M/s. Baxter India (P) Ltd., Haryana V. DCIT, New Delhi

CO 399/DEL/2010

• Counselvise Citation: [2016] 112 COUNSELVISE.COM (IT) 4081 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 7 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 21-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-04-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 14-12-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K K JAISWAL
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure; TDS

Judgement Text

ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 1 OF 24 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE VICE PRESIDENT & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NOS. 5323 & 2798/DEL/2012 ( ASSESSMENT YEARS: 2008-09 & 2007-08) ACIT CIRCLE 2(1), ROOM NO. 398D, C.R. BUILDING, NEW DELHI. VS BAXTER (INDIA) PVT. LTD. PLOT NO. 183, SECTOR 5, IMT MANESAR, HARYANA. AAACB3906F & ITA NO. 4785/DEL/2010 ( ASSESSMENT YEAR: 2004-05) DCIT CIRCLE 2(1), ROOM NO. 398D, C.R. BUILDING, NEW DELHI. VS BAXTER (INDIA) PVT. LTD. PLOT NO. 183, SECTOR 5, IMT MANESAR, HARYANA. AAACB3906F CROSS OBJECTION NO. 399/DEL/2010 (IN ITA NO. 4785/DEL/2010) ( ASSESSMENT YEAR: 2004-05) BAXTER (INDIA) PVT. LTD. PLOT NO. 183, SECTOR 5, IMT MANESAR, HARYANA. AAACB3906F VS DCIT CIRCLE 2(1), ROOM NO. 398D, C.R. BUILDING, NEW DELHI. ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 2 OF 24 ASSESSEE BY SH. HARPREET SINGH, ADV. & SH. ROHAN KHARE, ADV. REVENUE BY SH. K.K. JAISWAL, SR. DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER : ITA NO. 4785/DEL/2010 HAS BEEN PREFERRED BY THE DEP ARTMENT AGAINST THE ORDER DATED 30.08.2010 PASSED BY THE LD. CIT(AP PEALS)-V, NEW DELHI FOR AY 2004-05 AND CHALLENGES THE DELETION OF ADDITION ON ACCOUNT OF ROYALTY AMOUNTING TO RS. 1,33,83,745/-. CO 399/DEL/2010 HA S BEEN PREFERRED BY THE ASSESSEE ASSAILING THE INITIATION OF REASSESSMENT P ROCEEDINGS IN AY 2004-05. 2. ITA NO. 2798/DEL/2012 HAS BEEN PREFERRED BY THE DEPARTMENT AGAINST THE ORDER DATED 20.03.2012 PASSED BY THE LD. CIT(AP PEALS)-V, NEW DELHI FOR AY 2007-08 AND CHALLENGES THE IMPUGNED ORDER ON THR EE COUNTS VIZ. (I) DELETION OF ADDITION OF RS. 2,42,09,240/- ON ACCOUN T OF ROYALTY; (II) DELETION OF ADDITION OF RS. 18,423/- ON ACCOUNT OF EXTRA DEPRECIATION CLAIMED ON UPS; (III) DELETION OF ADDITION OF RS. 3 4,17,901/- ON ACCOUNT OF INTEREST INCOME. 3. ITA NO. 5323/DEL/2012 HAS ALSO BEEN PREFERRED BY THE DEPARTMENT DATE OF HEARING 25.04.2016 DATE OF PRONOUNCEMENT 21.07.2016 ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 3 OF 24 AGAINST THE ORDER DATED 28.11.2011 PASSED BY THE LD . CIT(APPEALS)-V, NEW DELHI FOR AY 2008-09 AND ASSAILS THE ACTION OF THE LD. CIT(APPEALS) IN DELETING THE ADDITION OF RS. 1,08,60,681/- ON ACCOU NT OF ROYALTY. SINCE ALL THE APPEALS HAD A COMMON ISSUE, THEY WERE HEARD TOGETHER AND THEY ARE BEING DISPOSED OF THROUGH THIS COMMON ORDER. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS PAI D ROYALTY TO M/S BAXTER INTERNATIONAL INC. USA @ 5.8% ON THE NET SALES ON Y EAR TO YEAR BASIS AND THE SAME WAS CLAIMED TO BE REVENUE EXPENDITURE. THE AS SESSEE I.E. BAXTER INDIA PVT. LTD. IS STATED TO BE A FRANCHISEE OF BAXTER IN TERNATIONAL INC. USA AND THE ASSESSEE USES THE NAME OF BAXTER AND MANUFACTURES HEALTH CARE PRODUCTS AND EQUIPMENT ACCORDING TO FORMULA, METHOD, TECHNIQ UES PROVIDED BY BAXTER INTERNATIONAL INC. AND IN RETURN THE ASSESSEE PAYS THE FEES IN THE FORM OF ROYALTY @ 5.8% OF THE NET SALE. HOWEVER, ITS BEEN THE DEPARTMENTS CONTENTION THAT IT WAS A PAYMENT MADE FOR THE PURPO SE OF ACQUIRING TRADE MARK AND TECHNICAL KNOW-HOW AND THAT BEING AN INTAN GIBLE ASSET IS NOT ALLOWABLE AS REVENUE EXPENDITURE. THE AO HELD THE EXPENDITURE TO BE OF CAPITAL IN NATURE AND DISALLOWED THE ENTIRE AMOUNT IN ALL THE THREE YEARS UNDER APPEAL. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE THE FIRST APPELLATE AUTHORITY WHO DELETED THE ADDITION IN ALL THE THREE YEARS BY ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 4 OF 24 RELYING ON SEVERAL JUDICIAL PRECEDENTS AND BY HOLDI NG THAT ON THE FACTS OF THE CASE, THE ASSESSEE HAD NOT OBTAINED ANY OWNERSHIP R IGHT IN THE TECHNICAL KNOW-HOW, TRADEMARK ETC. THE LD. CIT (A) HELD THA T ON A PERUSAL OF THE LICENCE AGREEMENT IT WAS CLEAR THAT THERE WAS NO TR ANSFER OF OWNERSHIP RIGHT AND HENCE THE ROYALTY PAYMENT COULD NOT BE SAID TO BE OF CAPITAL IN NATURE. AGGRIEVED, THE DEPARTMENT HAS NOW APPROACHED THE TR IBUNAL AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: GROUNDS OF APPEAL (ITA NO. 5323/D/2012 ): 1. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DE LETING THE ADDITION MADE ON ACCOUNT OF PAYMENT OF ROYALTY HELD AS CAPIT AL EXPENDITURE. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW AND ON THE FACTS IN IGNORING THAT PAYMENT OF ROYALTY WAS MADE FOR PROCU RING AND USAGE OF TRADE MARK IN TECHNICAL KNOW-HOW WHICH IS CLEARL Y UNAMBIGUOUSLY AN EXPENDITURE WHICH IS CAPITAL IN NATURE. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUNDS OF APPEAL AT ANY T IME BEFORE OR DURING THE HEARING OF THIS APPEAL. GROUNDS OF APPEAL (ITA NO. 2798/D/2012 ): 1. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DE LETING ADDITION OF RS. 2,42,09,240/- ON ACCOUNT OF ROYALTY. 2. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DE LETING THE ADDITION OF RS. 18,423/- ON ACCOUNT OF EXTRA DEPRECIATION CL AIMED ON UPS. 3. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DE LETING THE ADDITION OF RS. 34,17,901/- ON ACCOUNT OF INTEREST INCOME. 4. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 5 OF 24 ALTER, ADD OR FOREGO ANY GROUNDS OF APPEAL AT ANY T IME BEFORE OR DURING THE HEARING OF THIS APPEAL. GROUNDS OF APPEAL (ITA NO. 4785/D/2010 ): 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DEL ETING ADDITION OF RS. 1,33,83,745/- MADE ON ACCOUNT OF DISALLOWANCE O F ROYALTY PAYMENT IGNORING THAT PAYMENT OF ROYALTY WAS MADE FOR PROCU RING AND USAGE OF TRADE MARK AND TECHNICAL KNOW-HOW, WHICH IS CLE ARLY UNAMBIGUOUSLY AN EXPENDITURE CAPITAL IN NATURE. FU RTHER, IT IS A CASE, WHERE IT CAN BE EASILY CONSTRUED THAT HE ASSESSEE C OMPANY OWNED THE TRADE MARK AND TECHNICAL KNOW-HOW PARTLY ALON G WITH ITS PARENT COMPANY FOR ITS OPERATION FOR THE PERIOD OF TEN YEA RS. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUNDS OF APPEAL AT ANY T IME BEFORE OR DURING THE HEARING OF THIS APPEAL. GROUNDS OF CO NO. 399/D/2010 : 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DEL ETING ADDITION OF RS. 1,33,83,745/- MADE ON ACCOUNT OF DISALLOWANCE O F ROYALTY PAYMENT IGNORING THAT PAYMENT OF ROYALTY WAS MADE FOR PROCU RING AND USAGE OF TRADE MARK AND TECHNICAL KNOW-HOW, WHICH IS CLE ARLY UNAMBIGUOUSLY AN EXPENDITURE CAPITAL IN NATURE. FU RTHER, IT IS A CASE, WHERE IT CAN BE EASILY CONSTRUED THAT HE ASSESSEE C OMPANY OWNED THE TRADE MARK AND TECHNICAL KNOW-HOW PARTLY ALON G WITH ITS PARENT COMPANY FOR ITS OPERATION FOR THE PERIOD OF TEN YEA RS. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUNDS OF APPEAL AT ANY T IME BEFORE OR DURING THE HEARING OF THIS APPEAL. 5. THE LD. DR SUPPORTED THE ORDER OF THE AO AND SUB MITTED THAT BAXTER ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 6 OF 24 INTERNATIONAL INC. USA WAS IN EFFECT AN AE OF THE A SSESSEE AND THE PAYMENT OF ROYALTY WAS ACTUALLY A PAYMENT FOR THE PURCHASE OF TRADE-MARK/TECHNICAL KNOW-HOW UNDER THE GARB OF ROYALTY. HE RELIED ON T HE DECISION OF THE HONBLE APEX COURT IN 91 TAXMAN 1 WHEREIN THE HONB LE APEX COURT HAS OBSERVED AS UNDER: THE QUESTION WHETHER A PARTICULAR PAYMENT MADE BY AN ASSESSEE UNDER THE TERMS OF THE AGREEMENT FORMS A P ART OF CAPITAL EXPENDITURE OR REVENUE EXPENDITURE WILL DEPEND UPON SEVERAL FACTORS, NAMELY, WHETHER THE ASSESSEE HAS OBTAINED A COMPLETELY NEW PLAN WITH A COMPLETE NEW PROCESS AND COMPLETELY NEW TECHNOLOGY FOR MANUFACTURE OF THE PRODUCT OR THE PA YMENT IS MADE FOR THE TECHNICAL KNOW-HOW WHICH IS FOR THE BE TTERMENT OF THE PRODUCT IN QUESTION WHICH IS ALREADY BEING PROD UCED; WHETHER THE IMPROVISATION MADE IS THE PART AND PARC EL OF THE EXISTING BUSINESS OR A NEW BUSINESS IS SET UP WITH THE SO-CALLED TECHNICAL KNOW-HOW FOR WHICH PAYMENTS ARE MADE; WHE THER ON EXPIRY OF THE PERIOD OF AGREEMENT THE ASSESSEE IS R EQUIRED TO GIVE BACK THE PLANS AND DESIGNS WHICH ARE OBTAINED, THOU GH THE ASSESSEE CAN MANUFACTURE THE PRODUCT IN THE FACTORY THAT HAS BEEN SET UP WITH THE COLLABORATION OF THE FOREIGN F IRM; THE CUMULATIVE EFFECT ON A CONSTRUCTION OF THE VARIOUS TERMS AND CONDITIONS OF THE AGREEMENT; WHETHER THE ASSESSEE D ERIVES BENEFITS COMING TO ITS CAPITAL FOR WHICH THE PAYMEN T IS MADE. THE SUPREME COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT (1989) 177 ITR 377 HAS INDICATED THAT IN T HE INFINITE VARIETY OF SITUATIONAL DIVERSITIES IN WHICH THE CON CEPT OF WHAT IS CAPITAL EXPENDITURE AND WHAT IS REVENUE ARISES, IT IS NOT POSSIBLE TO FORM ANY GENERAL RULE EVEN IN THE GENERALITY OF CASES, SUFFICIENTLY ACCURATE AND REASONABLY COMPREHENSIVE, TO DRAW ANY CLEAR LINE OF DEMARCATION. THE SUPREME COURT FURT HER HELD THAT ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 7 OF 24 A PARTICULAR OUTLAY IS CAPITAL OR REVENUE. AND, TH EREFORE, ONCE FOR ALL TEST AS WELL AS THE TEST OF ENDURING BENE FIT MAY