Appeal Details
Counselvise Citation
132820114 RSA 2011
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 8 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-11-2012
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
11-09-2012
Assessment Year
2005-2006
Appeal Filed On
15-03-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO. 1328 /DEL/2011 ASSESSMENT YEAR: 2005-06 ITO, WARD 10(2), ROOM NO. 199, C.R. BLDG., NEW DELHI. VS. DAKIN AIR CONDITIONING (INDIA) PVT. LTD., 12 TH FLOOR, BLDG. NO. 9, TOWER A DLF CYBER CITY, DLF PHASE-III, GURGAON. PAN NO. AABCD0971F (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SANJAY KUMAR JAIN, SR. DR RESPONDENT BY: SH. S.K. AGARWAL, CA O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF LD. CIT(A) DATED 11/01/2011 FOR A.Y. 2005-06. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-CO MPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF MAN UFACTURING, EXPORTING, ASSEMBLING, SUPPLYING, DISTRIBUTING AND IMPORTING A LL TYPES OF AIR-CONDITIONING AND REFRIGERATION EQUIPMENT AND ACCESSORIES. THE A SSESSEE HAD DECLARED ITA NO. 1328/D/ 2011 2 BUSINESS INCOME AT RS. 81,772,968/- AND THE ASSESSM ENT WAS COMPLETED AT A TOTAL INCOME OF RS. 98,338,928/-, INTER-ALIA, MAK ING AN ADDITION OF RS. 43,75,000/- ON ACCOUNT OF TECHNICAL FEES TREATED AS CAPITAL EXPENDITURE BY ASSESSING OFFICER. 3. THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHO WHILE PARTLY ALLOWING THE ASSESSEES APPEAL, DELETED THE AFOREME NTIONED DISALLOWANCE. 4. BEING AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEF ORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND CIRCUMSTANCES OF THEN CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN TREATING THE PAYMENT OF RS. 43,75,000/- MADE ON ACCOUNT OF ACQUIRING TECHNICAL KNOW HOW AS REVENUE EXPENDITURE. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND A NY GROUND OF APPEAL RAISED BEFORE AT THE TIME OF HEARI NG. 5. BRIEF FACTS APROPOS THIS ISSUE ARE THAT DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAD ENTERED INT O TECHNOLOGICAL COLLABORATION AGREEMENT WITH DAIKIN INDUSTRIES LTD. AS PER WHICH, DAIKIN HAD AGREED TO GRANT AN EXCLUSIVE AND NON-TRANSFERABLE R IGHT AND LICENSE TO USE DAIKIN TECHNOLOGY TO MANUFACTURE, SELL, INSTALL, MA INTAIN AND SERVICE PRODUCTS DURING THE TERMS OF THE AGREEMENT. IN CONSIDERATIO N OF SUCH RIGHTS AND ITA NO. 1328/D/ 2011 3 LICENSE GRANTED BY DAIKIN, THE ASSESSEE COMPANY HAD AGREED TO PAY USD 3 LAKHS PAYABLE IN THREE EQUAL INSTALLMENTS. ACCORDI NGLY, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAD PAID RS. 43,75,000/- AS TECHNICAL FEES AS FIRST INSTALLMENT. THE AO REQUIR ED THE ASSESSEE TO JUSTIFY THE CLAIM OF TECHNICAL FEES ON