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TMI Blog2015 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... eral Provision of Section 37 of the Act is not applicable, which is not sustainable, in view of the judgments discussed above and in terms of the contract. We are thus to allow this appeal for two reasons. Firstly, there is no 'acquisition' of technical know-how as contemplated under Section 35AB of the Act, and secondly, Section 35AB would not apply to a revenue expenditure. As discussed earlier, judgment of the Apex Court in Drilcos (India) (2012 (9) TMI 299 - SUPREME COURT) is distinguishable and not applicable to the facts of the case and the later judgment of the Apex Court rendered in the case of Swaraj Engines (2008 (5) TMI 257 - SUPREME COURT) is squarely applicable to the facts of the case. Allow this appeal by setting aside the order of the Tribunal holding that the expenditure incurred by the assessee towards the procurement of technical know how by paying a lumpsum consideration for use in the course of business is a revenue expenditure falling u./s 37 of the Act and the provisions of Section 35 AB of the Act are not applicable to the present case. - Decided in favour of the assessee - ITA No. 1010 of 2008 - - - Dated:- 17-4-2015 - Vineet Saran And S. Sujatha,JJ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is admitted on the following substantial questions of law: a. Whether the Tribunal was justified in law in holding that the amount expended for producing technical know-how be allowed as expenditure under Section 35AB instead of Section 37 of the Income Tax on the facts and circumstances of the case? b) Whether the Tribunal erred in not holding that deduction contemplated under Section 35 AB is only in respect of a capital nature and the deduction of a revenue nature is allowable under Section 37(1) of the Income Tax Act? 4. The relevant clauses of the agreement entered into between the appellant-company and the WCL are extracted and reproduced below: 2. Technical Know-how: 2.1 Subject to receipt by WCL of payment by DEPL of the sum specified in to Clause 3.2.1 and below WCL shall supply to DEPL such written details and descriptions of the Technical know-how for imparting to DEPL an adequate knowledge of the Technical Know-how practiced by WCL at the date of this Agreement for production of the Product 2.2 To assist DEPL to manufacture and produce the Product in India WCL shall provide instruction to DEPL as follows:- 2.2.1 WCL shall give access to WCL's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trade Marks: DEPL acknowledges and agrees that all trade marks and trade names and in particular (without limitation) Colmonoy and Colmonoy Sweat-on-Paste are and will remain the exclusive property of WCL and/or any Associated Company of WCL and may be used by DEPL only while this Agreement is in force on Products to be exported with the prior approval in writing of WCL (such approval not to be unreasonably withheld) for the purposes of this Agreement. DEPL shall be entitled to use its own trademark or trade name for use on the Product sold within India. 9. Manufacture 9.4 DEPL shall be entitled to sub-licence the manufacture and sale of the Product and the use of the Technical Know-how under this Agreement to any other person firm or corporation in India should this be necessary to enable DEPL to comply with its requirements and obligations under this Agreement. The terms of such sub-licence shall however be subject to the agreement of WCL as well as the other parties concerned and shall be subject to the approval of the Government of India. 11. Termination: 11.2. Either party shall have the right to give notice of termination (to operate 30 days after being gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Judgment of the Madras High Court in the case of Commissioner of Income Tax vs Drilcos (India) Pvt. Ltd. [(2004) 266 ITR 12] and the Judgment of the Apex Court in Drilcos (India) Pvt. Ltd v. Commissioner of Income-Tax [(2012) 348 ITR 382 (SC)]. 8. Section 35AB(i) of the Act reads thus: 35AB(i) Subject to the provisions of subsection (2), where the assessee has paid in any previous year (relevant to the assessment year commencing on or before the 1st day of April, 1998) any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous year. 9. As explained in the case of MOLEX (INDIA) LTD., (supra) the following three factors have to be necessarily present to attract the said provision: (1) Payment by Lumpsum consideration (2) For acquiring any know-how for use (3) For the purposes of business then, one-sixth of the amount expended shall be deducted in computing the profits and gains of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of this section, 'knowhow' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). 15. CBDT Circular dated: 12.6.1985 as regards depreciation to be allowed on intangible assets reads thus: 15.2 As a consequence of this amendent , the deductions allowable under Section 35A of the Income-tax Act in respect of any expenditure of a capital nature incurred on the acquisition of patent rights or copyrights and under section 35AB in respect of expenditure on know-how have been withdrawn with effect from the assessment year 1999-2000. 16. In the case of CIT Vs. Swaraj Engines (supra), the Apex Court has held that if the expenditure is found to be revenue in nature then Section 35A B may not apply. However, if it is found to be capital in nature then the question of amortization and spread over as contemplated, under Section 35A B would certainly come into play . 17. In the case of Shriram Pistons and Rings Ltd (supra), the Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .37(1) of the act, would not arise . 19. In the case of Drilcos (India) Pvt. Ltd., Madras High Court relied on the judgment of CIT v. Tamil Nadu Chemical Products Ltd., case rendered prior to the judgment of the Apex Court in Swaraj Engines Ltd., (Supra) and has observed that Section 35AB of the Act are applicable in the context of the case where no know-how was made available to the assessee in the manner required. 20. The said judgment of the Madras High Court was carried in Appeal before the Apex Court wherein, It was held that it is true that on account of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American Company. However, the word for in section 35AB of the Act, which is a preposition in English grammar, has to be emphasized while interpreting section 35AB of the Act. Section 35AB of the Act says that the expenditure should have been incurred for the purposes of the business of the assessee. In the present case, the technical assistance agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the assessee. In our view, the period of agreement itself is not the determinative test to arrive at the nature of expenditure whether revenue or capital. Considering the over all clauses of the agreement, we are of the opinion that amount expended by the assessee for procurement of technical know-how is in the nature of revenue and not capital. 24. Section 35AB of the Act is applicable if the expenses incurred are held to be capital in nature. As we have noticed, the terms and conditions of the agreement entered into between the parties demonstrates that the amount expended are revenue in nature and does fall under Section 37 of the Act as held by the Apex Court in the case of Swaraj Engine Ltd (Supra). 25. Another aspect of the matter is that to attract the provisions of Section 35AB of the Act, the three main factors i.e, 1) Payment of lumpsum consideration, 2) acquiring any know how and 3) for the purpose of business, have to be compulsorily satisfied. As noticed above, there is no absolute acquisition of the technical know how by the assessee, no enduring benefit has accrued to the assessee. No ownership or domain right was enjoyed by the assessee. In such circums ..... X X X X Extracts X X X X X X X X Extracts X X X X
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