NOT BE CONCLUSIVE. CONSEQUENTLY, THE VARIOUS ITEMS AND CO NDITIONS OF THE AGREEMENT, THE ADVANTAGES DERIVED BY AN AGREEME NT, ARE ALL TO BE TAKEN INTO ACCOUNT AND THEN IT HAS TO BE DECI DED WHETHER THE WHOLE OR A PART OF THE PAYMENT THUS MADE IS A CAPIT AL EXPENDITURE OR A REVENUE EXPENDITURE. THE COURTS HAVE APPLIED DIFFERENT EXPENDITURE STARTING OF A NEW BUSINESS ON THE BASIS OF TECHNICAL KNOW-HOW RECEIVED FROM THE FOREIGN FIRM, EXCLUSIVE RIGHT OF THE COMPANY TO USE THE PATENT OR TRADEMARK WHICH IT REC EIVES FROM THE FOREIGN FIRM, THE PAYMENTS MADE BY THE COMPANY TO THE FOREIGN FIRM, WHETHER A DEFINITE ONE OR DEPENDENT U PON CERTAIN CONTINGENCIES, RIGHT TO USE THE TECHNICAL KNOW-HOW OF PRODUCTION OR THE ACTIVITY EVEN AFTER THE COMPLETION OF THE AG REEMENT, OBTAINING ENDURING BENEFIT FOR A CONSIDERABLE PART ON ACCOUNT OF THE TECHNICAL INFORMATION RECEIVED FROM A FOREIGN F IRM, PAYMENT WHETHER MADE ONCE FOR ALL OR IN DIFFERENT INSTALL MENTS CO- RELATABLE TO THE PERCENTAGE OF GROSS TURNOVER OF TH E PRODUCT TO ULTIMATELY FIND OUT WHETHER THE EXPENDITURE OR PAYM ENT THUS MADE MAKES AN ACCRETION TO THE CAPITAL ASSET AND AFTER T HE COURT COMES TO THE CONCLUSION THAT IT DOES SO, THEN IT HAS TO B E HELD TO BE A CAPITAL EXPENDITURE. NO SINGLE DEFINITIVE CRITERIO N BY ITSELF COULD BE DETERMINATIVE AND, THEREFORE, KEEPING IN MIND TH E CHANGING ECONOMIC REALITIES OF BUSINESS AND THE VARIETIES OF SITUATIONAL DIVERSITIES THE VARIOUS CLAUSES OF THE AGREEMENT IN QUESTION ARE TO BE EXAMINED. IN THE CASE ON HAND, THE TRIBUNAL HAVING CONSIDERED THE DIFFERENT CLAUSES OF THE AGREEMENT AND HAVING COME TO THE CON CLUSION THAT UNDER THE AGREEMENT WITH THE FOREIGN FIRM WHAT WAS SET UP BY THE ASSESSEE WAS A NEW BUSINESS AND THE FOREIGN FIRM HA D NOT ONLY FURNISHED INFORMATION AND THE TECHNICAL KNOW-HOW BU T RENDERED VALUABLE SERVICES IN SETTING UP FOR THE FACTORY ITS ELF AND EVEN AFTER THE EXPIRY OF THE AGREEMENT THERE WAS NO EMBARGO ON THE ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 8 OF 24 ASSESSEE TO CONTINUE TO MANUFACTURE THE PRODUCT IN QUESTION, IT WAS DIFFICULT TO HOLD THAT THE ENTIRE PAYMENT MADE WAS A REVENUE EXPENDITURE MERELY BECAUSE THE PAYMENT WAS REQUIRED TO BE MADE ON A CERTAIN PERCENTAGE OF THE RATES OF THE GR OSS TURNOVER OF THE PRODUCTS AS ROYALTY. IN THE FACTS AND CIRCUMST ANCES OF THE CASE, THE HIGH COURT WAS FULLY JUSTIFIED IN ANSWERI NG THE REFERENCE IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 6. THE LD. DR ALSO RELIED ON THE DECISIONS O F THE HONBLE CALCUTTA HIGH COURT IN CIT VS. SHRIRAM BEARINGS LTD. 119 TAXMAN 9 70 (CAL.), HONBLE ALLAHABAD HIGH COURT IN RAM KUMAR PHARMACEUTICAL WO RKS VS. CIT 119 ITR 33 (ALL.) AND ITAT DELHI IN MY FAIR LADY VS. IT O 41 TAXMAN 22 (DEL.) (MAG.). THE LD. DR ALSO SUPPORTED THE ASSESSMENT OR DER ON THE ISSUE OF DELETION OF ADDITIONS IN RESPECT OF EXTRA DEPRECIAT ION ON UPS AND INTEREST INCOME. 7. THE LD. AR IN RESPONSE AT THE OUTSET SUBMITTED THAT THE CO WAS NOT BEING PRESSED. HENCE THE CO OF THE ASSESSEE IS DIS MISSED AS NOT PRESSED. ON THE ISSUE OF ROYALTY, THE LD. AR PLACED RELIANCE ON THE DECISION IN HERO HONDA MOTOR CORP. LTD. VS. ACIT IN ITA NO. 5130/DEL /2010 AND ALSO SUPPORTED THE IMPUGNED ORDERS ON THE ISSUE FOR ALL THE THREE YEARS UNDER APPEAL. THE LD. AR SUBMITTED THAT ONLY NON EXCLUSI VE USAGE RIGHTS IN THE TRADEMARK AND TECHNICAL KNOW-HOW WITH NO RIGHT TO S UB-LICENSE WAS AVAILABLE TO THE ASSESSEE AND THAT THE OWNERSHIP WA S NEVER TRANSFERRED TO IT AT ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 9 OF 24 ANY STAGE. 8. ON THE ISSUE OF EXTRA DEPRECIATION ON UPS, IT WAS SUBMITTED THAT UPS FORMED INTEGRAL PART OF THE COMPUTER SYSTEM AS THE SAME WAS BEING USED ONLY WITH COMPUTERS AND NOT OTHERWISE AND HENC E DEPRECIATION WAS RIGHTLY ALLOWABLE AT 60% INSTEAD OF 15% AS ALLOWED BY THE AO. ON THE ISSUE OF ADDITION ON ACCOUNT OF INTEREST INCOME, THE LD. AR SUBMITTED THAT IN 2006, THE COMPANY HAS LODGED CLAIMS WITH WOCKHARDT LIFESC IENCES LTD (WLS) FOR NON FULFILLMENT OF CERTAIN CONDITIONS SPECIFIED IN THE BUSINESS TRANSFER AGREEMENT (BTA). PENDING SETTLEMENT OF SUCH CLAIMS THE COMPANY (ASSESSEE) HAS PLACED A DEPOSIT IN FIFTH ESCROW ACC OUNT OF RS. 8292600/- WITH THE CITI BANK , ESCROW AGENT. BOTH THE PARTIES HAVE FILED THEIR STA TEMENT OF CLAIMS ACCOUNT AND THE FIXED DEPOSIT SHALL BE EN -CASHED BY THE WINNING PARTY AS AND WHEN THE CASE IS DECIDED IN ARBITRATIO N. THIS FACT WAS DECLARED BY THE APPELLANT IN THE BALANCE SHEET. THE INTERES T ACCRUED ON THE ESCROW ACCOUNT IN THE LAST FOUR YEARS AND ITS DECLARATION SCHEDULE PER THE FOLLOWING TABLE - S.NO. A.Y. INTEREST