REVENUE ACCOUNT. TH E ASSESSEE EXPLAINED THAT THE TECHNICAL FEES PAID TO DAIKIN INDUSTRIES L TD. WAS REVENUE IN NATURE AND WAS USED EXCLUSIVELY FOR THE PURPOSE OF THE BUS INESS OF THE ASSESSEE. THE ASSESSEE HAD REFERRED TO VARIOUS CLAUSES OF AGR EEMENT WITH DAIKIN INDUSTRIES LTD. IN SUPPORT OF ITS CONTENTION. HOWE VER, THE AO HELD THAT SINCE TECHNICAL FEES HAD BEEN PAID FOR THE PURPOSE OF USI NG TECHNICAL KNOW-HOW PROVIDED BY DAIKIN INDUSTRIES AND, THEREFORE, IT WA S NOT AN EXPENDITURE OF REVENUE IN NATURE FOR THE FOLLOWING REASONS: - (I) IT ALLOWS THE ASSESSEE COMPANY TO MANUFACTUR E AND SELL PRODUCTS BY USING TECHNICAL KNOW HOW PROVIDED BY DAIKIN INDUSTRIES. (II) THE RIGHT TO MANUFACTURE ALLOWED UNDER THIS AG REEMENT IS CONNECTED AND HAS NEXUS WITH RECEIPT OF TECHNICAL INFORMATION. WITHOUT RIGHT TO MANUFACTURE AND SALE OF PRODUCTS, TECHNICAL INFORMATION AND KNOW HOW ARE OF NO USE AND HENCE THE PAYMENT OF TECHNICAL FEES IS OF CAPITAL NATURE. 6. HE, THEREFORE, TREATED THE SUM OF RS. 43,75,000/ - PAID AS TECHNICAL FEES BEING CAPITAL IN NATURE AND DISALLOWED THE ASSESSEE S CLAIM. ITA NO. 1328/D/ 2011 4 7. BEFORE LD. CIT(A), THE ASSESSEE, INTER-ALIA, SUB MITTED THAT UNDER THE AGREEMENT, ASSESSEE HAD MERELY ACQUIRED AN EXCLUSIV E AND NON- TRANSFERABLE RIGHT AND LICENSE TO USE DILS TECHNOL OGY AND TECHNOLOGICAL ASSISTANCE. IT WAS SUBMITTED THAT AGREEMENT DID NO T RESULT IN ANY ACQUISITION OF KNOW-HOW BY THE ASSESSEE AND DIL CONTINUE TO BE THE OWNER OF SUCH TECHNOLOGY OR TECHNICAL INFORMATION. THUS, IN SUM AND SUBSTANCE, IT WAS SUBMITTED THAT ASSESSSEE HAD NOT ACQUIRED ANY ASSET OR BENEFIT OF ENDURING NATURE AND HAD MERELY BEEN GRANTED THE NON-TRANSFER ABLE LICENSE FOR THE USE OF AN ASSET OWNED BY DIL. 8. BEFORE LD. CIT(A) THE ASSESSEE HAD ALSO RELIED O N FOLLOWING CLAUSES OF THE AGREEMENT IN SUPPORT OF ITS CONTENTION: - IN ORDER TO SUBSTANTIATE THE CLAIM OF THE ABOVE EXPENDITURE AS REVENUE EXPENDITURE THE APPELLANT CI TED VARIOUS CLAUSES OF THE AGREEMENT AND CONTENDED THAT : WHAT APPELLANT HAS ACQUIRED UNDER THE AGREEMENT WAS MERELY EXCLUSIVE AND NON TRANSFERABLE RIGHT AND LICENSE TO USE DAIKIN TECHNOLOGY AND TECHNICAL ASSISTANCE FROM DAIKIN TO MANUFACTURE ASSEMBLE, DISTRIBUTE AND SELL SPECIFIED PRODUCTS IN THE SPECIFIED TERRITORY IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE AGREEMENT. THE AGREEMENT ALSO PROVIDES FOR SUPPORT IN MODIFICATION AND ITA NO. 1328/D/ 2011 5 IMPROVEMENT OF THE EXISTING PRODUCTS OF THE APPELLANT. THE AGREEMENT DOES NOT PERTAIN TO PROVIDE ASSISTANCE FOR SETTING UP OF THE MANUFACTURING FACILITIES IN ANY WAY. THE AGREEMENT DID NOT RESUL T IN ANY ACQUISITION OF KNOW HOW BY THE APPELLANT AND ONLY A LICENSE WAS GRANTED TO USE THE