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TMI Blog2019 (11) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... new machinery which has been purchased by the assessee, but, it is in the nature of repair and maintenance of the existing machinery. The grounds raised by the assessee on this issue are accordingly dismissed. Disallowance on account of reclassification of certain assets as Building other than Residential - eligible for depreciation at 10%, which were originally classified by the Appellant as Plant and Machinery , eligible for depreciation at 15% - HELD THAT:- No infirmity in the order of the CIT(A) on this issue. The coal shed and GI sheets, in our opinion, cannot be considered as plant machinery when the assessee is engaged in manufacture of cement. We find merit in the logic given by the CIT(A) that the godowns, warehouses and other buildings which are utilized in an ordinary manner even for housing plant or machinery would not become plant or machinery by itself. Further, he has also given a finding that the GI sheets are such material which are utilized for the plant and by its nature this cannot be characterized as plant or machinery. Under these circumstances, we uphold the order of the CIT(A) and dismiss the grounds raised by the assessee on this issue. Disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional depreciation has been claimed that are not required for manufacturing activity or are mere replacements of plant machinery earlier in use. He, therefore, asked the assessee to justify the same and to explain as to why the claim of additional depreciation on the various items as per para 1.1 of his order be not disallowed. The assessee, in response to the said notice submitted that all the items as pointed out by the Assessing Officer are integral part of the Plant machinery which are essential for the smooth operations of the plant machinery. It was explained that such items are not capable of being used in isolation since the application of such items is essentially based on the functionality of the plant machinery. Therefore, they form an integral part of the plant and are to be treated as plant for the purpose of allowing additional depreciation. 4. However, the Assessing Officer was not satisfied with the argument advanced by the assessee. He referred to the provisions of section 32(1)(iia) of the Act and observed that the said section clearly allows additional depreciation for acquisition and installation of new plant machinery and not for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was entitled to extra depreciation under the provisions of section 10(2)(via) of 1922 Act in respect of engines so replaced. He accordingly submitted that the assessee is entitled to additional depreciation and, therefore, the CIT(A) was not justified in rejecting the claim of the assessee. 8. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that if the expenses of repair and maintenance of the existing machinery are permitted, then, even the repair expenditure would be entitled to additional depreciation. She accordingly submitted that the order of the ld.CIT(A) being in accordance with law should be upheld. 9. We have considered the rival arguments advanced by both the sides and perused the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the Assessing Officer, in the instant case, disallowed additional depreciation to the tune of ₹ 87,12,690/- on the ground that additional depreciation is allowable only for acquisition and installation of new plant machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the detailed nature and use of the assets, while holding this disallowance. 10. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has charged higher rate of depreciation on coal sheds and new GI sheets and, therefore, he disallowed an amount of ₹ 8,75,709/- on account of excess depreciation claimed. Before the CIT(A), it was argued that the coal sheds are integral part of the manufacturing process and similarly the GI sheets upon the factory building cannot be treated as a building because it is a part of the plant. However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee and rejected the ground by observing as under:- 5.2 I have given careful perusal of the facts of the case. The claim of the applicant that the coal shed is part of plant and machinery is not acceptable because in a business operation of manufacturing each and every building by that logic would become plant or machinery. The godowns, warehouses, and other buildings which are utilized in ordinary manner even for housing any plant or machinery would become plant or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, on the ground that such expenses have resulted in benefits of enduring nature to the Appellant and thereby constitutes a capital asset. 3.1 The Ld. CIT(A)/Ld.AO have erred on facts and in law in not appreciating that the Technical Know-how has been utilized for smooth running of the business of the Appellant and has not lead to acquisition of any new capital asset. 16. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings noted that the assessee has claimed expenses of technical know-how fee during the year to the tune of ₹ 14,09,84,000/-. This fee was paid to a foreign company M/s Heidelberg Cement Asia Pte Ltd. (HCA) in lieu of technical knowhow assistance from them. The assessee has debited the above amount as revenue expenditure. According to the Assessing Officer, this gives rise to benefit/advantage which is enduring in nature. He, therefore, asked the assessee to explain as to why the claim should not be allowed as a capital expenditure and not as a revenue expenditure. It was explained by the assessee that the expenditure was incurred by the assessee for technical information and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the entire business. The acquisition of technical know-how has brought in a complete and comprehensive overhauling of the entire business of the assessee. Relying on various decisions, the Assessing Officer held that 25% of the total technical know-how expenses of ₹ 14,09,84,000/- which comes to ₹ 3,52,46,000/- has to be treated as capital expenditure being spent towards acquisition of capital asset as it gives rise to enduring benefit which can be enjoyed by the assessee over a number of years. He, therefore, allowed depreciation on the above amounting to ₹ 88,11,500/- and made addition of ₹ 2,64,34,500/- to the total income of the assessee. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer. 19. Aggrieved with such order of the CIT(A), the assessee is in appeal. 20. The ld. counsel for the assessee strongly challenged the order of the CIT(A) upholding the order of the Assessing Officer. He submitted that the assessee was not a subsidiary of foreign company nor it is a case of diversion of any profit. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical information and assistance relates to the improving the process of manufacturing, therefore, the said amount is revenue in nature and, therefore, the ld.CIT(A) is not justified in upholding the action of the Assessing Officer by treating 25% of such payment as capital in nature and thereby allowing only depreciation on the same. 21. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that the benefit received by the assessee on account of such payment amounts to enduring benefit beyond the terms of the agreement. Referring to the decision of the Hon'ble Supreme Court in the case of Southern Switch Gear Ltd., 232 ITR 359, she submitted that in that case the assessee has entered into a collaboration agreement for providing for technical know-how for setting up of a factory and operation thereof. The foreign company agreed not to manufacture products in India and given right to a third person to do the same. Referring to the clauses of the agreement, it was held that the technical know-how so acquired resulted in enduring advantage and benefit and that the same was available to the assessee for its manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 2,64,34,500/- to the total income of the assessee. While doing so, the Assessing Officer held that the scope read with the provisions of technical know-how clearly indicate that the acquisition of technical know-how seeks to improve each and every aspect of the entire business. The agreement between the assessee and the HCA shows that the acquisition of technical know-how has brought in a complete and comprehensive overhauling of the entire business of the assessee. Therefore, the agreement clearly indicates that the technical knowledge the assessee obtained from this agreement with HCA secured to the assessee an enduring advantage and though benefit which was available to the assessee for its manufacturing and industrial process even after the termination of agreement ceases, but, when the agreement never terminates on account of revision/automatic renewal the benefit goes on and on. Further, continuous use of improved practices over several years leads to creation of institutional memory of advanced procedures and techniques. The Assessing Officer further noted that due to latent learning of systematic procedures and techniques through periodic training of pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information (or any of it) made by the MCL shall be and remain the property of HCA and MCL acknowledges the copyright in the Technical Information shall belong to an remain vested with HCA. HCA hereby grants to MCL licence to make such number of copies of the Technical Information (or any part thereof) as the MCL may reasonably require for the purposes of Agreement. 22.1 We find clause 5 of the agreement reads as under:- Technical know-how fee in respect of each quarter of a year equal to 2% on the basis of the net ex-factory price of the produce exclusive of excise duties minus the cost of standard bought-out components and landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties and net of distribution costs (fright and forwarding) etc. and as shown in the unaudited/audited financial accounts of MCI. 22.2 Similarly, clause 13 of the agreement reads as under:- 13.1 Upon the expiration of the term or earlier termination of this Agreement, MCL shall: 13.1.1 at its own cost promptly return to HCA, or otherwise dispose of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed parts which the Honda owned at the time of execution of the agreement or would own from time to time during the subsistence of the agreement. The term 'products' meant two-wheelers or three-wheelers as expressly specified under clauses (a) and (b), identified by licensor's development codes, viz. 198s, KCCA, etc. which had already been developed and was under manufacture under the earlier agreement. Under clause (c), it would include additional models or types of two/three wheelers pursuant to 'model change' as specified in the model agreement. The term 'new models' was to mean new models developed by Honda at the request of the respondent assessee with new development code and subject to new model agreement. Similarly, the term 'model change' was defined as conduct through which a new model with new development code was made by a change in any part or entirety of the product, including but not limited to appearance, structure, characteristics or specifications and in each case was subject to a new model agreement. The agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent's factories and other facilities for inspections to check and confirm whether conditions/obligations imposed were being complied with. (8) Knowhow, technical information and other non-public technical or business information was to remain solely and exclusively the property of Honda and was to be held in trust and in confidence for Honda by the respondent assessee. This information was not to be divulged, communicated or made known to third persons in any manner whatsoever, except as expressly provided. Respondent was to take all necessary precautions to keep the said information secret and confidential and restrict its use strictly as per the first as well as the present agreement. The respondent assessee was to establish and maintain internal regulations and procedures for protection of secrecy. The information could be disclosed to employees, Directors or approved sub-contractors when it was reasonably necessary for the purpose of manufacture, assembly, repair and servicing, subject to obtaining a 'written promise' from the approved sub-contractors to treat all information as secret and confidential. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. Royalty was running and periodical payment as specified in Exhibit 1 or the amounts calculated by multiplying the rate specified in Exhibit 1 with reference to the ex-factory/exwarehouse sales price. 16. Reading the aforesaid terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical knowhow and information. The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital expenditure. The expenditure was to be of revenue nature. In the case of Jonas Wood Head and Sons Vs. CIT, 117 ITR 55, it was held that the question regarding capital or revenue expenditure depends on the terms of agreement in each case. In the case of CIT Vs. Gujarat Carbon Ltd., 254 ITR 294, it was held that the payment of revenue under the agreement was directly relatable to services which were in the revenue field and were allowable as revenue expenditure. In the case of Goodyear (I) Ltd. Vs. ITO 73 ITD 189(Delhi), the assessee had not acquired ownership right of technical knowhow but transfer of use of licenses. There was no advantage of enduring nature and hence it was held to be a case of revenue expenditure. In the case of Travancore Sugar and Chemicals Ltd. 62 ITR 566 (SC) it was held that whenever a payment is based on a percentage of turnover or profits, it necessarily has no relation to the capital value of the asset, because it cannot be known at the time of the agreement what the turnover or profits will be over a period of years. In another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124 Taxman 188, the Tribunal held, revenue payment is allowable as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration, approval accorded by Government of India provides that in case item of manufacture is one which is patented in India, payment of 'Royalty'/lump sum made by Indian Company to Foreign collaborator, during period of agreement shall constitute full compensation for use of patent right till expiry of life of patent and Indian Company shall be free to manufacture that item even after expiry of the collaboration agreement without making any additional payments. Assessee claimed that royalty payment is part of percentage of selling price of product and not for acquiring technical know-how of manufactured licensed product having enduring benefit. These facts available on record have not been disputed and we have not been shown any authority so as to justify to take a different view than what has been taken by Tribunal. 37. In view thereof, we answer both the aforesaid questions against Revenue and in favour of Assessee and confirm the view taken by Tribunal on all these aspects. 27. Respectfully following the decisions cited, supra, we hold that the ld.CIT(A) is not justified in upholding the action of the Assessing Officer in treating 25% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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