DURING THE YEAR INTEREST DECLARED IN THE RETURN TDS CLAIMED DURING THE YEAR 1 2006-07 2332749 0.00 0.00 2 2007-08 3417901 0.00 766977 3 2008-09 6753475 0.00 1497245 4 2009-10 3767833 16271958 853790 ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 10 OF 24 THE ABOVE FIGURE OF RS. 1,62,71,958/- INCLUDES THE INTEREST OF RS. 1,25,04,125/- PERTAINING TO FY 2006-07, 2007-08, 20 08-09. YEAR AMOUNT 2006-07 23,32,749.00 2007-08 34,17,901.00 2008-09 67,53,475.00 2009-10 37,67,833.00 TOTAL 1,62,71,958.00 9 . IT WAS SUBMITTED THAT THIS DECLARATION OF INTEREST WAS MADE BY THE ASSESSEE IN THE LAST YEAR AS BECAUSE OF DISPUTE THE ASSESSEE WAS NOT ENTITLED TO CLAIM INTEREST THE SAME TILL THE SETTLE MENT OF DISPUTE. BUT THE TDS WAS CLAIMED AS THE ASSESSEE WAS OF THE BELIEF T HAT IF THE CASE GOES IN HIS FAVOUR IN FUTURE, HE MAY NOT BE ABLE TO CLAIM T DS ON THE SAME BECAUSE OF THE DIFFERENCE OF THE YEAR. THIS IS A SETTLED LA W THAT INCOME IS RECOGNIZED IN THE YEAR IN WHICH IT IS CRYSTALLIZED. AS THE CAS E WAS DECIDED IN FINANCIAL YEAR 2008-09, THE ASSESSEE DECLARED THE WHOLE INTER EST IN THE RETURN AND PAID THE TAX FULLY. CONTRARY TO THE ABOVE, THE AO A DDED THE AMOUNT OF THE INTEREST OF RS. 3417901.00 IN THE YEAR 2007-08 CAUS ING THE SAME INCOME BEING DOUBLE TAXED IN THE ASSESSMENT YEAR 2007-08 A ND FINANCIAL YEAR 2009-10 WHICH IS AGAINST THE PRINCIPAL OF LAW. ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 11 OF 24 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. WE HAVE ALSO PERUSED THE LICENSE AGREEMENT DATED 27 TH OCTOBER, 2003 SPECIALLY CLAUSE 2 WHICH SPECIFICALLY EXCLUDES THE RIGHT OF THE LICENSEE TO GRANT SUB LICENSES UNDER PATENT RIGHTS, TRADEMAR K RIGHTS AND SOFTWARE COPYRIGHT RIGHTS TO THIRD PARTIES UNLESS SO AUTHORI ZED BY THE LICENSOR. CLAUSE 7 OF THE AGREEMENT SAFEGUARDS THE LICENSORS RIGHT TO PROTECT THE PATENT RIGHTS, TRADEMARK RIGHTS AND SOFTWARE COPYRI GHT RIGHTS AND KNOW-HOW RIGHTS. CLAUSE 9 PROVIDES THAT EITHER PARTY CAN TE RMINATE EITHER THE WHOLE OR PART OF THE AGREEMENT UPON SERVICE OF 30 DAYS PRIO R NOTICE TO THE OTHER PARTY AND THAT THE INITIAL TENURE OF THE AGREEMENT IS FOR TEN YEARS WHICH IS EXTENDABLE FOR ONE YEAR EVERY YEAR SUBJECT TO THE T ERMINATION BY NOTICE BY EITHER OF THE PARTIES. HOWEVER, NO WHERE DOES THE AGREEMENT MENTION THAT PATENT/TRADEMARK/SOFTWARE COPYRIGHT/KNOW-HOW IS BEI NG PURCHASED BY THE LICENSEE/ASSESSEE AND THAT THE ASSESSEE WILL HAVE A N UNFETTERED RIGHT OVER THE SAME. THE LD. DR COULD NOT POINT OUT TO ANY CLAUSE IN THE AGREEMENT WHICH WOULD SUGGEST THAT THERE WAS A TRANSFER OF OWNERSHI P RIGHT AND THAT BY VIRTUE OF THE AGREEMENT THE ASSESSEE WILL BECOME THE OWNER OF SUCH TRADE- MARK/PATENT/TECHNICAL KNOW-HOW. IT IS UNDISPUTED T HAT THE ROYALTY EXPENDITURE IS A RECURRING EXPENDITURE IN THE PRESE NT APPEALS AND IS PAYABLE ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 12 OF 24 FOR EVERY YEAR THE TECHNICAL KNOW-HOW/PATENT/TRADE- MARK CONTINUES TO BE USED. IN THE CASE OF CIT VS. LUMAX INDUSTRIES LTD. 173 TAXMAN 390 (DELHI), THE ASSESSEE COMPANY ENTERED INTO AN AGREE MENT WITH M/S STANLEY ELECTRIC CO. LTD. (SECL) ON YEAR TO YEAR BASIS FOR ACQUISITION OF TECHNICAL KNOWLEDGE. THE ASSESSEE CLAIMED THE SAID PAYMENT AS REVENUE EXPENDITURE. THE ASSESSING OFFICER DISALLOWED THE CLAIM HOLDING THAT BY VIRTUE OF THE AGREEMENT, THE ASSESSEE HAD DERIVED AN ASSET OF END URING NATURE. ON APPEAL, THE CIT (A) ALLOWED THE ASSESSEE'S CLAIM HOLDING TH AT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS A RECURRING EXPENDITUR E AND NOT A CAPITAL EXPENDITURE. THE TRIBUNAL UPHELD THE ORDER OF THE C IT (A). ON REVENUE'S APPEAL TO THE HIGH COURT, IT WAS HELD AS UNDER:- 'A PERUSAL OF THE CIRCULAR NO.21 OF 1969, DATED 9-7 -1969 SHOWS THAT IF IN TERMS OF THE AGREEMENT, ONLY A LICENSE I S REQUIRED FOR USER OF TECHNICAL KNOWLEDGE FROM A FOREIGN PARTICIPANT F OR A LIMITED PERIOD TOGETHER WITH OR WITHOUT THE RIGHT TO USE TH E PATENTS AND TRADEMARKS OF THE FOREIGN PARTY, THE PAYMENT WOULD NOT BRING INTO EXISTENCE AN ASSET OF AN ENDURING ADVANTAGE TO THE INDIAN PARTY. RELYING UPON THIS CIRCULAR, THE COMMISSIONER (APPEA LS) CONCLUDED THAT THE ASSESSEE HAD BEEN PAYING THE LICENSE FEE T O 'S' ON A YEAR-TO- YEAR BASIS FOR ACQUISITION OF TECHNICAL KNOWLEDGE, AND EVEN IF THE ASSESSEE ACQUIRED A SET-UP OF AN ENDURING NATURE, I T WOULD NOT AMOUNT TO A CAPITAL EXPENDITURE BUT TO A REVENUE EX PENDITURE. THE COMMISSIONER (APPEALS) ALSO NOTED THAT FROM THE FINANCIAL YEAR 1985-86 TILL 1993-94, THE ASSESSEE HAD BEEN PAYING THE LICENSE FEE EVERY YEAR AND FOR EACH OF THOSE YEARS IT HAD BEEN INCURRING ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 13 OF 24 EXPENSES CLAIMED AS REVENUE EXPENDITURE AND THAT WA S BEING ALLOWED BY THE ASSESSING OFFICER. THEREFORE, THERE WAS NO REASON AS TO WHY AFTER A GAP OF ALMOST 10 YEARS, THE ASSESSIN G OFFICER SHOULD SUDDENLY CHANGE HIS MIND AND DECIDE TO TREAT THE EX PENDITURE INCURRED BY THE ASSESSEE AS A CAPITAL EXPENDITURE. THE TRIBUNAL ADDED THAT EVEN IF THE ASSESSEE HAD OB TAINED A LONG TERM ADVANTAGE OF AN ENDURING ADVANTAGE, THAT, BY I TSELF, WOULD NOT COVERT ANY EXPENDITURE INCURRED BY IT INTO A CAPITA L EXPENDITURE. IN THE INSTANT CASE, THE FACTS HAD BEEN FULLY CONSI DERED AND A CONCURRENT OPINION HAD BEEN EXPRESSED, BOTH BY THE COMMISSIONER (APPEALS) AS WELL AS BY THE TRIBUNAL THAT THE EXPEN DITURE WAS OF A REVENUE NATURE AND NOT OF A CAPITAL NATURE. THERE WAS NO REASON TO DIFFER WITH THE OPINION ON T HE FACTS OF THE INSTANT CASE AND IT WAS QUITE DEAR THAT THE RATIO O F THE DECISIONS OF THE SUPREME COURT IN JONAS WOODHEAD & SONS ((INDIA) LTD. V. OT [1997] 224 ITS 342/91 TAXMAN 1 AND IN EMPIRE JUTE C O.LTD. V. CIT [1980] 124 ITR 1/3 TAXMAN 69 WAS FULLY APPLICABLE T O THE FACTS OF THE INSTANT CASE AND BOTH THE AUTHORITIES WERE RIGH T IN CONCLUDING THAT THE PAYMENT MADE BY THE ASSESSEE TOWARDS LICEN CE FEE TO S' WAS A REVENUE EXPENDITURE. ' 11. IN THE CASE OF SHRIRAM PISTONS & RINGS LTD. V S. CIT, NEW DELHI - [2008] 171 TAXMAN 81 (DELHI), THE FACTS OF THE CASE WERE THAT THE ASSESSEE COMPANY HAD ENTERED INTO A TECHNICAL COLLA BORATION AGREEMENT WITH A JAPANESE COMPANY, 'R' FOR THE MANUFACTURE OF PISTON RINGS. THE SAID AGREEMENT MENTIONED THAT THE TECHNICAL KNOW-HO W WOULD BE SOLD BY 'R' TO THE ASSESSEE FOR A FIXED AMOUNT AND THE PAYM ENTS WOULD BE MADE ON THE FULFILLMENT OF CERTAIN CONDITIONS. THE AGREE MENT ENABLED THE ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 14 OF 24 ASSESSEE TO SUB-LICENSE THE TECHNICAL KNOWHOW TO AN OTHER INDIAN PARTY SUBJECT TO THE PRIOR WRITTEN PERMISSION OF 'R'. THE VALIDITY OF THE AGREEMENT WAS FOR A PERIOD OF FIVE YEARS, BUT IT CO ULD BE TERMINATED BEFORE THE EXPIRY OF THAT PERIOD IN THE EVENT OF AN Y DEFAULT BY ANY OF THE PARTIES. THE AGREEMENT LAID DOWN THAT THE RIGHT OF THE ASSESSEE TO MARKET ANY OF THE PRODUCTS MANUFACTURED UNDER THE AGREEMEN T WOULD CEASE UPON ITS EXPIRY OR TERMINATION. PURSUANT TO THE SAID AGR EEMENT, THE ASSESSEE PAID CERTAIN AMOUNT TO 'R' AND CLAIMED SAME AS REVE NUE EXPENDITURE. THE LOWER AUTHORITIES, RELYING ON THE WORD 'SOLD IN TH E AGREEMENT, HELD THAT IT WAS A CASE OF SALE OF TECHNICAL KNOW-HOW BY 'R 1 TO THE ASSESSEE AND, THEREFORE, PAYMENT IN QUESTION COULD NOT BE TREATED AS REVENUE EXPENDITURE. HOWEVER, THE TRIBUNAL HELD THAT THERE WAS NO SALE OF TECHNICAL KNOWHOW BY 'R TO THE ASSESSEE AND, THEREFORE, THE PAYMENT WAS REVENUE EXPENDITURE. IT WAS HELD AS UNDER:- 'THERE WAS, IN FACT, NO ABSOLUTE TRANSFER OF ANY RI GHT IN THE DOCUMENTATION GIVEN BY R TO THE ASSESSEE. THE ASS ESSEE WAS ENTITLED TO USE THE TECHNICAL KNOW-HOW FOR A PERIOD OF FIVE YEARS OR FOR A LESSER PERIOD, IN CASE THE AGREEMENT WAS T ERMINATED BEFORE THAT. THE ASSESSEE DID NOT HAVE A FREE HAND TO SUB-LICENSE THE TECHNICAL KNOW-HOW AND THAT WAS POSSIBLE ONLY W ITH THE PRIOR WRITTEN PERMISSION FROM R. FOR ALL OTHER MA TTERS, THE ASSESSEE WAS LIABLE TO TREAT AS CONFIDENTIAL ALL IN VENTIONS, DRAWINGS, DOCUMENTS, SPECIFICATIONS, ETC., FURNISHE D BY R TO IT. T ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 15 OF 24 EVEN THOUGH THE ASSESSEE WAS ENTITLED TO USE THE NA ME OF R IN THE MARKETING OF ITS PRODUCTS, YET THAT RIGHT WOULD CEASE UPON THE EXPIRY OR TERMINATION OF THE AGREEMENT. THE AGREEMENT WAS VALID ONLY FOR A PERIOD OF FIVE Y EARS, BUT COULD BE TERMINATED EARLIER. THERE WAS NO MAGIC IN THE WORD 'SOLD' USED IN CLAUSE 5.0 OF THE AGREEMENT BECAUSE ON A READING OF THE AGREEMENT AS A WHOLE, IT APPEARED THAT WHAT WAS TRANSFERRED TO THE ASSESSEE WAS ONLY A RIGHT TO USE THE TECHNICAL KNOW-HOW OF R AND THERE WAS NO SALE OF THE TECHNI CAL KNOW- HOW WHICH THE ASSESSEE COULD EXPLOIT. THE ASSESSEE' S RIGHTS WERE HEDGED IN WITH ALL SORTS OF CONDITIONS, CLEARLY MAK ING IT A CASE OF RIGHT TO USE THE TECHNOLOGY AND NOT SALE OF THE TEC HNICAL KNOW- HOW. THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING TH AT THERE WAS NO SALE OF TECHNICAL KNOW-HOW BY R TO THE ASSESSEE AND, HENCE, THE PAYMENT MADE BY THE ASSESSEE TO RWAS A REVENUE EXPENDITURE.' 