TECHNICAL INFORMATION SUPPLIED BY DAIKIN DURING THE CURRENCY OF THE AGREEMENT. DAIKIN HAD ONLY GRANTED EXCLUSIVE RIGHT TO USE OR LICENSE TO USE THE DAIKIN TECHNOLOGY/TECHNICAL INFORMATION AND HAD NOT TRANSFERRED OWNERSHIP OF THE TECHNICAL KNOW HOW FOR IMPROVEMENT OF EXISTING PRODUCTS OF THE APPELLANT AND MANUFACTURE OF NEW (LICENSED) PRODUCTS BY THE APPELLANT DURING THE CURRENCY OF THE AGREEMENT. DAIKIN CONTINUES TO BE THE OWNER OF SUCH TECHNOLOGY OR TECHNICAL INFORMATION AND ALL PATENT, TRADEMARK, TRADE NAME, COPYRIGHT OR DESIGN OWNED BY DAIKIN SHALL REVERT UPON EXPIRATION/TERMINATION OF THE AGREEMENT. IN CASE ANY COPYRIGHTS, PATENTS ETC. PERTAINING TO THE SAME ARE INFRINGED BY ANY THIRD PARTY/UNAUTHORIZED PERSON, NECESSARY REMEDIAL ACTION WOULD BE TAKEN AT DAIKINS COST. THEREFORE, THE PROTECTION OF INTELLECTUAL PROPERTY RIGHT IN RESPECT OF SUCH INFORMATION AND DESIGN IS THE RESPONSIBILITY OF DAIKIN AND NOT THE APPELLANT. ITA NO. 1328/D/ 2011 6 9. IT WAS FURTHER CONTENDED THAT IN THE RELEVANT PR EVIOUS YEAR, THE ASSESSEE HAD ACQUIRED RUNNING BUSINESS FROM SHREE R AM AIR CONDITIONER LTD. (SAL). THE AGREEMENT WITH DAIKIN ONLY PROVIDE D FOR IMPROVEMENT OF THE PRODUCTS BEING MANUFACTURED BY SAL AND ALSO FOR DEV ELOPMENT AND PRODUCTION OF NEW PRODUCTS. THE ASSESSEE FURTHER C ONTENDED THAT IF THE LUMP SUM FEE WAS FOR USE OF KNOW-HOW AND TECHNICAL INFOR MATION, WHICH DIRECTLY RELATED TO THE PRODUCTS OR WAS NECESSARY FOR THE MA NUFACTURE OF THE PRODUCTS, THEN, IT SHOULD BE ALLOWED AS REVENUE EXP ENDITURE. FOR THIS PROPOSITION, THE ASSESSEE RELIED UPON FOLLOWING JUD ICIAL PRONOUNCEMENTS: - CIT VS. TATA ENGINEERING AND LOCOMOTIVE CO. P. LTD. [123 ITR 538] DCIT VS. MAX INDIA LIMITED [105 TTJ 1002] GOODYEAR INDIA LTD. VS. ITO [73 ITD 189] AMTREX APPLIANCES LTD. VS. DCIT [94 TTJ 396] HONDA SIELS CARS INDIA LTD. VS. ACIT [ITA NO. 3173/ D/07] ASSAM BENGAL CEMENT CO. LTD. VS. CIT [27 ITR 34] EMPIRE JUTE CO. LTD. VS. CIT [124 ITR 1] CIT VS. CIBA INDIA LTD. [69 ITR 692] SHRIRAM REFRIGERATION INDUSTRIES LTD. VS. CIT [127 ITR 746] TRIVENI ENGINEERING WORKS LTD. VS. CIT [136 ITR 340 ] S.R.P. TOOLS LTD. VS. CIT [237 ITR 684] 10. THE ASSESSEE IN THE ALTERNATIVE HAD ALSO SUBMIT TED THAT GRANT OF EXCLUSIVE AND NON-TRANSFERABLE RIGHT AND LICENSE TO USE DAIKIN TECHNOLOGY RELATING TO LICENSED PRODUCTS AND EXISTING PRODUCTS WOULD FALL WITHIN THE PURVIEW OF THE DEFINITION OF INTANGIBLE ASSETS AS PER SEC. 32(1) CLAUSE (II) OF ITA NO. 1328/D/ 2011 7 THE ACT. ACCORDINGLY, DEPRECIATION @ 25% ON 43,75, 000/- BEING INTANGIBLE ASSETS MAY BE ALLOWED. 