9911796707
TMI Blog2016 (1) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... h in existence as on 01.04.2004. 3. That Ld. CIT(A) had erred in law and as well as on facts in holding that technical know how fees paid by the assessee as revenue expenditure whereas the assessee itself claimed depreciation over it for two consecutive assessment years." 3. Briefly stated facts are that the assessee claimed deduction of technical knowhow relating to sliding nozzle refractories obtained from M/s. Krosaki Harima Corporation, Japan amounting to Rs. 53,51,012/- as revenue expenditure. The AO on perusal of records and submission of the assessee observed that the assessee has acquired intangible asset during FY 2002-03 relevant to AY 2003-04 for a total consideration of Rs. 80,77,002/-. But one-sixth of such expenditure amounting to Rs. 13,46,167/- was claimed as deduction on account of amortization of expenses @ one-sixth and balance was capitalized under technical knowhow in the group of intangible asset and claimed depreciation @ 25% on such assets. According to AO, in the relevant AY 2005-06, the assessee took out the WDV of such intangible asset at Rs. 53,51,012/- from the block of assets of intangible asset and claimed the entire amount as deduction while com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such expenditure as an amortization of expenses and subsequently claimed depreciation @ 25% on such assets in AY 2004-05. He argued that once the asset is capitalized and claimed depreciation on the same, different treatment cannot be given and this cannot be claimed as revenue expenditure. According to Ld. Sr. DR, the assessee has acquired a capital asset and is deriving enduring benefit out of it. Hence, the expense cannot be claimed as capital in nature. Accordingly, he urged the bench to restore the order of AO. 6. On the other hand, the Ld. Counsel for the assessee supported the order of CIT(A). 7. We have heard rival submissions and gone through facts and circumstances of the case. The assessee company is engaged in the manufacturing of Specialized Refractories and Operating Systems used by producers of Iron & Steel. The assessee in pursuance to the technological up-gradation, entered into a technical assistance agreement with Krosaki Harima Corporation (KHC), by virtue of which, the assessee was granted a license to use the technical knowhow of KHC in its manufacturing operations. In consideration of KHC's disclosure of such technical information, assessee paid a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO added back the entire sum written off by the assessee and allowed only 50% of depreciation @ 25% of the total lump sum payment i.e Rs. 80,77,002/-. He further held that since the production began on 1.2.2005, the assessee was not entitled to depreciation in AY 2003-04 & 2004-05 also. From the above facts, it is clear that the amount was not written off on 1.4.2004 but was written off on 3l.3.2005, which was subsequent to commencement of production. This is substantiated by the fact that the letter of technical advisor is dated 31.3.2005, which shows that in-house appraisal of technologies took place in the year end in the course of which the writing off was done. 9. Secondly, the assessee had claimed depreciation on the same in AY 2004-05 and had shown the unamortized amount under the head 'Fixed Assets' of the Balance Sheet, however, treatment given by the assessee in the books of accounts is not conclusive. The true nature of the expenditure can be determined from the facts and circumstances of the case. Therefore let us now determine the true nature of the expenditure in the light of facts of the case and the legal position as argued by assessee. The first case l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business or not. In this regard it is pointed out that under the agreement the assessee was permitted to manufacture SNR products using KHC's technology, as per clause 2 of Article 1 of the agreement. Further, the assessee was already engaged in the manufacturing of SNR products as is evident from the clause of agreement that" .... IFGL has been supplying their product of SNR into the major steel mills in lower price ....". Therefore, it is clear that with the new technology, the assessee was not producing a new product, rather the assessee was producing the same product but with improved technology. Thus, from the above it is clear that the expenditure on account of know-how was not in pursuance of a new line of business. Further, the said expenditure was not account of an initial outlay or extension of business. Neither was the expenditure incurred to replace any equipment. Therefore, it is clear that the assessee's case does not fall under category (i). 10. Now, whether the aforesaid expenditure brought into existence an asset for the enduring benefit of the business, it would be appropriate to analyse the terms and conditions of the said agreement. On perusal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the technical know was at no point in time transferred absolutely in favour of the assessee. All the rights attached to ownership were still with KHC and had not been passed on to the assessee which was only given the rights of a user. By disclosing the technical information KHC had not parted with any of its assets and neither had the assessee acquired an asset. 11. We have gone through the Judgment of Hon'ble Supreme Court in case of CIT v Ciba of India Ltd. (1968) 69 ITR 692 (SC) wherein it is held that "the contribution was allowable as business expenditure under section l0(2)(xv). The assessee did not under the agreement become entitled exclusively even for the period of the agreement, to the patents and trade mark of the Swiss company; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The assessee was on that account a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade mark of that company. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions as discussed in the agreement. Hence, it is clear that the expenditure on account of know-how was neither in pursuance of a new line of business nor did it bring into existence any asset of enduring nature. Further, our attention was invited to the decision of Hon'ble Supreme Court in case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), whereby it is held that "The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from the area of the day-to-day business of the assessee 's established enterprise. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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