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TMI Blog2016 (1) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... ir Singh, JM: This appeal by revenue is arising out of order of CIT(A)-VI, Kolkata in Appeal No.276/CIT(A)-VI/07-08/C-6 dated 24.07.2008. Assessment was framed by Addl. CIT, Range-6, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2005-06 vide its order dated 30.11.2007. 2. The only issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance made by AO on account of write off of technical know-how. For this, revenue has raised following effective ground nos. 2 and 3: 2. That Ld. Cit(a) had erred in law and as well as on facts in deleting the disallowance of ₹ 53,51,012/-, made by the AO, on account of write off of technical know- how, where such intangible asset was very much 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the contention of the appellant and also judicial views cited by the appellant in statement of facts of case filed. Considering the facts and circumstances of the case, I am inclined to accept the submission of A/R of the appellant that the appellant is entitled to claim such expenses written off as revenue expenditure, instead of depreciation as allowed by AO. In view of the above, accordingly, AO is directed to allow the claim of ₹ 53,51,012/- on account of write off of technical knowhow fee and depreciation of ₹ 10,09,625/- allowed shall be withdrawn. Accordingly, ground no. 4 is al1owed. Aggrieved, now revenue is in appeal before us. 5. Before us Ld. Sr. DR argued that the assessee has purchased/acquired technical know-how and in AY 2003-04 it has capitalized the asset and claimed 1/6th of 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 derivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h technology, would be available at least for three to five years and accordingly the assessee did not claim the entire expenditure in the same year and decided to claim 1/6th in the first year and defer the amortization of the rest to the succeeding years. However, in course of in-house appraisal of technologies, it was realized that the said technology had become obsolete and substantial benefits were no longer expected to be received there from, hence, the assessee wrote off the balance of the unamortized technical fees in the relevant AY. The assessee in support of such claim of obsolescence of technology furnished a note, from which it is found that commercial production of products had commenced from lst February 2005. Secondly, technical advisor recommended write off of the unamortized portion as on 1.4.2004. We find that 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 ₹ 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 writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w determine, whether the expenditure on account of technical know fees, in the assessee's case, falls under any of the above two categories, if not then the same should be held to be revenue in nature. From the above, it is clear that an expenditure regardless of its source being capital or income, will be held to be on capital account if: (i) it is made for initial outlay or extension of business or a substantial replacement of the equipment or; (ii) it brings into existence an asset or advantage for the enduring benefit of the business We find that Hon ble Supreme Court held that if the expenditure does not bring into existence an asset or advantage for the enduring benefit of the business, the same shall be revenue in nature. With regard to this, let us firstly determine whether the expenditure was in pursuance of a new line 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Prices of all export refractory products of SNR manufactured and sold by IFGL in overseas market. (Clause 2 of Article 8) From the above terms of agreement, two things are clear: (i) Firstly, the fact that the assessee was paying a royalty which was linked to the sales of products, goes on to prove that the agreement was for use of know-how in return of which the assessee was paying royalty to the licensor. In fact the AO has himself allowed such royalty against revenue profits. The aforesaid allowance of the royalty, read consideration for know-how, by the AO proves that transaction was not for acquisition of know-how, but for mere use of know-how. Had the transaction been on capital account, the AO would not have allowed the running royalty, as the same would have constituted consideration towards acquisition of know-how. (ii) Secondly, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge of KHC. Further, by making the technology available, KHC did not part with any assets of its business, nor did the assessee acquire any asset or advantage of an enduring mature for the benefit of the business. Accordingly, by applying the principles laid out by Supreme Court in case of Ciba of India Ltd. supra Wavin (India) Ltd. supra, we can safely infer that the expenditure incurred on account of technical know-how is revenue in nature and hence is deductible under the Act. 12. Thus in the light of the terms and conditions of the agreement and the principle as laid out in the pronouncements, as discussed above, it is clear that the assessee had not acquired any capital asset by incurring the expenditure on account of know-how. By incurring the expenditure the assessee merely became entitled to the use of the know-how subject to the terms and conditions 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 ..... 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