11. LD. CIT(A) NOTED THAT APART FROM TECHNOLOGY TRA NSFER FEE, A ROYALTY OF 4% BY LICENCEES (I.E. THE ASSESSEE) NET EX-FACTORY SALE PRICE WAS ALSO PAYABLE FOR A PERIOD OF 10 YEARS FROM THE EFFECTIVE DATE OR FOR 7 YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. HE NOTED THAT THE AGREEMENT WAS TO REMAIN EFFECTIVE UNTIL THE ROYALTY PAYMENT PERIOD EXPIRED. AFTER CONSIDERING VARIOUS CLAUSES OF THE AGREEMENT, AS NOTED EARLIER, LD. CIT(A) DELETED THE DISALLOWANCE FOR THE FOLLOWING R EASONS: - I) THE ASSESSEE HAD ACQUIRED UNDER THE LICENSE AGR EEMENT ONLY ACCESS TO TECHNICAL KNOWLEDGE AND INFORMATION FRO M DAIKIN FOR MANUFACTURING OF LICENSED AND EXISTING PRODUCTS AND IT WAS NOT A CASE OF ABSOLUTE TRANSFER OF DAIKIN TECHNOLOGY. II) SINCE THE ASSESSEE HAD ALREADY ACQUIRED THE BU SINESS OF MANUFACTURING AIR CONDITIONERS AND WATER COOLERS AS A GOING CONCERN FROM SEIL LTD., THEREFORE, IT COULD NOT BE STATED T HAT THE ASSESSEE WAS ENTERING INTO A NEW LINE OF BUSINESS. III) THE ACCESS TO TECHNICAL KNOWLEDGE AND INFOR MATION WAS FOR RUNNING THE BUSINESS MORE PROFITABLY AND EFFICIENTL Y AND IN RESPECT, TO ITS EXISTING PRODUCTS. ITA NO. 1328/D/ 2011 8 IV) THE GRANT OF LICENSE BY DAIKIN WAS AN EXCLUSIV E AND NON- TRANSFERABLE RIGHT TO USE DAIKIN TECHNOLOGY IN FAVO UR OF THE ASSESSEE AND THIS RIGHT COULD NOT BE TRANSFERRED OR SUB LICE NSED TO ANY OTHER THIRD PARTY. V) LD. CIT(A) RELIED ON THE DECISION OF HONBLE JUR ISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. J.K. SYNTHETICS 309 IT R 371, WHEREIN IT WAS, INTER-ALIA, HELD AS UNDER: - (V)EXPENDITURE INCURRED FOR GRANT OF LICENSE WHICH ACCORDS ACCESS TO TECHNICAL KNOWLEDGE, AS AGAINST , ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION WOULD ORDINARILY BE TREATED AS REVENUE EXPENDITURE. IN ORDER TO SIFT, IN A MANNER OF SPEAKING, THE GRAIN FROM THE CHAFF, ONE WOULD HAVE TO CLOSELY LOOK AT THE ATTENDANT CIRCUMSTANCES, SUC H AS: - (A) THE TENURE OF THE LICENCE; (B) THE RIGHT, IF ANY, IN THE LICENSEE TO CREATE FU RTHER RIGHTS IN FAVOUR OF THIRD PARTIES; (C) THE PROHIBITION, IF ANY, IN PARTING WITH A CONFIDENTIAL INFORMATION RECEIVED UNDER THE LICENSE TO THIRD PARTIES WITHOUT THE CONSENT OF THE LICENSO R; (D) WHETHER THE LICENSE TRANSFERS THE FRUITS OF RESEARCH OF THE LICENSOR, ONCE FOR ALL; (E) WHETHER ON EXPIRY OF THE LICENSE THE LICENSEE I S REQUIRED BACK THE PLANS AND DESIGNS OBTAINED UNDER THE LICENSE TO THE LICENSOR EVEN THOUGH THE LICENSE E MAY CONTINUE TO MANUFACTURE THE PRODUCT, IN RESPECT ITA NO. 1328/D/ 2011 9 OF, WHICH ACCESS TO KNOWLEDGE WAS OBTAINED DURING THE SUBSISTENCE OF THE LICENCE. (F) WHETHER ANY SECRET OR PROCESS OF MANUFACTURE WAS SOLD BY THE LICENSOR TO THE LICENSEE. EXPENDITURE ON OBTAINING ACCESS TO SUCH SECRET PROCESS WOULD ORDINARILY BE CONSTRUED AS CAPIAL IN NATURE; 12. HE ALSO RELIED ON THE DECISION IN THE CASE OF C IT VS. GOODYEAR INDIA LTD. 243 ITR 239, WHEREIN HONBLE DELHI HIGH COURT, INTER-ALIA, UPHELD THE FOLLOWING FINDINGS OF THE TRIBUNAL: - (I) THAT THE ASSESSEE HAD ENTERED INTO AN AGREEM ENT WITH THE AMERICAN COMPANY FOR ENLARGING THE RANGE O F ITS EXISTING PRODUCTS AND HAD ONLY ACQUIRED THE RIGHT T O USE TECHNICAL KNOWLEDGE TO MANUFACTURE A NEW PRODUCT IN THE SAME LINE OF BUSINESS. THE TRIBUNAL HAD, INTER-ALI A, RECORDED THE FINDINGS THAT THE AGREEMENT WAS NOT MA DE FOR MANUFACTURING OF AN ENTIRELY NEW PRODUCT; THE CONSIDERATION WAS PAID FOR THE BETTERMENT OF THE PR ODUCT IN QUESTION AND THE ASSESSEE HAD ONLY ENLARGED THE RANGE OF ITS EXISTING PRODUCTS AND THE EXPENDITURE WAS AN OUTLAY OF BUSINESS IN ORDER TO CARRY IT ON TO EARN BETTER PROFITS. THESE WERE PURE FINDINGS OF THE FACT WHICH HAD NOT BEEN SPECIFICALLY CHALLENGED AS BEING PERVERSE. THE TRI BUNAL WAS JUSTIFIED IN HOLDING THAT THE EXPENDITURE INCUR RED BY THE ASSESSEE WAS REVENUE IN NATURE. NO QUESTION OF LAW AROSE FROM ITS ORDER. ITA NO. 1328/D/ 2011 10 13. THE NEXT DECISION RELIED UPON BY LD. CIT(A) ON THE ISSUE OF HONBLE DELHI HIGH COURT IN SHRIRAM PISTONS & RINGS LTD. VS . CIT, 307 ITR 363, WHEREIN IT WAS, INTER-ALIA, HELD THAT SINCE THE ASS ESSEES RIGHTS WERE BEING HEDGED WITH ALL SORTS OF CONDITIONS, THIS WAS A CAS E OF RIGHT TO USE THE TECHNOLOGY AND NOT SALE OF THE TECHNICAL KNOW-HOW. HENCE, IT WAS ALLOWABLE AS REVENUE EXPENDITURE. 14. LD. DR REFERRED TO PAGE 2 OF THE ASSESSMENT ORD ER AND POINTED OUT THAT THE AO TREATED THE EXPENDITURE AS CAPITAL EXPENDITU RE BECAUSE IT GAVE ENDURING BENEFIT TO THE ASSESSEE. HE SUBMITTED THA T BY INCURRING THIS EXPENDITURE, THE ASSESSEE COMPANY COULD MANUFACTURE AND SELL PRODUCTS AND, THEREFORE, THE RIGHT TO MANUFACTURE ALLEGED UN DER THIS AGREEMENT WAS CONNECTED AND HAD NEXUS WITH RECEIPT OF TECHNICAL I NFORMATION. WITHOUT RIGHT TO MANUFACTURE AND SELL OF PRODUCTS, TECHNICAL INFO RMATION AND KNOW-HOW WERE OF NO USE AND HENCE THE PAYMENTS OF TECHNICAL FEES WAS OF CAPITAL IN NATURE. 15. LD. DR REFERRED TO PAGE 41 OF THE PAPER BOOK, A ND REFERRED TO ARTICLE 11 OF TECHNOLOGICAL COLLABORATION AGREEMENT DATED 8 TH AUGUST, 2000, WHEREIN MODE OF PAYMENT OF TECHNOLOGY TRANSFER FEE HAS BEEN GIVEN. HE SUBMITTED THAT THIS CLEARLY SHOWS THAT THE BENEFIT OF THIS EX PENDITURE ENDURED OVER CONSIDERABLE PERIOD. LD. DR SUBMITTED THAT AO HAD ALLOWED THE ROYALTY ITA NO. 1328/D/ 2011 11 PAYMENT WHICH WAS THE REVENUE COMPONENT BUT TECHNOL OGY TRANSFER FEE WAS TREATED AS CAPITAL BECAUSE MANUFACTURING PER SE COU LD BE CARRIED OUT ONLY BY INCURRING THIS EXPENDITURE. LD. DR SUBMITTED THAT THIS AGREEMENT WAS FOR 10 YEARS AND THUS, THE LUMP SUM PAYMENT WAS FOR 10 YEA RS. THEREFORE, THE ASSESSEE DERIVED ENDURING BENEFIT. 