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TMI Blog2014 (8) TMI 459X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that it does so, then it has to be held to be a capital expenditure. Relying upon Alembic Chemical Works Company Limited Versus Commissioner of Income-Tax, Gujarat [1989 (3) TMI 5 - SUPREME Court] - no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined - The payment made in terms of the two agreements dated 24.5.1989 and 8.12.1993 is purely revenue in nature, as they provide for payment of license fee for manufacture and sale of the products which are manufactured pursuant to the first agreement dated 7/24.10.1986 – there was no justifiable reason to differ with the finding rendered by the Tribunal - the payment of royalty based on the two agreements dated 24.5.1989 and 8.12.1993 is revenue expenditure – Decided against Revenue. Exclusion of excise duty and sales tax collection for computation of total turnover – Deduction u/s 80HHC – Held that:- Following the decision in Commissioner of Income Tax v. Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME Court] - section 80HHC of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax collection should be excluded from the total turnover for the purpose of calculation of deduction under Section 80HHC? And (vi)Whether in the facts and circumstances of the case, the Tribunal was right in holding that the income from wind mill should be excluded from the turnover for computation of deduction under Section 80HHC? 2.1. At the outset, we notice that substantial question of law (v), namely, Whether in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax collection should be excluded from the total turnover for the purpose of calculation of deduction under Section 80HHC? , is squarely covered by a decision of the Supreme Court in Commissioner of Income Tax v. Lakshmi Machine Works, [2007] 290 ITR 667 and has been answered in favour of the assessee. 2.2. In Lakshmi Machine Works case, referred supra, the Supreme Court held that Section 80HHC of the Income-tax Act, 1961, is a beneficial section. It was intended to provide incentive to promote exports. The intention was to exempt profits relatable to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was valid for a period of ten years. Article 7(1) of the said agreement stipulates the manner in which payment should be made by the assessee to the Japanese company and for better clarity, the Article 7(1) is extracted hereunder: Article 7. Technical License Fee: 1. In consideration of the right and license granted under this Agreement, a. HI-TECH shall pay to ARAI the lumpsum of U.S. Two Hundred Ten Thousand Dollars (US $ 210,000) in three standard installments, the first installment U.S. Seventy Thousand Dollars (US $ 70,000) to be paid after the agreement is filed with RBI and Capital Goods clearance if any obtained, the second installment U.S. Seventy Thousand Dollars (US $ 70,000) on delivery of technical documentation in total and the third and last installment U.S. Seventy Thousand Dollars (US $ 70,000) to be obtained on the commencement of commercial production or four (4) years after the agreement is filed with RBI and Capital Goods Clearance if any obtained, whichever is earlier. The Indian Tax arising out of this lumpsum payment will be borne by HI-TECH on behalf of 'ARAI'. b. HI-TECH shall further pay to ARAI the running royalty of five per cent ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. In consideration of the right and license granted under this Agreement, HI-TECH shall further pay to ARAI the running royalty of five per cent (5%) for a period of five (5) years from the commencement of production effective date of this agreement calculated on the ex-factory price of products, net of excise duties minus the cost of standard bought-out components and landed cost of imported components manufactured by HI-TECH. This royalty payment will be subject to Indian Taxes. The payment made in terms of the above article was also accepted by the Department as revenue expenditure in terms of Section 37 of the Act. 5.5. Thereafter, the assessee entered into another Technical Collaboration Agreement dated 11.2.1999 with the Japanese company to continue the usage of technical know-how granted under agreements dated 7/24.10.1986 and 24.5.1989 for a further period of five years in respect of license to manufacture and sell the entire range of O' Rings, Oil Seals, Moulded Rubber Parts, Reed Valve Assemblies. In other words, this agreement renews the license granted under the agreements dated 7/24.10.1986 and 24.5.1989 for a further period of five years. Article 7(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , learned Senior Counsel appearing for the respondent and perused the decision of the Tribunal and the authorities below. 7. In this case, the Tribunal interpreted the agreements dated 24.5.1989 and 8.12.1993, as agreements for grant of license to an existing company for manufacture and sale of automobile parts and components and it is not technical know-how for setting up a new plant and for manufacturing a completely new product with the aid and assistance of the foreign company. The Tribunal, based on records, was of the firm view that the assessee in this case is an existing company manufacturing automobile parts and components and the same is not disputed by the Revenue. 8. The agreement dated 7/24.10.1986 provides for lumpsum payment for technical know-how, apart from royalty. The subsequent agreements dated 24.5.1989 and 8.12.1993 provide for grant of license on payment of royalty. The Tribunal took note of the fact that the said two agreements do not provide for payment of lumpsum, as in the case of the first agreement dated 7/24.10.1986. To come to the conclusion that the subsequent renewal agreement dated 11.2.1999 is only in the nature of license for the technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the various terms of the agreement clearly show that the expenditure cannot be regarded for acquiring a capital asset by the assessee. Though the assessee had a right to use the technical know-how even after the completion of the agreement, that fact itself would not be conclusive to hold that the payment was of capital nature. The question whether the payment can be regarded as revenue or capital in nature depends upon the object of the expenditure and the effect of the expenditure and the impact of the expenditure in the business carried on by the assessee and for that purpose, it is necessary to bear in mind the business exigencies on the basis of which the agreement had been entered into. We have carefully perused the terms of the agreement and the various articles of the agreement clearly show that the assessee was given only a licence and had access to the information for the running of the business of the assessee. No doubt, as found by the Commissioner (Appeals), the agreement was for a new product, but on that factor, it cannot be stated that the assessee acquired an enduring advantage in the capital field. Therefore, we are of the opinion that the Tribunal was not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the Revenue and against the assessee. These appeals are accordingly dismissed but in the circumstances without any order as to costs. 10. In our considered opinion, on facts, the decision in Jonas Woodhead and Sons (India) Ltd. case, referred supra, was rightly distinguished by the Tribunal following the decision of this Court in S.R.P.Tools Ltd. case, referred supra, as there was no setting up of a new factory based on the original Technical Collaboration Agreements or by the subsequent renewal agreements. What was sought to be renewed is only the license for manufacturing and selling the automobile parts and components, for which roya ..... X X X X Extracts X X X X X X X X Extracts X X X X
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