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TMI Blog2013 (10) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. The CIT (A) confirmed all these additions. Now, the assessee is in appeal before by taking the following grounds :- "1. That on the facts and circumstances of the case the CIT (A) erred in upholding the disallowance of Rs.121,60,191/- being 25% of total royalty expenses: 1.1 That on the facts and circumstances of the case the CIT (A) erred in alleging that the payment of royalty was partly towards capital and partly towards the revenue. 2. That on the facts and circumstances of the case the CIT (A) erred in upholding the action of the assessing officer in disallowing Rs.1,09,553/- being 25% of total amount paid as technical fee alleging the same to be of capital nature. 3. That on the facts and circumstances of the case the CIT (A) erred in upholding the action of the assessing officer in disallowing Rs.32,70,627/- being 25% of total amount paid towards design and drawing fee alleging the same to be of capital in nature. The appellant craves leave to add, alter, amend or vary from the above grounds of appeal on or before the time of hearing." 3. At the outset of the hearing, the ld. AR submitted that the assessee entered into technical collaboration contract 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year also, the clauses of Agreement remained more or less same. In the assessee's own case, the Hon'ble Delhi High Court in ITA Nos.56/2009, 85/2009 & 86/2009 dated 6th September, 2010 after elaborate discussion on terms of Agreement in respect of know-how and technical services and about the technical assistance has also decided the issue in favour of the assessee by dismissing the revenue's appeal. The relevant portion of this decision of Hon'ble Delhi High Court is reproduced as under :- "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 books of accounts. The said order of assessment was framed under Section 143(3) of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. g. Tools, jigs and gauges specification, and catalogues. h. Product performance data. i. Personnel requirement planning sheets. j. Product final inspection, standard and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in CIT v. T.E.I. Technologies P. Ltd., (2008) 304 ITR 262 (Delhi). The tribunal eventually came to hold that the expenses were incurred for training the personnel of the assessee and for availing drawi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0] 124 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 firm, payment whether made "once for all" or in different instalments co-relatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the products and this was more in the nature of information guidance or payment for consultancy. Being of this view, the Bench concurred with the conclusion arrived at by the tribunal. 11. In Shriram Pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal 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 facilitating the said purpose of manufacturing. This is basically in the realm of technical support and thus, the decisions in T.E.I. Technologies P. Ltd., (supra) and Shriram Pistons and Rings Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaon on account of slowness of meter by 32.04% as inspected by DHVBPN persons on 28.08.2003. This was due to yellow phase CIT of meter is found defective and accuracy of meter checked and found working slow by 32.04%. Assessee had taken a ground in Assessment Year 2004-05 appeal and also taken a ground in Assessment Year 2003-04 as narrated above. Ld. AR also submitted that these expenses were crystallized during financial year relevant to 2004-05 only and, therefore, these should be allowed in the year 2004-05. 9. On the other hand, ld. DR submitted that these expenses were pertaining to Assessment Year 2003-04 and the assessee came to know about the expenses in the month of April, 2003 and September, 2003 itself. Therefore, assessee could have made necessary provisions for these expenses in the accounts of Assessment Year 2003-04. It was a mandatory payment, therefore, the assessee should have debited this amount in the book of account for the Assessment Year 2003-04 which the CIT (A) has rightly directed to allow the same in Assessment Year 2003-04. 10. We have heard both the sides on the issue. The CIT (A) has directed to allow these expenses in Assessment Year 2003-04. These ..... 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