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TMI Blog2011 (4) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the same, by bringing to tax 'One time technology transfer fees', amounting to Rs.3,71,40,000. 2.1 That on the facts and circumstances of the case and in law the CIT erred in exercising jurisdiction under section 263 of the Act in respect of the said issue, without appreciating that the said issue of taxability of 'One time technology transfer fees' is debatable ousting jurisdiction under the said section. 2.2 That on the facts and circumstances of the case and in law the CIT erred in exercising revisionary powers under section 263 of the Act without appreciating that, on the said issue, the proceedings under section 154 of the Act had earlier been dropped by the Assessing Officer. 3 That the CIT erred on facts and in law in not appreciating that the twin conditions under section 263 of the Act, viz., assessment order being (i) erroneous as well as (ii) prejudicial to the interest of Revenue, were not satisfied, in as much as, no prejudice is caused to the Revenue in respect of the impugned issue as balance amount of 'One time technology transfer fees' has been offered for tax in the subsequent years. 4. That on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book. In response to the aforementioned show cause notice, the assessee has submitted a reply dated 20th December, 2010 copy of which is placed at pages 1-3 of the paper book. In the said reply, it was the case of the assessee that it is engaged in the manufacturing of power and distribution of transformers along with servicing and sales of electricity transmission and distribution products. It was submitted that the assessee is also engaged in providing consultancy in setting up power related projects in furtherance of its business it entered into an agreement with ZESA Enterprises of Zimbabwe for providing technical assistance and allied services for providing necessary drawings for repair and assembling, operating and instruction procedures and manuals. It was also under an obligation to carry out studies of the contracts, repairs and manufacturing facilities and was to assist in the preparation of such data or information as was required or necessary. Thus, it was submitted that the work arising out of the agreement was enormous and such agreement was entered into for a period of five years. The assessee was required to incur heavy cost on day-to-day basis on its employees on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as vehemently pleaded by learned AR that as the agreement was to subsist for a period of five years, the assessee had rightly shown income of Rs. 92,85,000/- on that account being 1/5th of the total amount of Rs. 4,64,25,000/- and the balance amount was shown as a liability to be appropriated against the future four years. He submitted that originally the assessment was framed u/s 143 (3) and, thus, the Assessing Officer had adopted a view which was a reasonable view, hence, the powers u/s 263 could not be invoked by the CIT as per decision of Hon'ble Punjab and Haryana High Court in the case of CIT vs. Max India Ltd. 268 ITR 128 (Pb). 5. He further referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goyal 197 Taxman 375 (Del) to contend that in order to put a sum chargeable to income-tax, it should accrue or arise to the assessee during the previous year; a right to receive a particular sum under an agreement would not suffice unless that right occurs by rendering of services and not by promising of services. He submitted that in order to bring the entire sum in the year under consideration, there should be either accrual or arising of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that he has acquired a right to receive the income or that income has accrued to him." 8. The learned AR further referred to the decision of Hon'ble Allahabad High Court in the case of CIT vs. Hindustan Computers Ltd. 233 ITR 366 (All) to contend that the entire receipts could not be assessed as income because they were received on account of AMC and was transferred to Profit and Loss Account as the same does not have the effect of changing the system of accounting and no real profit had arisen on the un-expired period of AMC. Therefore, the Tribunal was held right in deleting the addition of Rs. 72.05 lac even in accordance with the mercantile system of accounting. 9. The learned AR further referred to the decision of Hon'ble Supreme Court in the case of Calcutta Company Ltd. vs. CIT 37 ITR 1 (SC). Referring to the decision he contended that if there is a clear liability of the assessee to incur certain expenditure for certain period, then, the assessee is within its right to claim that expenditure in the year when the liability accrued. Thus, it was the contention of learned AR that the income which relates to subsequent years could not be assessed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat clause the minimum payments was fixed at USD 25,000/- per month. Thus, he submitted that one time technology transfer cost received by the assessee was nothing, but a lumpsum payment received by the assessee and the assessee was not to pay anything in the further five years for that purpose. He further referred to Article 11.4 according to which even in the case of termination of the agreement, the parties were obliged to perform the outstanding obligations under the agreement not affected by the termination. Thus, it was pleaded that the balance amount having not been taxed by the Assessing Officer made the assessment order erroneous as well as prejudicial to the interest of revenue. He submitted that it cannot be said that the order was not prejudicial to the interest of the revenue as the tax effect has to be taken into consideration even if it affects the loss or it reduce the loss claimed by the assessee. He pleaded that it has clearly been brought out in the order passed u/s 263 that the Assessing Officer did not discuss this issue during the course of assessment proceedings. He submitted that non-discussion or nondeliberation by the Assessing Officer on this issue during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tereo type order which simply accepts what the assessee has stated in his return and fails to make inquiries which are called for in the circumstances of the case. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case, the ITO should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the ITO is very different from that of a civil court. The statement made in the pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral when it simply gives decision on the basis of the pleadings and evidence which comes before it. The ITO is not only an adjudicator, but also an Investigator. He cannot remain passive in the face of a return which is apparently in order, but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in Section 263 emerges out of this context. It is because it is incumbent on the ITO to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to the year under consideration only as it has to be bifurcated into five years. For this purpose, we have to carefully consider the contents of the agreement to ascertain that what was the obligation of the assessee relating to 'one time technology transfer cost.' It will be proper if Article 7 is reproduced in its entirety to know that what type of payments were to be received by the assessee under the agreement:- "Article 7. Payment 7.1 In consideration of the Technical Information and the Industrial Property Rights furnished by Licensor to Licensee hereunder, Licensee shall pay to Licensor the following amounts in the manner specified below. a) One time Technology Transfer Costs of USD 1 million. The payment of USD 1 million is payment for the licence to be utilized by the Licensee in terms of this Agreement. Licensee shall therefore pay Licensor USD 500 000 within 6 months from the date of this Agreement and another USD 500 000 six months later to cover the licence fee subject to approval by the Reserve Bank of Zimbabwe. The payment shall be made through a confirmed irrevocable Letter of Credit from a first class bank in India. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of USD 1 million, was to receive 5% royalty of the total ex works sale of licensed products which was estimated to be not less than USD 25,000/- per month meaning thereby USD 0.3 million per year. Thus, what the assessee was to receive as a major revenue was the royalty in respect of total ex works sales of the licensed products. 19. We can take the brief overview of the entire agreement. The agreement is between the assessee being licensor and ZESA Enterprises Pvt. Ltd. being the licensee. The assessee having the expertise in the manufacture of power and distribution transformers to the electricity power sector and related activity has entered into an agreement with the licensee who desires to be authorized and obtained a licence to manufacture, repair, use and sale the licensed products utilizing the technical information furnished by the licensor who has given the authority and has granted the licence. Thus, according to the recital, the licensee wanted to be authorized to manufacture, repair, use and sell licensed products utilizing technical information furnished by the licensor. It can be divided into two parts; first to give the licence to manufacture and deal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the licensee to be trained by the licensor for which all the expenses were to be borne by the licensee subject to the conditions mentioned therein. The licensor was also required to carry out the studies of the licensees repair and manufacturing facility and to assist it in preparation of specifications to procure plant and machinery and to be part of negotiation, inspection and supervision of the installation work. The article 5 deals with 'improvements' which stipulates that if at any time during the currency of the agreement, it is discovered or comes to the possession of any improvements or further inventions relating to licensed products or in connection with the design, manufacture, repair and use and sale of the same; the party shall furnish the other party with the information on such improvement or further invention without any delay and free of charge and, thus, it is not only the obligation of the licensor, but, it is a mutual obligation to be discharged by both the parties. 22. Article 6 provide that 'financial arrangement' which is regarding soft loan to be given by the licensor to the licensee of USD 2 million and it also stipulates that the licensor shall h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms of obligations of the licensor vis-a-vis licensee, it can be observed that two types of revenue comes to the licensor; one is regarding one time technology transfer cost and the other is royalty earned during the subsistence of the agreement. It has already been observed that royalty constitute major part of revenue to be earned by the assessee from licensee. After giving the licensee a right to use the licensed products and manufacturing, sales and repairs thereof, the obligation of the licensor is to assist the licensee in all manner to enable the licensee to carry on its activity efficiently, smoothly and in a manner that it can generate substantial revenue. To earn substantial revenue by the licensee is the business interest of the licensor as it is to earn 5% of the total ex work sale of the licensed products. The substantial assistance required to be provided by the licensor to the licensee during the subsistence of the agreement is for the purpose of earning the royalty. It is important to note that for that purpose no cost has to be incurred by the licensor as the cost incurred by it has to be reimbursed or to be paid by the licensee only. Here, the argument of lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that the entire receipts were taxable in the year of agreement. In the case of E.D. Sassoon and Co. Ltd. vs. CIT (supra), it was held that the basic concept is that the assessee must have acquired a right to receive the income. According to that principle, in the present case, as the assessee has acquired the right to receive the income, it is to be assessed in the year in which it has acquired the right to receive the income. There is no provision in the agreement according to which it can be said that the right of the assessee to receive the income was restricted in any manner and was related to the year other than the year in which it was to be received by the assessee. 28. In the case of CIT vs. Hindustan Computers Ltd. (supra), the facts were that the assessee was receiving amounts for annual maintenance charges and it was held that merely because the entire AMC charges were transferred to PandL Account will not change the system of accounting and, on the basis of mercantile system of accounting the amount could not be taxed. 29. In the case of Calcutta Company Ltd. vs. CIT (supra), it was held that the expression 'profit or gains' has to be unders ..... X X X X Extracts X X X X X X X X Extracts X X X X
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