16. IN THE ALTERNATIVE LD. DR RELIED ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEARS LTD. VS. CIT, 232 ITR 359 AND ALSO ON THE DECISION OF HONBLE SUPREME COURT IN TH E CASE OF JONAS WOODHEAD & SONS (INDIA) LTD. VS. CIT, 224 ITR 342 F OR THE PROPOSITION THAT SINCE THE LUMP SUM PAYMENT WAS FOR 10 YEARS, IT SHO ULD BE ALLOCATED BETWEEN CAPITAL AND REVENUE EXPENDITURE DEPENDING U PON THE BENEFIT DERIVED BY THE ASSESSEE. 17. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FACTS IN THE CASE OF SOUTHERN SWITCHGEARS LTD. (SUPRA) AND JONAS WOODHEA D & SONS (INDIA) LTD. (SUPRA) WERE DIFFERENT. LD. COUNSEL SUBMITTED THAT IN THE PRESENT CASE THERE WAS NO ABSOLUTE TRANSFER OF TECHNICAL KNOW-HOW IN F AVOUR OF THE ASSESSEE. THE ASSESSEE HAD NOT ACQUIRED THE TECHNICAL KNOW-HO W BUT ONLY USE OF TECHNOLOGY WAS ALLOWED TO THE ASSESSEE. LD. COUNSE L REFERRED TO PAGE 8 OF LD. CIT(A)S ORDER, WHEREIN VARIOUS CLAUSES FROM AG REEMENT HAVE BEEN ITA NO. 1328/D/ 2011 12 REPRODUCED TO SUPPORT HIS CONTENTION THAT THERE WAS NO ABSOLUTE TRANSFER OF TECHNICAL KNOW-HOW IN FAVOUR OF THE ASSESSEE. 18. LD. COUNSEL ALSO REFERRED TO THE DECISION OF HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. J.K. SYNTHETICS, 309 I TR 371 REFERRED TO BY LD. CIT(A) AT PAGE 10 OF HIS ORDER AND POINTED OUT THAT SINCE ASSESSEE GOT ONLY ACCESS TO TECHNICAL KNOWLEDGE AS AGAINST ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE, THE EXPENDITURE INCURRED BY THE ASSESSEE ON TECHNICAL FEES WAS REVENUE IN NATURE. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. 20. THE FACTS ARE NOT DISPUTED. WHAT IS RELEVANT I S TO SEE THE INTENDED OBJECT AND EFFECT OF THE AGREEMENT BETWEEN PARTIES, CONSIDERED IN THE COMMON SENSE MANNER HAVING REGARD TO BUSINESS REALI TIES. FOR THIS PURPOSE IF WE EXAMINE THE VARIOUS CLAUSES OF AGREEMENT, WE FIND THAT AS PER ARTICLE 2.1 THE ASSESSEE (LICENSEE) WAS GRANTED AN EXCLUSIV E AND NON-TRANSFERABLE RIGHT AND LICENSE TO USE DAIKIN TECHNOLOGY TO MANUF ACTURE LICENSED PRODUCTS AND EXISTING PRODUCTS WITHIN THE TERRITORY. AS PER ARTICLE 3 THERE WAS UNDERTAKING OF PARTY IN CONSEQUENCE TO WHICH LICENS EE COULD SELL THE PRODUCTS WITHIN THE TERRITORY ASSIGNED TO IT. THE LICENSEE COULD EXPORT THE ITA NO. 1328/D/ 2011 13 LICENSED PRODUCTS MANUFACTURED/ASSEMBLED BY IT EXCL USIVELY THROUGH DAIKIN TO OUTSIDE THE TERRITORY. ARTICLE 4 OF THE AGREEME NT FURTHER IMPOSED RESTRICTION ON THE LICENSEE IN REGARD TO USE OF SUB-CONTRACTORS AND SUPPLIERS. FOR THIS PURPOSE LICENSEE WAS REQUIRED TO OBTAIN ADVANCE WRI TTEN APPROVAL FROM DAIKIN. AS PER ARTICLE 5 SUB LICENSING OF THE AGRE EMENT BY LICENSEE WAS PERMISSIBLE ONLY WITH THE PRIOR WRITTEN