12. IN THE CASE OF CIT VS. SHARDA MOTOR INDUSTRIAL LTD . - [2009] 319 ITR 109 (DELHI), THE FACTS WERE THAT THE ASSESSEE HAD E NTERED INTO TWO AGREEMENTS WITH A KOREAN COMPANY UNDER WHICH THE AS SESSEE WAS TO PAY A LUMP SUM AMOUNT FOR TRANSFER OF TECHNICAL KNOW-HO W AND RUNNING ROYALTY AT A SPECIFIED RATE PER 'PIECE OF PRODUCTIO N' OF DIFFERENT PRODUCTS. THE ASSESSEE SHOWED THE LUMP SUM PAYMENT AGAINST TR ANSFER OF TECHNICAL KNOW-HOW PROVIDED BY THE KOREAN COMPANY AS CAPITAL EXPENDITURE AND CLAIMED THAT THE ROYALTY WAS BUSINESS EXPENDITURE. THE ASSESSING ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 16 OF 24 OFFICER TREATED THE ROYALTY AS CAPITAL EXPENDITURE. THE ORDER OF THE ASSESSING OFFICER WAS REVERSED BY THE COMMISSIONER (APPEALS) AND THIS WAS AFFIRMED BY THE APPELLATE TRIBUNAL. ON APPEAL, IT WAS HELD AS UNDER:- 'THAT THE FINDING OF THE COMMISSIONER (APPEALS) THA T THE PAYMENT OF ROYALTY WAS PURELY A REVENUE EXPENDITURE , WHICH WAS ANNUAL EXPENDITURE DEPENDING UPON THE QUANTUM O F PRODUCTION IN THE RELEVANT YEAR WAS A FINDING OF FA CT RIGHTLY ARRIVED AT.' 13. IN THE ABOVE MENTIONED CASE OF SHARDA MOTORS (SUPR A), THEIR LORDSHIPS DISCUSSED THE EARLIER DECISION OF HONBLE JURISDICT IONAL HIGH COURT IN THE CASE OF CIT VS. J.K.SYNTHETICS LIMITED - [2009] 309 ITR 371 (DELHI) WHEREIN THEIR LORDSHIPS HAVE ENUMERATED CERTAIN PRI NCIPLES FOR DETERMINING WHETHER THE PAYMENT OF ROYALTY IS A CAP ITAL EXPENDITURE OR REVENUE EXPENDITURE. THE SAME IS DISCUSSED AT PAGES 111 & 112 OF 319 ITR AND IS BEING REPRODUCED HEREIN BELOW FOR READY REFERENCE:- '(V) EXPENDITURE INCURRED FOR GRANT OF LICENCE WHIC H ACCORDS 'ACCESS' TO TECHNICAL KNOWLEDGE, AS AGAINST, 'ABSOLUTE' TRANSFER OF TECHN ICAL KNOWLEDGE AND INFORMATION WOULD ORDINARILY BE TREATED AS REVENUE EXPENDITURE. IN ORDER TO SIFT, IN A MANNER OF SPEAKING, THE GRAIN FROM THE C HAFF, ONE WOULD HAVE TO CLOSELY LOOK AT THE ATTENDANT CIRCUMSTANCES, SUCH A S : (A) THE TENURE OF THE LICENCE, (B) THE RIGHT, IF ANY, IN THE LICENSEE TO CREATE FURTH ER RIGHTS IN FAVOUR OF TRIBUNAL THIRD PARTIES, ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 17 OF 24 (C) THE PROHIBITION, IF ANY, IN PARTING WITH A CONFIDE NTIAL INFORMATION RECEIVED UNDER THE LICENCE TO THIRD PARTIES WITHOUT THE CONS ENT OF THE LICENSOR, (D) WHETHER THE LICENCE TRANSFERS THE 'FRUITS OF RESEA RCH ' OF THE LICENSOR, 'ONCE FOR ALL', (E) WHETHER ON EXPIRY OF THE LICENCE THE LICENSEE IS R EQUIRED TO RETURN BACK THE PLANS AND DESIGNS OBTAINED UNDER THE LICENCE TO THE LICENSOR EVEN THOUGH THE HENCE MAY CONTINUE TO MANUFACTURE THE PRODUCT, IN R ESPECT OF WHICH 'ACCESS' TO KNOWLEDGE WAS OBTAINED DURING THE SUBSI STENCE OF THE LICENCE. (F) WHETHER ANY SECRET OR PROCESS OF MANUFACTURE WAS S OLD BY THE LICENSOR TO THE LICENSEE. EXPENDITURE ON OBTAINING ACCESS TO SU CH SECRET PROCESS WOULD ORDINARILY BE CONSTRUED AS CAPITAL IN NATURE; IN THE PRESENT CASE, ON FACTS, IT WAS, INTER ALIA, FOUND AS FOLLOWS: '(A) IN THAT CASE THE GRANT OF TECHNICAL AID WAS F OR SETTING UP OF THE FACTORY COMBINED WITH THE RIGHT TO SELL PRODUCTS WHILE IN O UR CASE OUR COMPANY IS ALREADY PRODUCING EXHAUST SYSTEMS AND THE TECHNOLOG Y AGREEMENT WAS NOT FOR SETTING UP OF THE FACTORY. (B) IN THE CITED CASE THE FOREIGN COMPANY WHO GAVE THE TECHNOLOGY AGREED NOT TO MANUFACTURE SIMILAR PRODUCTS IN INDIA WHILE THER E IS NO SUCH REGULATION IN OUR AGREEMENT. (C) IN THE CITED CASE THE TECHNICAL KNOWLEDGE OBTA INED WAS HELD TO GIVE AN ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE-COM PANY AND AS IT HAD THE RIGHT TO CONTINUE TO MANUFACTURE THE PRODUC T EVEN AFTER TERMINATION OF THE AGREEMENT. WHILE IN OUR CASE THE DESIGN PATENT APPLIES TO THE FOREIGN COMPANY AND WE ARE ONLY LICE NSED TO PRODUCE THE GOODS FOR HYUNDAI CAR AND WE CANNOT CONTINUE TO PRODUCE THE GOODS IF THE AGREEMENT IS TERMINATED. THIS ITSELF I S A MAJOR DIFFERENCE BETWEEN THE CASE CITED BY YOUR HONOUR AND THE FACTS OF OUR CASE.' ON THE FACTS AND AFTER APPLYING THE AFORESAID PRINC IPLE, IT BECOMES CRYSTAL DEAR THAT THE EXPENDITURE IS OF REVENUE NATURE.' 14. IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. V S. CIT - [2009] 319 ITR 113 (DELHI), THE FACTS OF THE CASE WERE THAT THE AS SESSEE COMPANY ENGAGED IN ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 18 OF 24 THE MANUFACTURE AND SALE OF HEAT EXCHANGERS (RADIAT ORS) ENTERED INTO TECHNICAL COLLABORATION AGREEMENT WITH A US COMPANY TO MANUFACTURE RADIATORS WITH TECHNOLOGY OWNED BY THE US COMPANY. UNDER THE AGREEMENT, THE ASSESSEE WAS PERMITTED TO USE THE TECHNOLOGY FO R MANUFACTURE OF UPGRADED RADIATORS FOR WHICH THE ASSESSEE WAS TO MA KE A LUMP SUM PAYMENT OF US $ 1 MILLION TO THE US COMPANY, WHICH WAS CAPI TALIZED IN THE ASSESSEE'S BOOKS OF ACCOUNT AND A ROYALTY OF 3 PER CENT, OF DOMESTIC SALES AND 5 PER CENT, OF EXPORT SALES TO THE US COMPANY F OR A PERIOD OF 7 YEARS FOR USING THE TECHNOLOGY AND FOR AVAILING OF TECHNICAL SERVICES. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002- 03, THE ASSESSEE PAID TO THE FOREIGN COLLABORATORS ROYALTY CALCULATED AT 3 P ER CENT, OF DOMESTIC SALES AND AT 5 PER CENT, OF EXPORT SALES AND CLAIMED DEDU CTION THEREOF AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER DISALLOWED IT AS BEING OF CAPITAL NATURE AND THIS WAS CONFIRMED BY THE COMMISSIONER (APPEALS ) AS DID THE ITAT ON THE GROUNDS, INTER ALIA, (A) THAT EVEN AFTER TERMIN ATION OF THE AGREEMENT THE ASSESSEE COULD CONTINUE TO USE TECHNICAL INFORMATIO N IN PRODUCTION OF LICENSED PRODUCTS AND HENCE THE ASSESSEE OBTAINED E NDURING BENEFIT, AND (B) THAT THERE WAS NOTHING TO SHOW THAT ANY TECHNICAL S ERVICE WAS TO BE PROVIDED ON DAY-TO-DAY OR ON REGULAR BASIS AT ANY SPECIFIED INTERVAL AND THUS IT WAS A ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 19 OF 24 CASE OF OUTRIGHT TRANSFER OF TECHNICAL KNOW-HOW. ON APPEAL, THE HON'BLE JURISDICTIONAL HIGH COURT HELD AS UNDER:- 'HELD, ALLOWING THE APPEAL, THAT UNDER THE AGREEMEN T, PAYMENTS WERE TO BE MADE BY THE ASSESSEE IN TWO PARTS: A LUM P SUM FEE FOR TRANSFER OF TECHNOLOGY (WHICH THE ASSESSEE HAD ADMITTED AS BEING OF CAPITAL NATURE) AND ROYALTY PAYMENT IN CON SIDERATION OF PROVIDING TECHNOLOGY SERVICES. THE PAYMENT OF ROYAL TY DEPENDED ON THE QUANTUM OF DOMESTIC AS WELL AS EXPORT SALES WHICH WOULD DECREASE OR INCREASE EVERY YEAR DEPENDING UPON THE DECREASE OR INCREASE IN THE SALES. THIS PAYMENT WAS NOT BECAUSE OF TRANSFER' OF TECHNOLOGY, BUT FOR PROVIDING 'TECHNIC AL SERVICES', IN SUCH CIRCUMSTANCE, THE PAYMENT OF ROYALTY, WHICH WAS A CONTINUOUS PROCESS, SHOULD HAVE BEEN TREATED AS REV ENUE EXPENDITURE. 15. IN THE CASE OF CIT VS. MUNJAL SHOWA LTD. - [201 0] 329 ITR 449 (DELHI), THE FACTS OF THE CASE WERE THAT THE ASSESS EE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE OF SHOCK ABSORBERS USED IN AUTOMOBILE VEHICLES UNDER LICENSE FROM S, A JAPANESE COMPANY. IT INCURR ED EXPENSES ON TRAVEL AND STAY OF FOREIGN TECHNICAL PERSONNEL OF S IN JAP AN AND ALSO ON DESIGNS AND DRAWINGS CHARGES PAYABLE TO S. THE ASSESSEE CLA IMED THE ENTIRE EXPENSES AS REVENUE EXPENDITURE. THE ASSESSING OFFI CER TREATED THE EXPENSES AS CAPITAL EXPENDITURE WHICH WAS CONFIRMED BY THE CIT (A). THE TRIBUNAL HELD THAT THE EXPENSES WERE INCURRED FOR T RAINING THE PERSONNEL OF THE ASSESSEE AND FOR AVAILING OF DRAWI NGS AND DESIGNS TO ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 20 OF 24 MANUFACTURE THE SHOCK ABSORBERS BUT NOT FOR ACQUIRI NG TECHNOLOGY ITSELF AND, THEREFORE, THEY COULD NOT BE HELD TO CAPITAL EXPEND ITURE. ON APPEAL, THEIR LORDSHIPS OF JURISDICTIONAL HIGH COURT HELD AS UNDE R:- 'HELD, DISMISSING THE APPEALS, THAT THE KNOW-HOW WA S GRANTED BY THE FOREIGN COMPANY SOLELY FOR THE PURPOSE OF MA NUFACTURE, ASSEMBLY AND SALE OF PRODUCTS DURING THE TERM OF TH E CONTRACT AND THE LICENSE WAS TO PAY ROYALTY TO THE LICENSOR. THE DRAWINGS AND DESIGNS WHICH WERE SUPPLIED BY THE LICENSOR ONL Y ENABLED THE ASSESSEE TO MANUFACTURE THE SHOCK ABSORBERS. TH E ASSESSEE WAS REQUIRED TO CHANGE THE DESIGN OF SUCH SHOCK ABS ORBERS FROM TIME TO TIME FOR WHICH NEW DRAWINGS AND DESIGNS WER E REQUIRED. FOR THIS PURPOSE, THE TRAINING OF THE PERSONNEL OF THE ASSESSEE WAS IMPERATIVE. UNDER THE AGREEMENT, THE KNOW-HOW A CQUIRED RELATED TO THE PROCESS OF MANUFACTURING AND FOR A T ECHNICAL AND THE DOCUMENTS, DESIGNS AND SPECIFICATIONS WHICH HAD BEEN SUPPLIED BY THE LICENSOR WERE ONLY FOR FACILITATING THIS PURPOSE OF MANUFACTURING. THIS WAS BASICALLY IN THE REALM O F TECHNICAL SUPPORT.' 16. IN THE ASSESSEES CASE THE DEPARTMENT HAS HEAVI LY RELIED UPON THE DECISIONS OF THE HON'BLE APEX COURT IN THE CASE OF JONAS WOODHEAD AND SONS (INDIA) LTD. (SUPRA), FOR HOLDING THAT THE PAY MENT OF ROYALTY IS CAPITAL EXPENDITURE BUT, THE ASSESSING OFFICER HAS NOT FULL Y APPLIED THAT DECISION BECAUSE IN THE CASE OF JONAS WOODHEAD AND SONS (IND IA) LTD. (SUPRA) , ONLY 25% OF THE ROYALTY PAYMENT WAS HELD TO BE CAPITAL E XPENDITURE AND 75% WAS ALLOWED AS REVENUE EXPENDITURE WHEREAS IN THE PRESE NT APPEALS THE ASSESSING OFFICER HAS DISALLOWED THE ENTIRE PAYMENT AS CAPITA L EXPENDITURE. WE, ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 21 OF 24 THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE MENTION ED DECISIONS OF THE HONBLE JURISDICTIONAL HIGH COURT HOLD THAT THE ANN UAL PAYMENTS OF ROYALTY WERE REVENUE EXPENDITURE. 17. ACCORDINGLY, ITA NOS. 4785/DEL/2010 FOR AY 2004-05 AND 5323/DEL/2012 FOR AY 2008-09 FILED BY THE DEPARTMEN T ARE DISMISSED AND GROUND NO. 1 IN ITA NO. 2798/DEL/2012 (DEPARTMENTS APPEAL) IS ALSO DISMISSED. 18. AS FAR AS GROUND NO. 2 IN ITA NO. 2798/DEL/2012 IS CONCERNED, THE DEPARTMENT HAS CHALLENGED THE DELETION OF ADDITION OF RS. 18,243/- ON ACCOUNT OF DEPRECIATION CLAIMED @ 60% ON UPS. THE LD. CIT (A) HAS RELIED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BSES YAMUNA POWER LTD. IN ITA NO. 1267/2010 WHILE D ELETING THE DISALLOWANCE. THE LD. DR COULD NOT CITE ANY OTHER JUDGMENT WHERE A DIFFERENT VIEW HAS BEEN HELD. HENCE, WE FIND NO RE ASON TO INTERFERE AND DISMISS GROUND NO. 2 OF THE DEPARTMENTS APPEAL. 19. AS FAR AS GROUND NO. 3 IN ITA NO. 2798/DEL/20 12 REGARDING THE ADDITION OF RS. 34,17,901/- ON ACCOUNT OF INTEREST INCOME IS CONCERNED, WE FIND THAT THE ISSUE HAS BEEN DISCUSSED AT LENGTH IN PARA 6.1 OF THE IMPUGNED ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 22 OF 24 ORDER WHICH READS AS UNDER: 6.1 THE ISSUE INVOLVED AND THE SUBMISSIONS MADE BY THE APPELLANT HAVE BEEN CONSIDERED. FACTS EMERGING FROM THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE AP PELLANT ARE THAT THERE WAS A DISPUTE BETWEEN THE APPELLANT AND WOCKHARDT LIFESCIENCES LTD (WLS) ON ACCOUNT OF NON FULFILLMEN T OF CERTAIN CONDITIONS BY THE WOCKHARDT LIFESCIENCES LTD. SPECIFIED IN THE BTA. THE DISPUTE WAS REFERRED FOR ARBITRATION. PEND ING DECISION OF THE ARBITRATOR THE APPELLANT PLACED A DEPOSIT IN FIFTH ESCROW ACCOUNT OF RS.82,92,600/-WITH THE CITI BANK; ESCROW AGENT. THE ARBITRATOR GAVE ITS AWARD IN THE FY 2008-09 RELEVAN T TO AY 2009- 10. THE APPELLANT GOT THE AMOUNT DEPOSITED IN THE ESCROW A/C ALONGWITH INTEREST OF RS. 1,62,71,958/-. THE APPELL ANT DECLARED THIS INTEREST AMOUNT IN THE ITR FOR THE AY 2009-10 AND CLAIMED TDS OF RS.8,58,53,790/-. THE AO HAS HOWEVER, TREATE D THE INTEREST ACCRUED IN THE AY 2007-08 AT RS.34,17,901/ - AS INCOME NOT DECLARED BY THE APPELLANT INSPITE OF THE FACT T HAT IT HAD CLAIMED CREDIT FOR TDS ON THE SAME IN THE AY 07-08. AS PER PRACTICE WITH THE BANK INTEREST ON FDR/ESCRO W ACCOUNT IS CREDITED ON ACCRUAL BASIS. THE BANK KEPT ON GIVING CREDITS FOR THE INTEREST ACCRUED TO THE APPELLANT AND TDS WAS ALSO DEDUCTED AS AND WHEN THE INTEREST, AMOUNT WAS CREDITED IN THE A PPELLANT'S A/C THE APPELLANT HOWEVER, DID NOT HAVE ANY LEGAL RIGHT TO WITHDRAW THE AMOUNT OF DEPOSIT AND NEITHER OF THE ACCRUED IN TEREST FROM THE ESCROW ACCOUNT BECAUSE THE MATTER WAS PENDING BEFORE THE ARBITRATOR. THE LEGAL RIGHT OF THE APPELLANT AROSE ONLY WHEN THE ARBITRATOR GAVE ITS AWARD IN THE PREVIOUS YEAR RELE VANT TO AY 2009-10 IN FAVOUR OF THE APPELLANT. THE APPELLANT H AS DECLARED INTEREST OF RS.1,62,71,958/- IN ITS RETURN OF INCOM E FOR AY 2009- 10 CAUSE THE INTEREST INCOME HAS ACCRUED TO IT DURI NG THE AY 2009-10. THE BREAKUP OF THE INTEREST PERTAINING TO THE AY 2006- 07, 2007-08, 2008-09 & 2009-10 CREDITED BY THE BANK IN ITS ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 23 OF 24 ACCOUNT HAS BEEN GIVEN BY THE APPELLANT AS NOTED AB OVE. SINCE THE APPELLANT DID NOT HAVE ANY RIGHT TO CLAIM THE I NTEREST, IT DID NOT HAVE ANY INCOME ACCRUED TO IT ON ACCOUNT OF INT EREST IN THE ASST. YEARS PRECEDING 2009-10. HOWEVER, SINCE THE T DS WAS DEDUCTED ON THE INTEREST CREDITED BY THE BANK, THE APPELLANT HAS TAKEN CREDIT ON THE SAME IN THE ITRS FOR THE EARLIE R ASST. YEARS. SINCE THE APPELLANT HAS DECLARED THE INTEREST ACCRU ED FOR THE ENTIRE PERIOD AT RS.1,62,71,958/- IN THE AY 2009-10 WHEN IT GOT THE RIGHT TO INTEREST INCOME ,THE ACTION OF THE AO IN ASSESSING THE INTEREST CREDITED BY THE BANK AT RS. 34,17,901/- IN THE AY 2007-08 IS NOT IN ORDER. HAD THE APPELLANT NOT CLAIMED TDS DEDUCTED BY THE BANK IN THE RESPECTIVE ASSESSMENT YEARS, THE TD S WOULD HAVE BEEN LOST. AS PER THE APPELLANT-FOR THE ASSESSMENT YEAR 2008-09 THE AO HAS NOT MADE ANY ADDITION ON THIS ACCOUNT. T HEREFORE THE ADDITION MADE BY THE AO IS DELETED AND THE GROUND O F APPEAL IS ALLOWED. 20. THE LD. DR COULD NOT BEING ANY FA CTS ON RECORD TO DISPUTE THE FINDINGS OF THE LD. CIT (A) AND HENCE WE UPHOLD THE FINDINGS OF THE LD. CIT (A) ON THIS ISSUE AND DISMISS GROUND NO. 3 OF THE D EPARTMENTS APPEAL. ACCORDINGLY, ITA NO. 2798/DEL/2012 IS ALSO DISMISSE D. 21. IN THE FINAL RESULT ALL THE THREE APPEALS OF THE DEPARTMENT AS WELL AS THE CO OF THE ASSESSEE ARE DISMISSED. ITA NOS. 4785/D/2010, 2798 & 5323/D/12 AND CO NO. 399/D/2010 BAXTER INDIA (P) LTD. PAGE 24 OF 24 ORDER IS PRONOUNCED IN THE OPEN COURT ON 21.07.2016 SD/- SD/- (G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA ) VICE PRESIDENT JUDICIAL MEMBER DATED: 21.07.2016 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI