9911796707
TMI Blog2000 (8) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be allowed. It is 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 (Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------ With regard to the technical know-how fees pertaining to other projects, the learned counsel did not press the claim for deduction of the entire payment made in the respective assessment years as revenue expenditure. We would accordingly confine ourselves to the issue of deduction of technical know-how fees in respect of the aforesaid two projects, namely Caustic Soda Prills and Hydrogen Peroxide only. 4.1 The assessee-company is a Limited Company in which public are substantially interested, 34 per cent of the Equity is held by Gujarat Industrial Investment Corporation Limited and 33 per cent of the Equity is held by Financial Institutions and Nationalised Banks and the balance equity is held by the Public. The Company is engaged in the business of manufacture of caustic soda, liquid chlorine, Hydrochloric acid etc. Hydrogen Peroxide Project 4.2 The Company took up the project for manufacture of 11,000 MTA of Hydrogen Peroxide based on Auto Oxidation process at the Vadodara Complex, where the main feed stock hydrogen is available as a bye-product from the electrolytic caustic soda process. For acquiring the technical know-how for setting up th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into an agreement with M/s Mistry Prabhudas Manji Engineering (P.) Ltd. for providing technical know-how for setting up 100 TPD Caustic Soda Prilling Unit. Particulars of the agreement are placed at pages 54 to 62 of the paper book filed by the learned DR. Technology to be used in this plant was to be based on technical know-how from M/s Raytheon Engineers, USA M/s Dowy Chemicals, USA. The payments to be made as per the agreement comprised (a) for licence and know-how Rs. 5 crores (b) for basic engineering Rs. 3 crores. The agreement further provided that the MPM Engineering (P.) Ltd. would pay the following royalty to the assessee on Future Caustic Flaking/Prilling units offered to any other party. FOR CONVERSION PLANTS FROM CAUSTIC SODA FLAKING TO PRILLS: 2.5 PER CENT OF THIS ORDER VALUE FOR FIRST THREE PLANTS (EACH PLANT) FOR GRASS ROOT PRILLING PLANTS I.E. FROM LYE TO PRILLS 2% OF THE ORDER VALUE OF FIRST THREE PLANTS (EACH PLANT) 4.7 From the aforesaid facts it would be noted that payments for acquiring technical know-how have been made by the assessee-company for setting up a new unit for manufacture of caustic soda prills and the party providing the technical know-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation on the intangible assets under section 32 with effect from 1-4-1999 amply demonstrates that section 35AB applies only to capital expenditure whereby the assessee purchases technical know-how in an outright manner. The learned counsel placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Sayaji Industries Ltd. [IT Appeal No. 3582 (Ahd.) of 1992] whereby it has been held by the Tribunal vide order dated 15-9-1999 that lumpsum consideration paid for use of technical know-how without acquiring ownership rights constitutes revenue expenditure under section 37. The learned counsel further placed reliance on the following decisions: 1. CIT v. IAEC (Pumps) Ltd. [1998] 232 ITR 316 (SC). 2. CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). 3. CIT v. BPL Systems & Projects Ltd. [1997] 227 ITR 779 (Ker.). 4. CIT v. Tata Engg. & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538 (Bom.). 5. K.T. Udeshi v. CIT [1978] 114 ITR 542 (Bom.). 6. Kirloskar Pneumatic Co. Ltd. v. CIT [1982] 136 ITR 746 (Bom.). The learned counsel further referred to the Third Member decision of Delhi Bench of the Tribunal in the case of Good year India Ltd. v. ITO [2000] 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Legislature which clearly brings out the legislative intent that section 35AB would extend to expenditure on technical know-how whether capital or revenue in nature. 4.14 We have carefully considered the rival submissions and have gone through the string of judicial authorities cited on behalf of both the sides before us. A question whether a particular payment made by an assessee under the terms of an agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors whether the assessee obtained completely a new plant 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 intended for the betterment of the product in question which was already being produced, whether the improvision made is part and parcel of the existing business or a new plant was set up with the technical know-how for which payments were made, whether on expiry of a period of agreement the assessee is required to give back the plans and designs which were obtained. The cumulative effect on a construction of various terms and conditions of the agreement would have to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which is outside the purview of section 37(1). The expenditure in question on account of technical know-how has a close and proximate connection with the setting up of new plants for production of hydrogen peroxide and caustic soda prills. Obviously, the expenditure would contribute to augmentation and expansion of the profit earning apparatus of the assessee-company and therefore clearly lies in the capital field. Since the basic frame work of the capital structure of the business is being extended and expanded, we have no doubt in our mind that the expenditure is of capital nature. Setting up of new plants cannot by any stretch of imagination be construed as connected with the running and conduct of assessee's business. 4.20 From the terms and conditions of the collaboration agreements under which the technical know-how has been acquired by the assessee, as set out here-in-before it clearly follows that the technical know-how fees paid by the assessee under both the agreements is fully covered under the provisions of section 35AB. In the case of collaboration agreement entered into with UHDE, the German Company, the assessee acquired irrevocable right for setting up the manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Hon'ble Bombay High Court in the case of Tata Engg. & Locomotive Co. (P.) Ltd. In this case the agreements entered into by the assessee were essentially for acquiring technical knowledge regarding methods of production or for use of the trade name. The expenditure was thus clearly intended to improve the efficiency of the profit earning apparatus of the company. The expenditure was connected with the running of the business and not with the capital structure of the business. The decision therefore, does not held the case of the assessee. 4.25 For the aforesaid reasons we uphold the order of the CIT(A) on the issue for both the assessment years i.e., assessment years 1994-95 and 1995-96 and reject the common ground of appeal. 5. Ground No. 3 reads as under: "The learned CIT(A) has erred in confirming the disallowance of Rs.6,42,11,408 being amount of interest paid in respect of Phosphoric Acid, Hydrogen Peroxide and Caustic Soda Prills and Commitment charges in respect of Hydrogen Peroxide. While confirming the disallowance reliance placed in the reverse way on provisions of section 43(1) were also misplaced. It is therefore, submitted that the expenditure is admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 business are liable as revenue expenditure irrespective of the object and purpose for which loans raised have been utilised. The learned counsel placed reliance on the following decisions of Ahmedabad Bench of the Tribunal: 1. Dy. CIT v. Patel Filter [IT Appeal No. 1870 (Ahd.) of 1989]. 2. Vadilal Dairy [IT Appeal No. 500 (Ahd.) of 1997]. 3. Dy. CIT v. GSFC (IT Appeal No. 974 (Ahd.) of 1994]. Further reliance is placed on the following decisions of M.P. High Court: 1. CIT v. Malwa Vanaspati & Chemicals Co. Ltd. [1997] 92 Taxman 262. 2. CIT v. Bhilai Iron & Foundry (P.) Ltd. [1998] 100 Taxman 193. The learned counsel argued that the projects being set up by the assessee-company constitute expansion of running business of the assessee inasmuch as the projects are part of the forward integration of backward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 embodies the legislative intention that interest paid in respect of capital borrowed would be deducted as revenue expenditure. It is immaterial whether capital is borrowed for purchase of capital asset of the business or whether borrowing is for the purpose of conduct and running of business of the assessee. Whatever be the purpose for which capital is borrowed, interest paid thereon would be deductible provided the borrowing is "for the purposes of the business". Once the condition for deduction of interest, as stipulated under section 36(1)(iii) is fulfilled and capital is borrowed for the purposes of the business, the amount of interest would be treated as revenue expenditure. 5.4 The Revenue has heavily relied upon Explanation 8 below section 43(1) of the Act by the Finance Act, 1986 with effect from 1-4-1974. The said Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 legislative intent. Hence in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1-4-1974 and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years." From the aforesaid Circular it is clear that Explanation 8 has been inserted by the Legislature retrospectively for clarifying the meaning of the expression "actual cost" for purposes of claiming depreciation and investment allowance etc. The Explanation is intended to exclude capitalisation of interest relating to the post-production period. However, the Explanation cannot be used for the purpose of denying the claim of deduction as allowed under section 36(1)(iii). The scope and ambit of section 36(1)(iii) is not in any manner res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stt. 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 aforesaid decisions of Hon'ble Supreme Court as well as High Courts including the Hon'ble Gujarat High Court, we hold that interest and commitment charges are allowable as revenue expenditure under section 36(1)(iii). However, the Assessing Officer would withdraw the depreciation allowed in relation to the capitalised interest. Ground of appeal No. (3) in ITA No. 15/35/Ahd./99 is accordingly allowed. The Assessing Officer would consequently withdraw the depreciation allowed in relation to the capitalised amount. 6. Ground No. 4 reads as under: "The learned CIT(A) has erred in disallowing deduction of Rs.9,90,000 being consultancy fees paid to M/s Tata Economic & Consultancy Service for obtaining feasibility study report for power generation. It is submitted that power is consumed substantially as the main raw material is power f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Hon'ble Gujarat High Court inter alia on the ground that the expenditure was undertaken with the purpose and object of creating a capital asset. In this decision their Lordship approvingly referred to their earlier decision in the case of CIT v. Shri Digvijay Cement Co. Ltd [1986] 159 ITR 253. In CIT v. Ambica Mills Ltd. [1999] 236 ITR 921 (Guj.), cited by the learned DR, expenditure incurred for getting feasibility report for putting up new steel plant has been held to been capital expenditure. A similar view has been taken by the Delhi High Court in the case of Triveni Engg. Works Ltd. v. CIT[1998] 232 ITR 639 relied upon by the learned DR before us. In this case the assessee claimed deduction of expenditure incurred for obtaining a project report for manufacturing insecticide formulation. The Court held that the expenditure attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. v. CIT [1973] 87 ITR 542 and held that Sales-tax from part of the trading receipt. With regard to Excise duty, the Assessing Officer placed reliance on the decision of Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. The learned counsel strongly argued that Excise duty and Sales tax do not form part of the total turnover since export turnover used in the numerator do not include Sales-tax and Excise duty. In support of his contention the learned counsel placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Dinesh Mills Ltd. [1999] 72 ITD 110. The learned DR, on the other hand, placed reliance on the following decisions of the Tribunal in support of his contentions Sales-tax and Excise, Duty from part of total turnover: 1. Britannia Industries Ltd. v. Dy. CIT [1999] 71 ITD 14 (Cal.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 working out profits of the business. We would accordingly direct the Assessing Officer to include Insurance receipts while working out profits from the business under Explanation (baa). 9.2 With regard to Dividend, the Assessing Officer has deducted an amount of Rs.1,34,97,701 on account of dividend while working out "profits of the business" under Explanation (baa). The dividend is obviously not assessable as business income and is covered under the head "income from other sources." The Assessing Officer is therefore justified in excluding the dividend income for the purpose of computing profits of the business under Explanation (baa). 9.3 With regard to computation under section 80HHC, no other grievance has been pressed before us by the learned counsel on behalf of the assessee company. We would accordingly direct the Assessing Officer to include Insura ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
