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TMI Blog2018 (7) TMI 2035X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible for deduction ?" 3. The bare necessary facts of the case are that the appellant-company was incorporated on 27.09.1994. Prior to its incorporation, Memorandum of Understanding (for short 'MoU') was signed on 07.07.1994, between M/s Berlac Limited of Switzerland (for short 'foreign company') and appellant. The MoU was signed for setting up of a joint venture in India for manufacturing of lacquers, varnishes, paints etc. The foreign company was to transfer technical information for manufacture of planned products including composition/specification of material, equipment required, technique of production and tests & procedures for quality control. The appellant-company was to pay royalty @ 5% net of taxes on sales of respective products for a period of seven years. The foreign company deputed Mrs. Heinz Kohler, one of its employee for supervising new products and development to be undertaken by the appellantcompany. 4. The assessment year involved was the first year of commercial production. The appellant filed Income Tax Return and claimed Rs. 1,64,157/- royalty paid, as revenue expenditure. 5. Vide order dated 24.08.1998, the Assessing Officer finali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sach, Switzerland, hereinafter referred to as "BERLAC" and Mr. Y. Saboo (including his nominees and nominated/associated firms and companies), residing at H. No.1, Sector 5, Chandigarh 160008 (INDIA), hereinafter referred to as "SABOO", for the purpose of setting up a joint venture in India for the manufacture of specialty lacquers, varnishes, paints and other similar products. An understanding has been reached between the two parties as to the following :- 1. Subject to the techno-economic - viability being established, parties agree to set up a joint venture to manufacture in India at first lacquers, followed by varnishes, enamels, printing inks and related auxiliary products in mutually agreed phases. Necessary steps for the planning and implementation of this project shall be started on both sides. 2. BERLAC agrees to transfer to SABOO all technical information for the manufacture of the planned products including the composition specifications of materials and equipment required, the techniques of production, tests and procedures for the quality control. For the knowhow transfer as above, BERLAC is to be paid royalty @5%, net of taxes on sales of respective products in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Ltd. Vs. CIT (2017) 8 SCC 170, while considering royalty paid for acquisition of technical information and know-how, held as under :- XX XX XX "19. If the aforesaid factors are taken in isolation, probably the claim of the assessee may be justified. Distinction between capital and revenue expenditure with reference to acquisition of technical information and know-how has been spelled out by this Court as well as the High Courts in series of cases. Primary test which is adopted to differentiate between capital and revenue expenditure remains the same, namely, the enduring benefit, it will be treated as capital expenditure. In contradistinction to the cases where expenditure of concurrent and reoccuring nature is incurred and latter would belong to revenue field. Technical information and know-how are intangible. They have different and distinct character from tangible assets. When the expenditure is incurred to acquire a tangible asset, determination as to whether the said acquisition of tangible asset is of capital nature or the expenditure is of revenue nature, may not post a problem. However, in case of technical information and know-how, having regard to their uniqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a limited period, but considering the agreement, it was held that agreement was framed in a manner to give it a colour of licence for a limited period, whereas it was not so. 16. In M/s Jonas Woodhead and Sons Ltd., Madras Vs. Commissioner of Income Tax, Madras (1997) 224 ITR 342, the apex Court laid down test to determine whether a particular payment is revenue expenditure or capital expenditure as follows:- XX XX XX "4. The question whether a particular payment made by the assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made, is the part and parcel of the existing business or a new business was set up with the so called technical knowhow for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lembic Chemical Work's case (1989) 177 ITR 377 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. But in the case in hand the Tribunal having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable 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 a revenue expenditure merely because the payment is required to be made on a certain percentage of the rates of the gross turnover of the products of the income 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the level of rendering valuable services including setting up of factory. Though, the royalty was to be paid over a period of seven years, there was no restriction on the appellant to continue with the manufacture and sale of products thereafter also. In the present case, the expenditure was incurred at the pre-production stage and hence is being held as capital expenditure. In view of the decisions of the Supreme Court in M/s Jonas Woodhead and Sons Ltd., Madras (supra) and Honda Seil Cars India Limited (supra), no blemish can be cast upon by the findings arrived by Tribunal holding that the payment of royalty was capital in nature. 21. In all fairness, we refer to the contention of the learned counsel for the appellant that since the payment of royalty was being made on percentage basis of sales, therefore, payment was revenue in nature, is not well founded. Though, the CIT(A) had allowed the appeal merely on that basis but had erred as the mode of payment either being made in lump sum or in installments or on percentage of sales, is a decision taken by the parties, as per their commercial expediency. It would not be the sole deciding factor regarding nature of expenditure. 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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