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TMI Blog2011 (9) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... greement and treating the same as capital expenditure primarily on the ground that it is a capital expenditure. The facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act, 1961 dated March 30, 2004 were that the assessee-company is in the business of manufacturing of ball-bearings. It was stated by the Assessing Officer that the assessee was in the said business since 1996. It was noted by the Assessing Officer that an agreement was entered into between the assessee and FAG Automobiltechnik AG dated March 30, 2000. That agreement was in respect of a know-how to be provided by the said collaborator to the assessee, called as Indian company. That know-how was in respect of manufacturing of certain kinds of ball-bearings listed therein. As per clause 2 the character of the know-how was as follows: "2. The know-how shall : (a) be in line with the process of manufacture of the products being followed by the Indian company ; and (b) include : (i) developments and improvements in the said process of manufacture ; (ii) designs of the products ; (iii) selection of machinery and equipment for the manufacture of the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession 'royalty' shall have the same meaning as in Explanation 2 to section 9(1)(vi) ; clause (B) of the Explanation to section 40(a)(i) coins a definition of the expression 'fees for technical services' shall have the same meaning as in Explanation 2 to section 9(1)(vii). Technical know-how for industrial information and technical services are covered under the provisions of section 32(1)(ii) of the Income-tax Act". In the result, the assessee's claim that the said expenditure was revenue in nature was disallowed. However, it was held that the assessee was eligible for claim of depreciation. The issue was carried before the first appellate authority. The learned Commissioner of Income-tax (Appeals) has discussed the clauses of the impugned agreement and related facts in detail. The learned Commissioner of Income-tax (Appeals) has also discussed certain case law. The learned Commissioner of Income-tax (Appeals) has also called for a remand report and in that remand report in respect of technical services of Rs. 43.10 lakhs it was reported that for the assessment year 2002-03 as well the said payment was capitalised and depreciation was allowed. It was also mentioned in the remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorised dealer in foreign exchange, whichever is earlier ; (2) a sum equal to 5 percent net of Indian taxes of the net ex-factory sale price of the products ; (3) the sums payable to the collaborator is payable also in respect of the products that may be in stock with the Indian company at the time of expiration or sooner termination of the agreement." The observation of the learned Commissioner of Income-tax (Appeals) was that as per the terms and conditions of the agreement there were two kinds of payment; one was a lump sum consideration and, the other was recurring in nature depending upon the net ex-factory sale price. As regards to the lump sum consideration, as per the learned Commissioner of Income-tax (Appeals), it was stated to be Rs. 43.10 lakhs. At that juncture, the learned Commissioner of Income-tax (Appeals) has quoted CIT v. Sarada Binding Works [1976] 102 ITR 187 (Mad) for the proposition that where a fixed annual sum is paid towards royalty, then the same is in the nature of capital expenditure. The learned Commissioner of Income-tax (Appeals) has therefore concluded that the said lump sum consideration was capital in nature, hence the action of the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties shall assign this agreement or any part hereof nor any right hereunder without the previous consent in writing of the other party. (f) Clause 13 The Indian company shall not during the currency of this agreement, except with the previous consent in writing of the collaborator, directly or indirectly, receive or seek to receive from any third party and know-how relative to the products. (g) Clause 14 The Indian company may export the products manufactured by it with prior approval in writing of the collaborators. (h) In terms of the clause 24(a) of the agreement, upon termination of the agreement, the Indian company has to return to the collaborators the know-how as has been provided to it by the collaborators." The learned authorised representative has also quoted a clarification of the Central Board of Direct Taxes dated July 9, 1969 in the following manner : "(F) It has been clarified by the Central Board of Direct Taxes vide Circular No. 21 (F. No. 7A/40/68-IT (A-II)), dated July 9, 1969 that if what has been acquired under the agreement is merely a licence for the user, for a limited period, of a technical knowledge of the foreign participant, together wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty CIT [1995] 55 ITD 338 (Calcutta) 4. Deputy CIT v. Metalman Auto P. Ltd. [2001] 78 ITD 327 (Chandigarh) 5. K. B. Mehta v. Deputy CIT [2004] 265 ITR (AT) 17 (Pune) ; [2003] 86 ITD 256 (Pune) 6. Eicher Motors Ltd. v. Deputy CIT [2004] 82 TTJ (Indore) 61 7. CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) 8. CIT v. Lucas-T. V. S. Ltd. (No. 1) [1977] 110 ITR 338 (Mad) 9. CIT v. Sarada Binding Works [1976] 102 ITR 187 (Mad) 10. CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) From the side of the Revenue, the learned Departmental representative Mr. Rabindra Kumar, Commissioner of Income-tax-Departmental representative appeared and supported the action of the Revenue authorities. In his opinion, as per the terms of the agreement the said collaborator has provided know-how for setting up an altogether a new part of the plant. The transfer of know-how required training of technical persons. According to his argument by transfer of know-how the assessee had obtained an advantage of enduring nature. It was for an altogether a new product therefore training of technical persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led before us containing almost 400 pages and the case law cited. Before us, an agreement dated March 30, 2000 was referred to which was executed between FAG Automobiltechnik AG on one part referred as "the collaborator" and "FAG Bearings (India) Ltd." as other part mentioned as "the Indian company". The said collaborator is a subsidiary of FAG