CONSENT OF DAIKIN. AS PER ARTICLE 11.3 THE PERIOD OF AGREEMENT WAS FOR 10 YEARS FROM THE E FFECTIVE DATE OR FOR 7 YEARS FROM THE COMMENCEMENT OF COMMERCIAL PRODUCTIO N OF THE LICENSE PRODUCTS BY THE LICENSEE. THUS, IT WAS NOT AN AGRE EMENT IN PERPETUITY. ARTICLE 14.3 HAD PUT RESTRICTION ON IMPROVEMENT OF LICENSE PRODUCTS BY LICENSEE. THIS ARTICLE READS AS UNDER: - 14.3 IMPROVEMENTS IN ANY ITEMS OF LICENSED PRODUCTS WHICH LICENSEE WISHES TO PUT INTO PRODUCTION SHALL BE SUBJECT TO A PRIOR WRITTEN APPR OVAL OF DAIKIN. ANY IMPROVEMENTS MADE BY LICENSEE IN RESPECT OF DAIKIN TECHNOLOGY AS PROVIDED HEREIN SHALL BE LICENSED BACK/GRANT-BACK PERPETUALLY TO DA IKIN BY LICENSEE WITH THE RIGHT OF SUB-LICENSING AND WIT HOUT PAYMENT OF ANY FEES OR COSTS BY DAIKIN, ANY MAY BE USED BY DAIKIN IN ITS OWN PRODUCTION OF DAIKIN PRODUCTS IN JAPAN OR ELSEWHERE AS IT MAY, IN ITS UNFETTERED JUDGMENT, DEEM FIT. 21. ARTICLE 17 CONTEMPLATED FOR CONFIDENTIALITY AND NON-DISCLOSURE AND ARTICLE 17.1 READ AS UNDER: - ITA NO. 1328/D/ 2011 14 17.1 LICENSEE SHALL KEEP STRICTLY SECRET AND CONFIDENTIAL ALL DAIKIN TECHNOLOGY AND/OR TECHNICAL DOCUMENTATION TRANSFERRED BY DAIKIN UNDER THIS AGREEMENT TO LICENSEE, AND SHALL NOT DISCLOSE THE SAME EITHER IN WHOLE OR IN PART TO ANY UNAUTHORIZED THIRD PARTY. 22. ARTICLE 18 DEALT WITH INFRINGEMENT/OWNERSHIP OF INTELLECTUAL PROPERTY RIGHT AND ARTICLE 18.2 READ AS UNDER: - 18.2 ALL RELEVANT INTELLECTUAL PROPERTY RIGHTS, INCLUDING TRADEMARKS, DESIGNS, PATENTS AND COPY RIG HTS OR ANY OTHER OWNED BY DAIKIN OR WHICH VESTS IN DAIKIN UNDER THIS AGREEMENT SHALL REVERT TO DAIKIN UPON EXPIRATION OR TERMINATION IN ACCORDANCE WITH ARTICLE 20 & 21 HEREOF. 23. ARTICLE 22 DEALT WITH EFFECT OF EXPIRATION OR T ERMINATION OF AGREEMENT AND ARTICLE 22.2 READ AS UNDER: - 22.2 FOR FIVE (5) YEAR PERIOD AFTER THE TERMINATI ON OF JOINT VENTURE AGREEMENT FOR WHATSOEVER REASON, LICENSEE SHALL NOT SELL ANY AIR CONDITIONER S TO ANY PLACE OR CUSTOMER LOCATED OUTSIDE THE TERRITORY NOR SHALL SELL THE SAME TO ANYONE WHOM LICENSEE KNOWS OR HAS REASON TO BELIEVE MAY INTEND TO RE-SELL THE SAME OUTSIDE THE TERRITORY. 22.3 UPON EARLY TERMINATION OF THIS AGREEMENT FOR ANY REASON TO WHICH LICENSEE IS LIABLE. LICENSEE SHALL ITA NO. 1328/D/ 2011 15 CEASE TO USE DAIKIN TECHNOLOGY TRANSFERRED HEREUNDER AND SHALL, AT ITS SOLE EXPENSE, RETURN AN D DELIVER TO DAIKIN, WITHOUT DELAY, ALL TECHNICAL DOCUMENTATION THEREFORE, PROVIDED TO IT BY DAIKIN HEREUNDER, TOGETHER WITH ANY REPRODUCED COPY THEREOF AND SHALL NOT KEEP IN ITS POSSESSION ANY DUPLICATE COPY OR INFORMATION WHATSOEVER RELATING T O TECHNICAL DOCUMENTS. 