9911796707
TMI Blog2000 (8) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that this being the position the whole expenditure should be allowed." In the return of income filed by the assessee-company for assessment year 1995-96 the assessee claimed deduction of technical know-how fees under section 35AB amounting to Rs.6,26,70,890. In the note enclosed with the return the assessee however, claimed that deduction on account of technical know-how fees paid during the year amounting to Rs.13,60,50,698 should be allowed in full since the expenditure incurred on payment of technical know-how fees represents allowable business expenditure under section 37(1). The technical know-how fees paid during the year related to various projects as under: 1. Membrane Cell-II (Commissioned) Rs. 19,42,711.00 2. Potassium Hydroxide (Commissioned) Rs. 71,35,107.00 3. Phosphoric Acid Rs. 49,00,000.00 4. Sodium Hypochloride-II (Commissioned) Rs. 52,500.00 5. 300 TPD Caustic Soda Rs. 41,64,809.00 6. Hydrogen Peroxide Rs. 11,64,69,440.00 7. 90 MW Power Project Rs. 13,86,131.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1 UHDE hereby grants to GACL the irrevocable, non-exclusive and non-transferable right to establish and operate the PLANT and to sell Hydrogen Peroxide from the PLANT anywhere, except the Republic of Korea and Southern Africa (Africa south of latitutde 10 degrees south). UHDE undertakes for a period of three years from START UP, to not grant a licence in India under terms and conditions more favourable to the licensee than the terms and conditions under the present CONTRACT. 2.2 UHDE shall perform basic engineering services, with regard to the process plant sections as mentioned in ANNEXURE I. The scope of such engineering to be performed by UHDE is described in ANNEXURE IV. 2.3 UHDE shall provide training to GACL's personnel in an operating Hydrogen Peroxide Plant in South Africa and/or Republic of Korea for two batches of eight persons for a period of three weeks each." 4.3 Article 9 stipulates that the assessee undertakes to treat as strictly confidential the information and data disclosed by the UHDE. The technical information and data provided by the German Company was to be used exclusively by the assessee in connection with the setting up of the plant and ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 35AB and not under section 37. The Assessing Officer placed reliance on the decision of Hon'ble Madras High Court in the case of Erode Transports (P.) Ltd. v. CIT [1969] 71 ITR 283 and held that since the expenditure has been incurred for acquiring benefit of enduring nature, provisions of section 37 would not apply. Further placing reliance on the decision of Allahabad High Court in the case of Ram Kumar Pharmaceuticals Works v. CIT [1979] 119 ITR 33, the Assessing Officer held that the expenditure in question constituted capital expenditure outside the purview of section 37. The Assessing Officer accordingly, allowed deduction of 1/6th of the technical know-how fees under the provisions of section 35AB. 4.9 In appeal, the learned CIT(A) upheld the action of the Assessing Officer allowing deduction equal to 1/6th of technical know-how fees paid by the assessee during the relevant year. 4.10 Shri J.P. Shah, the learned counsel for the assessee, argued that technical know-how fees in respect of Hydrogen Peroxide Plant and Caustic Soda Prilling Plant constitute deductible revenue expenditure under section 37 and the entire technical know-how fees claimed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR, expenditure incurred in the process of setting up new plants is inextricably linked with the capital cost of the project and would clearly be outside the purview of section 37. The learned DR, relying upon the decision of the Hon'ble Gujarat High Court in the case of Shree Vallabh Glass Works v. CIT[1981] 127 ITR 37, argued that all expenditure necessary to bring capital assets into existence and to put those assets in working condition has been held by the jurisdictional High Court to be integral part of the actual cost of the assets to the assessee. The learned DR further relied upon the following decisions in support of his contentions: (1) Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 (SC). (2) McGaw Ravindra Laboratories v. CIT [1994] 207 ITR 239 (Guj.). (3) Jyoti Electric Motors Ltd v. CIT [1999] 237 ITR 280 (Guj.). (4) Jonas Woodhead Sons (India) Ltd. v. CIT [1997] 224 ITR 342 (SC). (5) CIT v. Thyristors Controls (P.) Ltd. v. CIT [1994] 207 ITR 317 (Guj.). (6) Ram Kumar Pharmaceutical Works' case. (7) D H Secheron Electrodes v. CIT [1981] 132 ITR 1 (MP). 4.12 The learned DR argued that a close reading of the Collaboration A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently and more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. 