Kugelfischer Georg Schaefer AG incorporated under the laws of the Federal Republic of Germany. Clause (c) on page 1 of the said agreement states that the "Indian company" and the "collaborator" have over the years entered into diverse agreements for supply of know-how and technical assistance in respect of diverse types of bearings. The present agreement was in respect of know-how and technical services in respect of the following products. Clutch release bearings. Altemator bearings. Wheet bearings hub units (all generations). Tensioner icer assemblies. From the side of the assessee by referring the types of the products, i.e., bearings, etc., the main argument was that there were no new product introduced but mainly the technical assistance was to improve the quality of the existing products. Apart from the above specifications, it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is capital in nature, but if the payment is for securing the use of know-how, then allowable as revenue expenditure. In these decisions, it has been conveyed that the expenditure towards improvisation for the existing business is to be considered a revenue expenditure. In the present appeal, undisputedly the know-how related to the existing manufacturing operation of ball-bearings, i.e., stated to be same type of product. It cannot be ruled out that in a fast growing era of new technologies the outdated or obsolete technologies are required to be replaced and that expenditure can be held as business requirement. It has also been noted while reading the clauses of the agreement that one of the clause is about the non-portability. Therefore, this clause has demonstrated that the know-how was not the property of the assessee. Rather, the said collaborator has imposed a condition of confidentiality and secrecy which leads to an inference that the property belonged to the said collaborator. Rather, we are inclined to draw an inference that the transfer of know-how in the present set of facts and circumstances was restricted to the use rather than its acquisition. In the light of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid under different agreements. We have also attached the summary of royalty payments made for various years on page 44. On the perusal of page 45 your kind office would notice that royalty is paid to the following companies : (a) FAG OEM Und Handel AG, Germany ; (b) FAG Kugelfischer Georg Schaefer AG, Germany ; and (c) FAG Automobiltechnik AG, Germany. It may be mentioned that the payment to party at (s) above was made at 1.5 percent for the months of April, 2000 and May, 2000 and at 3 percent for the remaining period till March 31, 2011. With respect to the increase in the rate of royalty we would like to put the following facts on record. The company was originally paying royalty at 1.5 percent under agreement dated February 24, 2000. The said agreement was effective from April 1, 1999 to March 31, 2004. Copy of the agreement is attached in the paper book 4 at pages 273 to 286. The said agreement was approved by SIA vide letter dated September 18, 2000 and also taken on record by the RBI vide letter dated October 9, 2000 (see pages 287 and 288 of Paper Book 4). There was a change in the industrial policy of the Government of India for foreign technology agreements under wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those approvals were the requirement of the law but those approvals have not given a sanction to arbitrarily pay the know-how fees to a sister-concern. Those approvals were granted with a different angle considering the related law but not the Income-tax Act. He has concluded that the royalty at 1.5 percent both on domestic and export sales was reasonable and rest was excessive payment of royalty, therefore disallowed under section 40A(2)(b) of the Act. From the side of the appellant, Mr. A.V. Sonde argued that it was wrong on the part of the Commissioner of Income-tax (Appeals) to presume that FAG OEM Und Handel AG happened to be "a person" specified in section 40A(2)(b). For this proposition, the learned authorised representative has referred the constitution of the said collaborator. His next plank of argument was that it was the onus of the Revenue Department to refer a comparable instances to demonstrate that the expenditure in question was excessive than the fair market value. He has mentioned that the agreements itself suggest that the increase in the fees was a legitimate business need of the assessee. The learned authorised representative has also cited a list of several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said collaborator is not within the definition of the specified person as defined in section 40A(2)(b). The learned Departmental representative has contested that no such plea had ever been raised before the Commissioner of Income-tax (Appeals), therefore it is against the natural justice to raise an altogether new defence without granting an opportunity to the Revenue. The learned Departmental representative has also objected the argument of the learned authorised representative that the Revenue had not placed on record any comparable instance. According to the Departmental representative, there was no necessity to place several evidence on record when the agreements itself have demonstrated that there was an abrupt increase in the payment. Having heard the submissions of both sides at some length, we have noted that in respect of FAG OEM Und Handel AG an agreement dated February 24, 2000 was executed. In respect of the said agreement, we have been informed that the approval of SIA and the approval of RBI was obtained. Undisputedly, the rate of royalty was 1.5 percent on scheduled products and 5 percent on non-scheduled products. There was an another agreement dated Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d litigation. In the result, this issue of the assessee as raised vide Ground No. 2 is restored to the file of the Assessing Officer to be decided de novo needless to say after granting a reasonable opportunity of hearing to the assessee, hence allowed but for statistical purposes only. Grounds Nos. 3 and 4 read as under : 3. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in treating repairing expenses to plant and machinery of Rs. 46,58,516 as capital expenditure instead of revenue expenditure as claimed by the appellant. 4. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in treating repairing expenses to plant and machinery of Rs. 2,28,55,484 as capital expenditure instead of revenue expenditure as claimed by the appellant. The learned Commissioner of Income-tax (Appeals) further erred in fact and in law in not allowing depreciation on the amount considered as capital expenditure on the ground that no evidence was furnished for proving that the subject asset was installed and put to use during the year. The observation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. By not disclosing in the profit and loss account, the true and correct picture of the business profitability could not be reflected. It has also been noted that other repairs and spares and tools were otherwise debited in the profit and loss account. So he has commented that there was no reason as to why the assessee had not included the impugned expenditure. Again, it was commented by the Assessing Officer that no details were furnished in respect of replacement of cost of furnace. In the absence of a justifiable explanation it was held by the Assessing Officer that the said expenditure of Rs. 46,58,516 was capital expenditure. In respect of the remaining claim of expenditure of Rs. 2,28,55,484 the entire amount was rejected and even not allowed as a capital expenditure because the assessee had failed to file details and evidences in support of the said claim. The matter was carried before the first appellate authority. The first appellate authority has affirmed the action of the Assessing Officer primarily on the ground that the assessee had not explained that under what circumstances the expenditure was treated as capital expenditure in the books of account, however, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est had not become final during the year under consideration. It was noted that the assessee has received interest under section 244A on income-tax refund. The said amount was not included in the computation of income. It was accordingly taxed in the hands of the assessee. When the matter was carried before the first appellate authority, a remand report was called for and after examining the details of the interest received by the assessee on income-tax refund, it was held that the same was liable to be taxed in the hands of the assessee. Now before us the learned authorised representative Mr. Milin Mehta has fairly informed that this issue now stood covered against the assessee by a Special Bench decision of Mumbai in the case of Avada Trading Co. P. Ltd. v. Asst. CIT [2006] 284 ITR (AT) 73 ; [2006] 100 ITD 131 (Mumbai). However, he has pleaded that after the lapse of so many years, now those assessments have been concluded and reached to the finality therefore the Assessing Officer may be directed to include only that interest which has now been finalised. We direct accordingly, however, the issue of taxability of interest granted on income-tax refund goes against the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby direct to allow the claim. This ground is allowed. Ground No. 7 reads as under : 7. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in considering software expenses of Rs. 26,95,590 as capital expenditure. The assessee has incurred expenditure on computer software, details as under : (Rs.) (a) Fees paid for use of Microsoft office 9,45,005 (b) Expenses incurred for use of e-mail facility 2,72,500 (c) Cost of Auto card for bearing design 4,57,160 (d) Expenses incurred for upgradation of software/maintenance of computer 10,20,925 Total 26,95,590 The authorities below have held that the expenditure constituted acquisition of assets and disallowed the same. On the other hand, it was pleaded that number of licences of small amounts were purchased. Our attention was invited on pages 298 to 305 of the paper book to demonstrate the softwares acquired by the assessee. It has also been explained that due to technological changes the old softwares were required to be replaced year-after-year. Having heard the submissions of both sides, we have found that the identical issue now stood covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id expenditure. Therefore, the same was disallowed. When the matter was carried before the first appellate authority, following the past history of the case, however, without having discussion on merits, the claim was allowed. Now before us, it was fairly accepted by the learned authorised representative Mr. Mehta that vide a decision of the Special Bench in the case of Deputy CIT v. FAG Bearings India Ltd. [2008] 306 ITR (AT) 60 (Ahd) the issue is decided against the assessee, however, the assessee is eligible to claim the deduction of such pre-paid rent in the year for which it relates. Having heard the submissions of both sides, as far as the legality of the claim is concerned, the same goes in favour of the Revenue, however, the alternate plea of the assessee can be considered by the Assessing Officer. This ground of the Revenue is allowed. Ground No. II reads as under: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals), Baroda has erred in II. reducing the addition of Rs. 5,66,10,000 to Rs. 43,10,000 on account of payment of technical know-how fees holding that the remaining expenditure is revenue in nature. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had a limited right of use. After the expiry of the term the assessee is under obligation to return the know-how. We have also discussed few case laws as cited before us and thereafter held that the expenditure is allowable as revenue expenditure. On the same lines, for the impugned amount as challenged by the Revenue, we hereby uphold the findings of the Commissioner of Income-tax (Appeals) and therefore this ground of the Revenue is dismissed. Ground No. III reads as under : On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals), Baroda has erred inIII. deleting the disallowance to the extent of Rs. 12,58,330 out of total disallowance of Rs. 27,60,840 on account of repairs to building. In respect of repairs of building while deciding the connected ground of the assessee, we have held that no new assets was created and the nature of expenditure was nothing but "current repairs". Even the learned Commissioner of Income-tax (Appeals) has opined that replacing of tiles was in the nature of current repairs. Moreover, we have already held that the maintenance of the existing building cannot be held as a creation of new asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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