24. FROM THE AFOREMENTIONED DISCUSSION, IT IS EVIDE NT THAT ASSESSEE WAS ENTITLED ONLY ACCESS TO THE TECHNICAL KNOWLEDGE AND INFORMATION FROM DAIKIN FOR MANUFACTURING OF LICENSED AND EXISTING PRODUCTS AND IT WAS NOT A CASE OF ABSOLUTE TRANSFER OF DAIKIN TECHNOLOGY. THE ASSESS EES RIGHT TO USE LICENSE WAS BEING HEDGED WITH ALL SORTS OF CONDITIONS AS NO TED ABOVE. 25. THE ASSESSEE HAD ACQUIRED THE BUSINESS OF SIEL LTD. ON A GOING CONCERN BASIS VIDE BUSINESS PURCHASE AGREEMENT DATE D 8 TH AUGUST, 2000. THE TECHNOLOGICAL COLLABORATION AGREEMENT WITH DAIK IN ENTERED INTO ON THE SAME DATE PRIMARILY FACILITATED IN IMPROVING THE TE CHNICAL ASPECT OF MANUFACTURING BUT IT DID NOT ESSENTIALLY FORMED PAR T OF THE REVENUE EARNING APPARATUS VIZ. PLANT AND MACHINERY OF ASSESSEE. TH E EXPENDITURE INCURRED FOR ACQUIRING TECHNOLOGY WHICH BECOMES PART AND PAR CEL OF REVENUE EARNING APPARATUS CAN ONLY BE SAID TO BE IN CAPITAL FIELD B UT WHERE THE TECHNOLOGY ONLY FACILITATED IN IMPROVING THE MANUFACTURING PRO CESS, IT COULD NOT BE SAID ITA NO. 1328/D/ 2011 16 TO BE PART AND PARCEL OF CAPITAL STRUCTURE OF COMPA NY. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE JURI SDICTIONAL HIGH COURT IN THE CASE OF JK SYNTHETICS (SUPRA), WHEREIN HONBLE DELHI HIGH COURT HAS, INTER-ALIA HELD AS UNDER: - (V) EXPENDITURE INCURRED FOR GRANT OF LICENSE WH ICH ACCORDS ACCESS TO TECHNICAL KNOWLEDGE, AS AGAINST , ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION WOULD ORDINARILY BE TREATED AS REVENUE EXPENDITURE. IN ORDER TO SIFT, IN A MANNER OF SPEA KING, THE GRAIN FROM THE CHAFF, ONE WOULD HAVE TO CLOSELY LOOK AT THE ATTENDANT CIRCUMSTANCES, SUCH AS. 26. SIMILARLY, WE FIND THAT THIS ISSUE IS ALSO COVE RED BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. GOODYE AR INDIA LTD., 243 ITR 235 (SUPRA), WHEREIN IT HAS BEEN HELD THAT CONSIDER ATION PAID FOR BETTERMENT OF THE PRODUCT WAS IN REVENUE FIELD. 27. SIMILARLY IN THE CASE OF SHRIRAM PISTONS & RING S LTD. VS. CIT, 307 ITR 363, IT HAS BEEN HELD THAT WHERE THERE IS NO ABSOLU TE TRANSFER OF ANY RIGHT IN THE DOCUMENTATION AND THE ASSESSEE WAS ENTITLED TO USE THE TECHNICAL KNOW- HOW FOR A PERIOD OF 5 YEARS OR FOR A LESSER PERIOD AND DID NOT HAVE A FREE HAND TO SUB-LICENSE THE TECHNICAL KNOW-HOW WHICH WA S POSSIBLE ONLY WITH PRIOR WRITTEN PERMISSION FROM THE LICENSOR THEN IT WAS A CASE OF ASSESSEES ITA NO. 1328/D/ 2011 17 RIGHTS BEING HEDGED IN WITH ALL SORTS OF CONDITION AND, THEREFORE, EXPENDITURE WAS HELD TO BE IN REVENUE FIELD. 28. IN VIEW OF THE ABOVE DISCUSSION, WE UPHOLD THE ORDER OF LD. CIT(A). 29. IN THE RESULT, THE DEPARTMENTS APPEAL IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30/11/2012 SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 30/11/12 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR
