherein the Bombay High Court held that if the know-how acquired relates to the process of manufacture, then any payment made for the said purpose would have to be considered as a revenue expenditure since the acquirer does not obtain any asset of an enduring nature because it is more in the nature of a payment for consultancy. The Bench referred to the decision in Empire Jute Co. Ltd. v. CIT (supra) and came to hold that 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 assessee acquired technical know-how to enable it to manufacture th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it a case of right to use the technology and not sale of the technical know-how. That being our conclusion, we are in agreement with the view expressed by the Tribunal that there was no sale of technical know-how by Riken to the assessee and therefore, the payment made by the assessee to Riken was a revenue expenditure." 12. In the case at hand, the know-how was granted by the foreign company solely for the purpose of manufacture, assembly and sale of products during the term of the contract and the licensee was to pay royalty to the licensor. The drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the goods, namely, the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For the aforesaid purpose, the training of the personnel of the assessee was imperative. If the agreement is read in entirety in a purposeful manner, there can be no trace of doubt that the know-how acquired relates to the process of manufacturing and for a tenure and the documents, designs and specifications which have been supplied by the licensor are only for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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