4.16 In Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 the Hon'ble Supreme Court held that since the expenditure had been incurred to improve the efficiency and profitability of the existing business of the assessee, the expenditure was revenue in nature. 4.17 Relying upon the aforesaid decisions of the Hon'ble Supreme Court, it has been held by the Hon'ble Gujarat High Court in the case of CIT v. Suhrid Geigy Ltd. [1996] 220 ITR 153 that if the technical know-how is acquired for the purpose of establishing an altogether new or fresh venture or the launching of a new enterprise, the expenditure may be treated as capital and not revenue. 4.18 In the rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l know-how fees have been paid for setting up the project on turnkey basis and the collaborator party is liable under the agreement to pay royalty to the assessee in case similar plant is offered to any other party. These vital facts relating to the aforesaid collaboration agreements entered into by the assessee lead to the irresistible conclusion that the lump sum payments for acquiring technical know-how are covered under the provisions of section 35AB and the provisions of section 37(1) would not apply. 4.21 Since the expenditure on account of technical know-how incurred by the assessee has been held by us to be capital in nature, we do not consider it necessary to consider and decide the alternative contentions of the Revenue that even if expenditure on technical know-how is revenue in nature, section 35AB would override the provisions of section 37(1). 4.22 Before parting with this ground, we may observe that the decisions cited by the learned counsel in support of his contentions have been carefully perused by us. In our opinion these decisions render no assistance to the assessee's case. In these decisions the basic test laid down by the Hon'ble Supreme Court for ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,50,19,789 (iii) Caustic Soda Prills Rs. 12,03,236 ------------------- Rs. 6,35,09,765 Commitment Charges: (i) Phosphoric Acid Rs. 7,01,642 ------------------- Total Rs. 6,42,11,408 ------------------- During the year Caustic Soda Prills Unit commenced production and depreciation has been allowed by the Assessing Officer amounting to Rs.12,03,236. The Assessing Officer however, disallowed claim of deduction amounting to Rs.6,42,11,408 treating the same as capital expenditure on the ground that the expenditure pertains to pre-commencement period during which the machinery has not been used for production purposes. The disallowance has been upheld by the learned CIT(A) treating the expenditure as capital expenditure. 5.1 The learned counsel, assailing the impugned disallowance argued that the view of the specific provisions contained under section 36(1)(iii), interest and commitment charges incurred by the assessee for the purposes of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1998] 65 ITD 169 and argued that in case the view taken earlier by the Ahmedabad Bench of the Tribunal is considered binding, the issue may be referred to a larger Bench to resolve the conflict of view between the various Benches of the Tribunal. 5.3 We have carefully considered the rival submissions and have gone through various decisions of Hon'ble Supreme Court and High Courts cited before us. While adjudicating ground No. 2 above relating the deduction of technical know-how fees, we have held that the test to be adopted for judging the nature of an expenditure whether revenue of capital is -- whether the expenditure is incurred for extension or expansion of the income yielding apparatus of the assessee's business OR whether the expenditure is connected with the running and conduct of business. In so far as interest paid on loans taken for purchase of machinery for setting up new projects is concerned, the expenditure is undoubtedly connected with the capital structure of assessee's business. However, the express and unequivocal provisions contained under section 36(1)(iii) carves out a clear exception to the general principle laid down above inasmuch as this section embod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of claiming depreciation, investment allowance, etc., under the Income-tax Act. 18.2 It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowings and not the cost of the assets acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the asset coming into production, i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalised. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some tax-payers had adopted a contrary stance and had capitalised such interest. The first decision in favour of this stance had been rendered on 13-5-1974, in the case of CIT v. J.K. Cotton Spg. Wvg. Mills Ltd. [1975] 98 ITR 153 (AP). This decision as well as the subsequent decisions were contrary to the legislati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 1972-73 to 1974-75. The machinery in question had not been actually used in the business of the assessee till the time when the assessments were made. This decision rendered by the Hon'ble Supreme Court relates inter alia to assessment year 1974-75 when Explanation 8 to section 43(1), inserted by the Finance Act, 1986 was applicable. Explanation 8 has been introduced by the Legislature retrospectively w.e.f. 1-4-1974 and applies for assessment year 1974-75 onwards. The decision is therefore a direct authority in favour of the view taken by us. A similar view has been taken by the Hon'ble Supreme Court in the cases of CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465 and Addl CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464. 5.7 We may also refer to the decision of jurisdictional High Court in the case of Arvind Polycot Ltd. v. Asstt. CIT [1996] 222 ITR 280 (Guj.) wherein it has been held by the Hon'ble Gujarat High Court relying upon its earlier decision in CIT v. Alembic Glass Industries Ltd [1976] 103 ITR 715 that interest paid on purchase of machinery for the pre-installation period is allowable as revenue expenditure under section 36(1)(iii). 5.8 Respectfully following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, has already been elucidated by us while adjudicating ground No. 2 above relating to deduction of technical know-how fees. Similar principles would apply for ascertaining whether expenses incurred for obtaining the feasibility study report for setting up the Captive Power Plant are capital or revenue in nature. The expenditure in question is obviously connected with the capital structure of the assessee-company. The profit earning apparatus of the company would be augmented by setting up the Captive Power Plant by the assessee. The Captive Power Plant would obviously the capital asset for the purposes of assessee's business and the expenditure for obtaining the feasibility study report, which is inextricably linked with the setting up of the Power Project, is thus clearly in the capital field. The decision of Gujarat High Court in CIT v. Deepak Nitrite Ltd. [2000] 108 Taxman 479 cited by the learned DR directly supports the case of the Revenue. In the said case the assessee had decided to install its own plant to produce adequate ammonia gas for its own captive use. Foreign tour expenses to study the feasibility of acquiring such a plant were held to be capital expenditure by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the IT Act. 7.2 While dealing with ground No. 3 above we have held that in view of specific provisions contained under section 36(1)(iii) amount of interest paid in respect of capital borrowed for the purpose of business is liable to be allowed as a revenue expenditure irrespective of the fact whether the expenditure has been incurred in the capital field. The Supreme Court decision cited by the learned counsel in any case fully supports the assessee's case. We would therefore delete the disallowance of Rs.7,18,551 and allow ground No. 5 8. [This para is not reproduced here as it involves minor issue.] 9. Ground Nos. 7, 8 and 9 are concerned with deduction under section 80HHC. The Assessing Officer has dealt with the issue vide para 17 of the assessment order and worked out deduction under section 80HHC amounting to Rs.40,40,318. In the synopsis of arguments submitted by the learned counsel, following objections have been raised before us by the learned counsel: Item 1. Excise Duty and Sales-tax included in the total turnover: With regard to Sales-tax, the Assessing Officer relied upon the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken by the Bombay Bench in Ponds (India) Ltd's case and Calcutta Bench in Britannia Industries Ltd's case since this view is in conformity with the decisions of the Hon'ble Supreme Court in the McDowell Co. Ltd's case and Chowringhee Sales Bureau (P.) Ltd's case as well as the view of Bombay High Court in the cases referred to above. Item 2. Insurance Claim and Dividend: While adopting the figure of "profits of the business" as defined under Explanation (baa) appended to section 80HHC, the Assessing Officer has excluded insurance claim and dividend on the ground that the dividend is not assessable as business income. There is no discussion in the assessment order as to why insurance claim of Rs.53,02,208 has been deducted from the business income for the purposes of Explanation (baa). The learned CIT(A) has however upheld the action of the Assessing Officer vide para 25 of the impugned order on the basis of Explanation (baa) inserted below sub-section (4B) of section 80HHC. We are not inclined to agree with the learned CIT(A). Insurance receipts form part of profits of business and Explanation (baa) does not make any reference for excluding the Insurance receipts while work ..... X X X X Extracts X X X X X X X X Extracts X X X X
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