Arvind Clothing Ltd., Ahmedabad V. The ACIT., Ahmedabad Circle-1, Ahmedabad

ITA 1471/AHD/2005

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0539 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-09-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 24-05-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M MATHIVANAN
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Depreciation; Business expenditure; Retrospective amendment; Revenue expenditure; Set aside
• Section: 80HHC; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI R.V.EASWAR, VICE PRESIDENT AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 23/09/09 DRAFTED ON: 26/ 10/09 1. ITA NO.1471/AHD/2005 2. ITA NO.1677/AHD/2005 ASSESSMENT YEAR : 2001-02 1. ARVIND CLOTHING LTD. ARVIND MILLS PREMISES NARODA ROAD AHMEDABAD-380 025 2. THE ASSTT.CIT CIRCLE-1, AHMEDABAD VS. 1. THE ASSTT.CIT AHMEDABAD CIRCLE-1 AHMEDABAD 2. ARVIND CLOTHING LTD. AHMEDABAD-380 025 PAN/GIR NO. : AABCA 2401 K (APPELLANTS) .. (RESPONDENTS) ASSESSEE BY : SHRI S.N.SOPARKAR, AR REVENUE BY: SHRI M.MATHIVANAN, SR.DR O R D E R PER D.C.AGRAWAL , ACCOUNTANT MEMBER :- THESE ARE THE CROSS APPEALS; ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE AGAINST THE COMMON ORDER OF THE LD.CIT( APPEALS)-V, BARODA DATED 24/03/2005 PASSED FOR ASSESSMENT YEAR 2001 -02. 2. IN ASSESSEES APPEAL, THE GROUNDS RAISED ARE QUI TE ARGUMENTATIVE, THEREFORE, THE ISSUES RAISED THEREIN ARE SUMMARIZE D AS UNDER. (1) DEDUCTION U/S.80-IB OF THE I.T. ACT, 1961. (A) REDUCING ESTIMATED INCOME FROM TRADING ACTIV ITY. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 2 - (B) HOLDING THAT OTHER INCOME OF RS.41,02,440/- IS NOT DERIVED FROM BUSINESS OF THE NEW INDUSTRIAL UNDERTAKING. THIS INCLUDED SOME OF RS.23,59,250/- TOWARDS DUTY DRAW BACK, RECE IPT FROM SALE OF QUOTA AT RS.1,99,271/- AND A SUM OF RS.10,7 1,371/- RECEIVED FROM DEALERS TOWARDS DELAYED DEPOSIT OF SA LE PROCEEDS. (2) COMPUTATION OF DEDUCTION U/S.80HHC OF THE I.T. ACT, 1961 THIS INCLUDED APPLICATION OF SEARCH 801A(9) IN FAVO UR OF REVENUE, NOT GIVING DEDUCTION U/S.80HHC OF THE I.T. ACT, 196 1 ON A SUM OF RS.1,99,271/- REALISED ON SALE OF EXPORT QUOTA, SUM OF RS.10,71,317/- RECEIVED FROM THE DEALERS TOWARDS D AILY RECEIPT OF SALE PROCEEDS, NOT REDUCING 10% AND THE EXPORT INCE NTIVE FROM THE AMOUNT OF INDIRECT COST ATTRIBUTABLE TO EXPORTS. 2.1. IN REVENUES APPEAL, THE SOLE ISSUE IS ABOUT D IRECTING TO DELETE THE DISALLOWANCE MADE ON ACCOUNT OF ROYALTY EXPENSE OF RS.40,92,000/-. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE-C OMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF GARMENTS. 4. FIRST, WE TAKE UP ASSESSEES APPEAL (ITA NO.1471 /AHD/2005) 5. THE FIRST ISSUE RELATES TO CLAIM OF DEDUCTION U/ S.80-IB OF THE I.T. ACT, 1961. WHILE EXAMINING THE REPORT IN FORM 3CD AND THE TITLE OTHER INCOME IN THAT REPORT , THE ASSESSING OFFICER NOTE D THAT THE ASSESSEE HAS CREDITED CERTAIN INCOME UNDER THE HEAD BUSINESS T REATING IT AS DERIVED ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 3 - FROM THE BUSINESS AND CLAIMED DEDUCTION U/S.80-IB O F THE I.T. ACT, 1961. THESE AMOUNTS ARE AS UNDER:- SR.NO(S). PARTICULARS AMOUNT (RS.) 1. INTEREST FROM BANKS (GROSS) 60,000 2. INTEREST OTHERS (GROSS) 98,000 3. DUTY DRAW BACK, SALE OF QUOTA ON EXPORTS 25,59,000 MISC. INCOME 4. RENT RECEIVED 3,10,000 5. OTHER MISC. INCOME 4,123 6. INTEREST ON DELAYED DEPOSITS- FRANCHISES 10,71,317 TOTAL 41,02,440/- 6. IN RESPECT OF INTEREST RECEIPT, THE ASSESSING OF FICER NOTED THAT THE ASSESSEE HAS RECEIVED INTEREST FROM BANK AND FROM FRANCHISES. HE HELD THAT THEY ARE NOT GENERATED FROM THE MAIN COURSE O F THE BUSINESS. IT IS NOT OUT OF THE MAIN ACTIVITY OF MANUFACTURING OF READY- MADE GARMENTS. THE ASSESSING OFFICER RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD VS. CIT 262 ITR 278 ( SC) AND HELD THAT INTEREST INCOME IS NOT DERIVED FROM MANUFACTURING ACTIVITY OF THE ASSESSEE. REGARDING RECEIPT FROM DUTY DRAW BACK AND SALE OF Q UOTA ON EXPORTS, THE LD. ASSESSING OFFICER HELD THAT THIS INCOME IS ALSO NOT DERIVED FROM MANUFACTURING ACTIVITIES. HE REFERRED TO THE DECIS ION OF HON'BLE SUPREME ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 4 - COURT IN THE CASE OF CIT VS. STERLING FOODS LIMITED 237 ITR 579 (SC). REGARDING RENT RECEIPTS AND OTHER MISCELLANEOUS I NCOME, THE LD. ASSESSING OFFICER HAD SIMILARLY HELD THAT THEY ARE NOT DERIVED FROM MANUFACTURING ACTIVITY. THE LD. ASSESSING OFFICE R FURTHER SOUGHT TO EXCLUDE TRADING PROFIT FROM COMPUTATION OF ELIGIBLE PROFIT FOR COMPUTING DEDUCTION U/S.80-IB OF THE I.T. ACT, 1961 HOLDING T HAT THE ASSESSEE IS SIMULTANEOUSLY ENGAGED IN THE TRADING ACTIVITIES AN D PROFIT EARNED FROM TRADING ACTIVITIES ARE NOT ELIGIBLE FOR DEDUCTION U /S.80-IB OF THE I.T. ACT, 1961. IT WAS ARGUED ON BEHALF OF ASSESSEE THAT MA NUFACTURING AND TRADING ACTIVITIES ARE INTERTWINED TO EACH OTHER AND CANN OT BE SEPARATED TOTALLY. THE DIVISION OF DIFFERENT EXPENDITURE IS NOT POSSI BLE. IT WAS ALSO ADMITTED THAT IT IS IMPOSSIBLE TO PREPARE SEPARATE BOOKS OF ACCOUNT FOR THE TWO ACTIVITIES. HOWEVER, THE ASSESSING OFFICER REJECT ED THE ARGUMENTS AND HELD THAT PROFITS FROM TRADING ACTIVITY IS REQUIRED TO BE EXCLUDED. HE CALCULATED PROFIT ON TRADING AND EXCLUDED THE SAME FROM THE ELIGIBLE PROFITS. 7. THE LEARNED CIT(APPEALS) CONFIRMED THE DISALLOWA NCE OF DEDUCTION U/S.80-IB OF THE I.T. ACT, 1961 IN RESPECT OF INTE REST INCOME AND DUTY ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 5 - DRAW BACK BY FOLLOWING THE DECISION OF HON'BLE SUPR EME COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT(SUPRA). SIM ILARLY, HE CONFIRMED THE ORDER OF THE ASSESSING OFFICER IN EXCLUDING THE MISCELLANEOUS INCOME AS IT DID NOT FORM PART OF THE INCOME DERIVED FROM BUSINESS OF INDUSTRIAL UNDERTAKING HE ALSO CONFIRMED THE ORDER OF THE AS SESSING OFFICER IN EXCLUDING TRADING PROFIT FROM THE ELIGIBLE PROFITS AS NO SEPARATE BOOKS OF ACCOUNT WERE MAINTAINED BY THE ASSESSEE AS THEY WER E NOT DERIVED FROM MANUFACTURING ACTIVITY. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN OUR CONSIDERED VIEW, THE ISSUE REGARDING INTEREST, RENT RECEIVED A ND MISCELLANEOUS INCOME ARE COVERED AGAINST THE ASSESSEE BY THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT(SUPRA ). THEREFORE, THE GROUNDS RELATING TO THESE ISSUES ARE REJECTED. A NOTHER ISSUE RELATING TO COMPUTATION OF DEDUCTION U/S.80-IB OF THE I.T. ACT, 1961 RELATED TO INCLUSION OF PROFIT REALIZED ON DEPB AND DUTY DRAW BACK. THIS ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE DECISI ON OF HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 3 17 ITR 218 (SC). ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 6 - 8.1. THE RELEVANT EXTRACT FROM THAT DECISION ARE RE PRODUCED AS UNDER:- 14. ANALYSING CHAPTER VI-A, WE FIND THAT SECTIONS 80-IB/80-IA ARE THE CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. THEREFORE, WE NEED TO EXAMIN E WHAT THESE PROVISIONS PRESCRIBE FOR 'COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS'. IT IS EVIDENT THAT SECTION 80-IB PROVIDES FOR ALLOW ING OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE ELIGI BLE BUSINESS. THE WORDS 'DERIVED FROM' IS NARROWER IN CONNOTATION AS COMPAR ED TO THE WORDS 'ATTRIBUTABLE TO'. IN OTHER WORDS, BY USING THE EXP RESSION 'DERIVED FROM', PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. IN THE PRESENT BATCH OF CASES, THE CONTROVERSY WHICH ARISE S FOR DETERMINATION IS: WHETHER THE DEPB CREDIT/DUTY DRAWBACK RECEIPT COMES WITHIN THE FIRST DEGREE SOURCES? ACCORDING TO THE ASSESSEE(S), DEPB CREDIT/DUTY DRAWBACK RECEIPT REDUCES THE VALUE OF PURCHASES (CO ST NEUTRALIZATION), HENCE, IT COMES WITHIN FIRST DEGREE SOURCE AS IT IN CREASES THE NET PROFIT PROPORTIONATELY. ON THE OTHER HAND, ACCORDING TO TH E DEPARTMENT, DEPB CREDIT/DUTY DRAWBACK RECEIPT DO NOT COME WITHIN FIR ST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM INCENTIVE SCHEMES ENA CTED BY THE GOVERNMENT OF INDIA OR FROM SECTION 75 OF THE CUSTO MS ACT, 1962. HENCE, ACCORDING TO THE DEPARTMENT, IN THE PRESENT CASES, THE FIRST DEGREE SOURCE IS THE INCENTIVE SCHEME/PROVISIONS OF THE CU STOMS ACT. IN THIS CONNECTION, DEPARTMENT PLACES HEAVY RELIANCE ON THE JUDGMENT OF THIS COURT IN STERLING FOOD (SUPRA). THEREFORE, IN THE P RESENT CASES, IN WHICH WE ARE REQUIRED TO EXAMINE THE ELIGIBLE BUSINESS OF AN INDUSTRIAL UNDERTAKING, WE NEED TO TRACE THE SOURCE OF THE PRO FITS TO MANUFACTURE. (SEE CIT V. KIRLOSKAR OIL ENGINES LTD. REPORTED IN [1986] 157 ITR 762) 15. CONTINUING OUR ANALYSIS OF SECTIONS 80-IA/80-IB IT MAY BE MENTIONED THAT SUB-SECTION (13) OF SECTION 80-IB PROVIDES FOR APPLICABILITY OF THE PROVISIONS OF SUB-SECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80-IA, SO FAR AS MAY BE, APPLICABLE TO THE ELIGIBLE BUSINE SS UNDER SECTION 80-IB. 16. DEPB IS AN INCENTIVE. IT IS GIVEN UNDER DUTY EX EMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCENTIVE. NO DOUBT, THE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT. THIS NEUTRALIZATI ON IS PROVIDED FOR BY ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 7 - CREDIT TO CUSTOMS DUTY AGAINST EXPORT PRODUCT. UNDE R DEPB, AN EXPORTER MAY APPLY FOR CREDIT AS PERCENTAGE OF FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENCY. CREDIT IS AVAILABLE ON LY AGAINST THE EXPORT PRODUCT AND AT RATES SPECIFIED BY DGFT FOR IMPORT O F RAW MATERIALS, COMPONENTS ETC.. DEPB CREDIT UNDER THE SCHEME HAS T O BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF TH E EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYABLE ON SUCH DEEMED IMPORTS. THEREFORE, IN OUR VIEW, DEPB/DUTY D RAWBACK ARE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY CE NTRAL GOVERNMENT OR FROM SECTION 75 OF THE CUSTOMS ACT, 1962, HENCE, INCENTIVES PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDE R SECTION 80-IB. THEY BELONG TO THE CATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKINGS. 17. THE NEXT QUESTION IS - WHAT IS DUTY DRAWBACK? S ECTION 75 OF THE CUSTOMS ACT, 1962 AND SECTION 37 OF THE CENTRAL EXC ISE ACT, 1944 EMPOWER GOVERNMENT OF INDIA TO PROVIDE FOR REPAYMEN T OF CUSTOMS AND EXCISE DUTY PAID BY AN ASSESSEE. THE REFUND IS OF T HE AVERAGE AMOUNT OF DUTY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR D ESCRIPTION OF GOODS USED IN THE MANUFACTURE OF EXPORT GOODS OF SPECIFIE D CLASS. THE RULES DO NOT ENVISAGE A REFUND OF AN AMOUNT ARITHMETICALLY E QUAL TO CUSTOMS DUTY OR CENTRAL EXCISE DUTY ACTUALLY PAID BY AN INDIVIDU AL IMPORTER-CUM- MANUFACTURER. SUB- SECTION (2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT OF DRAWBACK TO BE DETERMINED ON A CONSID ERATION OF ALL THE CIRCUMSTANCES PREVALENT IN A PARTICULAR TRADE AND A LSO BASED ON THE FACTS SITUATION RELEVANT IN RESPECT OF EACH OF VARIOUS CL ASSES OF GOODS IMPORTED. BASICALLY, THE SOURCE OF DUTY DRAWBACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THE CENTRAL EXCISE AC T. 18. ANALYSING THE CONCEPT OF REMISSION OF DUTY DRAW BACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON ACCO UNT OF THE STATUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHE ME(S) FRAMED BY THE GOVERNMENT OF INDIA. IN THE CIRCUMSTANCES, WE HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FALL WITHIN THE E XPRESSION 'PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING' IN SECTION 80- IB. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 8 - 8.2. RESPECTFULLY FOLLOWING ABOVE DECISION, THIS ISSUE IS ALSO DECIDED AGAINST THE ASSESSEE. 9. REGARDING NOT ALLOWING DEDUCTION U/S.80-IB OF TH E I.T. ACT, 1961 ON TRADING ACTIVITIES, THE LEARNED AUTHORISED REPRESEN TATIVE OF THE ASSESSEE HAS SUBMITTED THAT MANUFACTURING OF GARMENTS AND RE LATED TRADE OPERATIONS ARE INTERLINKED AND INTERTWINED AND, HENCE, PROFIT THEREON WOULD ALSO QUALIFY FOR DEDUCTION U/S.80-IB OF THE I.T. ACT, 1 961. HOWEVER, THERE IS A CLEAR FINDING GIVEN BY THE TWO AUTHORITIES BELOW TH AT ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT SHOWING THE PR OFITS SEPARATELY EARNED ON TRADING ACTIVITIES. WE, THEREFORE, REST ORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO VERIFY WHETHER THE ASSESSE E HAS MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR TRADING ACTIVITIES AN D MANUFACTURING ACTIVITIES. THE ASSESSEE WILL PRODUCE NECESSARY EV IDENCE TO SHOW THAT THE BOOKS FOR TWO ACTIVITIES ARE SEPARATE AND DEDUCTION U/S.80-IB OF THE I.T. ACT, 1961 HAS BEEN CLAIMED ONLY IN RELATION TO THE MANUFACTURING ACTIVITIES. IN CASE, NO SEPARATE BOOKS ARE PRODUCED BEFORE THE ASSESSING OFFICER, THE DISALLOWANCE OF DEDUCTION TO THE EXTENT DONE BY THE ASSESSING OFFICER IS CONFIRMED. OTHERWISE, THE ASSESSING OFFICER WILL E XAMINE THE BOOKS OF ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 9 - MANUFACTURING ACTIVITY AND FIND OUT WHETHER IT IS R ECORDING TRANSACTIONS AND PROFITS ARISING FROM MANUFACTURING ACTIVITY ONLY. HENCE, THIS PART OF THE GROUND IS TREATED AS ALLOWED BUT FOR STATISTICAL PU RPOSES. 10. THE ISSUE REGARDING EXPORT QUOTA IS ALSO COVERE D AGAINST HE ASSESSEE BY THE DECISION OF HON'BLE SUPREME COURT IN THE CAS E OF LIBERTY INDIA VS. CIT (SUPRA). 11. REGARDING DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961 REGARDING SALE OF QUOTA UNDER FOREIGN TRADE (DEVEL OPMENT AND REGULATION) ACT, 1992, THE LD. ASSESSING OFFICER PO INTED OUT THAT THE ASSESSEE HAS CREDITED THE RECEIPTS UNDER THE HEAD OTHER INCOME IN PROFIT & LOSS ACCOUNT, BUT CLAIMED DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961 ON 90% OF THE PROFIT ON THE SALE BY TRADING THE COS T AS NIL. THE CLAIM OF THE ASSESSEE WAS THAT THE CLAIM IS COVERED UNDER P ROVISO TO SUB-SECTION(3) OF SECTION 80-HHC OF THE I.T. ACT, 1961. BUT THE A SSESSING OFFICER DISALLOWED THE CLAIM HOLDING THAT SECTION 28(IIIA) DOES NOT COVER ANY QUOTA OR LICENCE GRANTED BY GOVERNMENT OF INDIA UNDER FO REIGN TRADE (DEVELOPMENT REGULATION) ACT, 1992 ACCORDING TO H IM, ONLY THE LICENCE ISSUED UNDER THE IMPORT AND EXPORT (CONTROL) ACT, 1 947 ARE COVERED UNDER ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 10 - SECTION 28(IIIA) OF THE I.T. ACT, 1961. THE ASSESS ING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAS OTHER INCOME AMOUNTI NG TO RS.15,43,440/-. HE HAS NOT REDUCED 90% OF SUCH INCOME WHILE COMPUTI NG DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961. THE DETAILS OF S UCH INCOME ARE AS UNDER:- SR.NO(S). PARTICULARS AMOUNT (RS.) 1. INTEREST FROM BANKS (GROSS) 60,000 2. INTEREST OTHERS (GROSS) 98,000 3. MISC. INCOME - 4. RENT RECEIVED 3,10,000 5. OTHER MISCELLANEOUS . INCOME 4,123 6. INTEREST ON DELAYED DEPOSITS- FRANCHISES 10,71,317 TOTAL 15,43,440/- 12. THE ASSESSING OFFICER RELYING TO THE EXPLANATIO N (BAA) NOTED THAT THE BUSINESS PROFIT WAS ALSO REQUIRED TO BE REDUCED BY 90% OF ABOVE RECEIPTS. THE ASSESSEES CONTENTION THAT THEY ARE RELATED TO BUSINESS WAS NOT ACCEPTED BY HIM. THE LEARNED CIT(APPEALS) UPHELD THE ACTION OF THE ASSESSING OFFICER. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN OUR VIEW, THE ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 11 - DISALLOWANCE AND DEDUCTION U/S.80-0HHC OF THE I.T. ACT, 1961 IN RESPECT OF MISCELLANEOUS ITEMS HAS TO BE CONSIDERED ON THE MERIT OF EACH ITEM. SO FAR AS CLAIM OF DEDUCTION ON SALE OF QUOTA UNDER FO REIGN TRADE DEVELOPMENT AND REGULATION ACT, 1992 IS CONCERNED, THE VIEW OF THE ASSESSING OFFICER AND THAT OF LEARNED CIT(APPEALS) NEEDS TO BE UPHELD. SECTION 28(IIIA) SPECIFICALLY COVERS ONLY THE QUOTA /LICENCE ISSUED UNDER FOREIGN TRADE DEVELOPMENT AND REGULATION ACT, 1992. IT DOES NOT COVER LICENCE ISSUED UNDER IMPORT CONTROL ORDER (1995). THEREFORE, RECEIPT THEREFROM CANNOT BE TREATED AS INCOME EARNED FORM B USINESS OF EXPORT. IN FACT, THERE IS NO IMMEDIATE NEXUS BETWEEN EXPORT BU SINESS AND SALE OF LICENCE GRANTED UNDER IMPORT CONTROL ORDER(1995). ONCE IT IS NOT INCOME FROM BUSINESS, IT HAS TO BE TAXED AS INCOME FROM O THER SOURCES AND, THEREFORE, NO DEDUCTION U/S.80HHC OF THE I.T. ACT, 1961 WOULD BE ALLOWABLE. 14. REGARDING INTEREST INCOME RECEIVED FROM THE BAN KS, THERE IS NO EVIDENCE OF ANY IMMEDIATE NEXUS BETWEEN THE INTERES T RECEIVED ON FDRS AND EXPORT ACTIVITIES. ACCORDINGLY, SUCH INTEREST S CANNOT BE TREATED AS INCOME FROM BUSINESS AND, THEREFORE, THERE IS NO CASE OF ONLY EXCLUDING ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 12 - 90% OF SUCH RECEIPTS FROM THE BUSINESS PROFITS. THE ENTIRE INTEREST INCOME WOULD GO OUT OF COMPUTATION OF MISCELLANEOUS PROFITS FROM THE BUSINESS FOR THE PURPOSE OF DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961. WE DERIVE SUPPORT FROM THE DECISION OF HON'BLE HIGH GUJARAT HIGH COURT IN THE CASE OF CIT VS. DELHI BRASS AND METAL WORKS LTD. (2009) 313 ITR 352(GUJ.) AND CIT VS. SRI RAM HONDA POWER EQUIP (20 07) 289 ITR 475 (DELHI). ONCE IMMEDIATE NEXUS OF EXPORT ACTIVITIES WITH INTEREST INCOME EARNED IS NOT ESTABLISHED, IT CANNOT BE TREATED AS BUSINESS INCOME AND, THEREFORE, 100% THEREOF WOULD BE EXCLUDED. FURTHER QUESTION OF NETTING WOULD ARISE ONLY WHEN INTEREST PAID HAS DIRECT NEXU S WITH INTEREST EARNED OR INTEREST EXPENDITURE WAS INCURRED FOR THE PURPOS E OF EARNING INTEREST INCOME AND THE INCOME SO EARNED HAD DIRECT NEXUS WI TH THE EXPORT ACTIVITIES. SO FAR AS NETTING UNDER THE HAD INCOM E FROM OTHER SOURCES IS CONCERNED, IT IS NOT RELEVANT FOR THE PURPOSE OF C OMPUTATION OF DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961 AND THAT ISSUE IS NOT BEFORE US. 15. REGARDING INTEREST FROM OTHER SOURCES AMOUNTING TO RS.98,000/-, WE HOLD THE SAME VIEW AS ABOVE AND, ACCORDINGLY, ASSE SSEES GROUND IN RESPECT OF THESE TWO ISSUES ARE REJECTED. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 13 - 16. REGARDING THE ISSUE OF RENT RECEIPT AND DEDUCT ION U/S.80-HHC OF THE I.T. ACT, 1961 THEREON, WE RESTORE THE MATTER T O THE FILE OF ASSESSING OFFICER TO FIND OUT WHETHER RENTAL INCOME IS ASSESS ED AS BUSINESS INCOME AND HOW IT HAS NEXUS WITH THE EXPORT ACTIVITIES. IF RENTAL INCOME IS ASSESSED UNDER THE HEAD BUSINESS AND IT HAS NEXUS WITH EXPORT ACTIVITIES 90% THEREOF WOULD ONLY TO BE EXCLUDED WITHIN THE ME ANING OF EXPLANATION (BAA) TO SECTION 80-HHC OF THE I.T. ACT, 1961. THI S ISSUE IS, THEREFORE, RESTORED TO THE FILE OF ASSESSING OFFICER FOR DECIS ION AFRESH. 17. REGARDING OTHER MISCELLANEOUS INCOME OF RS.4,1 23/-, WE DECIDE THE ISSUE AGAINST THE ASSESSEE HOLDING THAT THERE IS NO DIRECT NEXUS OF THESE RECEIPTS WITH EXPORT BUSINESS OF THE ASSESSEE. THE REFORE, THIS ISSUE IS ALSO REJECTED. 18. REGARDING INTEREST ON DELAYED DEPOSIT AMOUNTING TO RS.10,71,317/-, WE RESTORE THE ISSUE TO THE FILE OF ASSESSING OFFIC ER FOR FINDING OUT NEXUS WITH THE EXPORT ACTIVITIES OF THE ASSESSEE. WHERE MONEY IS PAID BY FRANCHISE-HOLDERS AS DEPOSIT WITH THE ASSESSEE AS C LAIMED, THEN IT IS APPARENTLY IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE AND, THEREFORE, ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 14 - ONLY 90% WOULD BE EXCLUDED TREATING IT AS BUSINESS INCOME. IF IT IS NOT CONNECTED WITH EXPORT ACTIVITIES WITH THE ASSESSEE , 100% WILL BE EXCLUDED AS IT WOULD BE ASSESSABLE UNDER THE HEAD INCOME FR OM OTHER SOURCES. 19. REGARDING INTEREST ON DELAYED DEPOSIT, WE DERIV E SUPPORT FOR OUR DISCUSSION FROM THE DECISION OF HON'BLE SUPREME CO URT IN THE CASE OF CIT VS. K.RAVINDRANATHAN NAIR (2007) 295 ITR 228 (SC), OF LIBERTY FOOD WEAR COMPANY LTD. VS. CIT (2006) 283 ITR 398 (P&H) AND OF CIT VS. GASKETS AND RADIATORS DISTRIBUTORS (2008) 296 ITR 4 40 (GUJ.). 20. IN ANY CASE, THE ASSESSING OFFICER WOULD VERIFY THE FACTS AND TAKE A VIEW AFRESH. THIS PART OF THE GROUND IS ALLOWED FO R STATISTICAL PURPOSES. 21. ANOTHER ISSUE U/S.80-HHC OF THE I.T. ACT, 1961 IS REGARDING INTEREST COST, ADMINISTRATIVE, SELLING AND DISTRIBUTION EXPE NDITURE, FINANCE CHARGES AND DEPRECIATION WHICH ARE NOT TAKEN INTO CONSIDERA TION WHILE COMPUTING EXPORTS PROFITS WITHIN THE MEANING OF 80HHC 3(C)(II ) OF THE I.T. ACT, 1961. THE ASSESSING OFFICER HAS TAKEN ENTIRE EXPENDITURE INTO CONSIDERATION WHILE WORKING OUT ELIGIBLE PROFITS. THE VIEW OF TH E LEARNED AUTHORISED ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 15 - REPRESENTATIVE OF THE ASSESSEE IS THAT THEY ARE NOT FULLY RELATED TO THE TRADING ACTIVITY. THEREFORE, WE SET ASIDE THE ORDE R OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND DIRECT THE ASSESSIN G OFFICER TO GIVE OPPORTUNITY TO THE ASSESSEE TO FURNISH EVIDENCE AS TO THE BIFURCATION OF EXPENDITURE. IF NO EVIDENCE IS FORTHCOMING, THEN W ORKING DONE BY THE ASSESSING OFFICER ON THIS ISSUE IS CONFIRMED. 22. THE NEXT ISSUE LEFT FOR OUR ADJUDICATION IS THA T THE AUTHORITIES HAVE REDUCED THE DEDUCTIONS COMPUTED U/S.80-IB OF THE I .T. ACT, 1961 FROM THE DEDUCTION U/S.80-HHC OF THE I.T. ACT, 1961. IN OUR CONSIDERED VIEW, THIS ISSUE IS COVERED NOW AGAINST THE ASSESSEE BY THE D ECISION OF ITAT DELHI BENCH C (SPECIAL BENCH) IN THE CASE OF ACIT VS. HINDUSTAN MINT AND AGRO PRODUCTS (P) LTD. (2009) 119 ITD 107 (DELHI (S B). FOR THE SAKE OF CONVENIENCE, WE REPRODUCE HEREUNDER THE RELEVANT PA RT OF THE ORDER OF THE SPECIAL BENCH: ON CONSIDERATION OF PROVISIONS OF SECTION 80-IA(9) , IT IS FOUND THAT THERE ARE TWO RESTRICTIONS IN THE STATUTORY PROVISION UNDER CONSI DERATION. THESE ARE : ( A ) WHERE AN ASSESSEE IS ALLOWED DEDUCTION UNDER THIS SECTION ( I.E., 80-IA OR 80-IB), DEDUCTION TO THE EXTENT OF SUCH PROFIT AND GAIN SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISION OF THIS CHAPTER (HEADING C - DEDUCTION IN RESPECT OF CERTAIN INCOMES), AND ( B ) DEDUCTION SHALL IN NO CASE EXCEED THE PROFIT AND GAIN OF THE UNDERTAKING OR HOTEL, AS THE CASE MAY BE. [PARA 21] ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 16 - THE CONTENTION OF THE ASSESSEE WAS THAT TOTAL DEDUC TIONS UNDER VARIOUS SECTIONS SHOULD NOT EXCEED PROFITS AND GAINS OF AN UNDERTAKI NG. IT WAS NOT POSSIBLE TO ACCEPT THIS CONTENTION. IT IS SEEN THAT THE CBDT CI RCULAR NO. 772, DATED 23-12- 1998 CLARIFIED AND ONLY DEALT WITH ( B ) ABOVE AND DID NOT DEEM IT NECESSARY TO MAKE REFERENCE TO RESTRICTION ( A ). IN ORDER TO ACCEPT THE CONTENTION OF THE ASSESSEE, ONE HAS TO EXCLUDE PORTION OF THE PROVISI ON COVERED BY ( A ) AND IGNORE THE RESTRICTION PLACED THEREIN. WHY SUCH COURSE SHO ULD BE ADOPTED WHEN WORDS USED BY THE LEGISLATURE, CLAIMED AND ALLOWED UNDER THIS SECTION FOR ANY ASSESSMENT YEAR, DEDUCTION TO THE EXTENT OF SUCH PR OFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIONS, ARE QUITE CLEA R AND UNAMBIGUOUS AND ARE TO BE GIVEN EFFECT TO AS RIGHTLY CONTENDED BY THE REVE NUE. THE PROFITS OR GAINS OF AN INDUSTRIAL UNDERTAKING, WHICH HAS ALREADY BEEN ALLO WED AS A DEDUCTION UNDER SECTION 80-IA, SUCH PROFIT (TO THE EXTENT) CANNOT B E TAKEN INTO CONSIDERATION FOR ALLOWING DEDUCTION UNDER ANY OTHER PROVISION OF THI S CHAPTER C. IF PROFIT, WHICH HAS ALREADY BEEN ALLOWED AS A DEDUCTION, IS AGAIN T AKEN INTO CONSIDERATION FOR COMPUTING DEDUCTION UNDER ANY OTHER PROVISION REFER RED TO ABOVE, THEN RESTRICTION ( A ) ABOVE IS DISREGARDED AND IGNORED. IT CANNOT BE DO NE WITHOUT DOING VIOLENCE TO THE LANGUAGE OF THE PROVISION. THERE IS NO JUSTIFIC ATION FOR ADOPTING A COURSE PROHIBITED BY THE LEGISLATURE. IT IS NOT POSSIBLE T O IGNORE THE RESTRICTION PLACED AS ( A ) NOR IT IS POSSIBLE TO ACCEPT THAT IN CIRCULAR NO. 772, THERE IS A SUGGESTION TO IGNORE RESTRICTION ( A ) MENTIONED ABOVE. AS PER THE SETTLED LAW, THE COUR TS AND THE TRIBUNALS MUST SEE THE MANDATE OF THE LEGISLATURE A ND GIVE EFFECT TO IT, AS RIGHTLY ARGUED BY THE REVENUE. THEREFORE, RESTRICTION ( A ) ABOVE HAS TO BE RESPECTED AND FOLLOWED. [PARA 22] THE STATUTORY PROVISION OF SECTION 80AB, NO DOUBT, PROVIDES THAT DEDUCTION UNDER EACH SECTION OF CHAPTER VI-A IS TO BE COMPUTED INDE PENDENTLY. BUT, NOT ONLY THE TOTAL SCHEME OF THE STATUTE BUT SCHEME OF EVERY SEC TION IS TO BE READ AND INTERPRETED AND EVERY WORD IS TO BE GIVEN PROPER ME ANING. IN SEVERAL SECTIONS UNDER CHAPTER VI-A, IT IS PROVIDED THAT IF DEDUCTI ON IS ALLOWED UNDER THAT SECTION, THEN NO DEDUCTION UNDER ANY OTHER SECTION UNDER CHA PTER VI-A WOULD BE ALLOWED. THUS, WHERE DEDUCTION UNDER SUCH SPECIFIC SECTION H AS BEEN CLAIMED AND ALLOWED, THERE IS NO NEED TO COMPUTE DEDUCTION PERM ISSIBLE UNDER OTHER SECTIONS OF CHAPTER VI-A. IT WOULD BE A FUTILE AND USELESS E XERCISE. THEREFORE, NO QUESTION OF COMPUTING DEDUCTION IN ABOVE CIRCUMSTANCES WOULD ARISE AND SECTION 80AB WOULD HAVE NO APPLICATION. THE SAID SECTION PROVIDE S NO SOLUTION TO THE PROBLEM WHERE DEDUCTION IS TO BE COMPUTED UNDER MORE THAN O NE SECTION OF CHAPTER VIA. IT CANNOT FOLLOW THAT OTHER SECTIONS PROVIDING MODI FICATION OR CHANGE IN MANNER OR MODE OF COMPUTATION ARE TO BE IGNORED. THERE ARE SE VERAL SECTIONS LIKE SECTIONS 80HHA, 80HHA(5), 80HHA(6) PROVIDING MANNER OF DEDUC TIONS OR PREFERENTIAL TREATMENT TO ONE DEDUCTION OVER ANOTHER WHEN THE AS SESSEE IS ENTITLED TO DEDUCTION UNDER MORE THAN ONE SECTION OF CHAPTER VI -A. IT IS PROVIDED THAT EFFECT SHALL FIRST BE GIVEN TO A PARTICULAR SECTION. ALL T HE SECTIONS ARE TO BE READ TOGETHER HARMONIOUSLY. THE FACT THAT SECTION 80AB STARTS WIT H A NON OBSTANTE CLAUSE DOES NOT MAKE ANY DIFFERENCE, AS THERE IS NO CONFLICT IN VARIOUS PROVISIONS. RESTRICTION PLACED ON DOUBLE DEDUCTION OF SAME ELIGIBLE PROFIT CANNOT BE READ AS AN ABSURDITY OR CONFLICT. HAVING REGARD TO ABOVE PROVISIONS, PUT TING BAN ON ALLOWABILITY OF DEDUCTION UNDER OTHER SECTIONS, COMPUTATION OF DEDU CTION UNDER THOSE SECTIONS ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 17 - WOULD SERVE NO PURPOSE. IT CANNOT FOLLOW FROM ABOVE THAT RESTRICTION OF THOSE SECTIONS ARE NOT TO BE GIVEN EFFECT TO AS SCHEME IN THOSE SECTIONS IS DIFFERENT FROM SCHEME OF SECTION 80AB WHICH STARTS WITH A NON OBSTANTE CLAUSE NOTWITHSTANDING ANYTHING . ARGUMENTS OF THE ASSESSEE, IF ACCEPTE D, WOULD LEAD TO COMPLICATIONS NOT ENVISAGED BY THE LEGISLATURE. THE REFORE, IN A CASE WHERE DEDUCTION UNDER SECTION 80-IA HAS BEEN ALLOWED, THE N IN THE LIGHT OF PROVISIONS OF SUB-SECTION (9), SUCH PROFITS AND GAINS (TO THE EXT ENT) SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISION OF THE RELEVANT CHAPTER. FOR EX AMPLE, IF TOTAL PROFIT OF UNDERTAKING IS RS. 100 AND 20 PER CENT IS ALLOWED A S A DEDUCTION UNDER SECTION 80-IA OR 80-IB, THEN FOR PURPOSES OF OTHER PROVISIO NS LIKE SECTION 80HHC, ON SUCH 20 PER CENT OF PROFIT, NO DEDUCTION CAN BE ALLOWED. THE DEDUCTION UNDER OTHER SECTIONS HAS TO BE COMPUTED AFTER REDUCING SUCH PRO FIT OF 20 PER CENT. IN OTHER WORDS, IT WILL BE COMPUTED WITH REFERENCE TO 80 PER CENT OF THE PROFIT. SUCH DEDUCTION CANNOT BE GOVERNED BY SECTION 80AB ALONE, AS IT IS A CASE IN WHICH DEDUCTIONS UNDER MORE THAN ONE SECTION OF CHAPTER V I-A ARE TO BE ALLOWED; ADJUSTMENT OF DEDUCTIONS UNDER VARIOUS SECTIONS IS TO BE MADE. IT IS NOT A CASE WHERE PROVISION BEFORE MAKING ANY DEDUCTION UNDER C HAPTER VIA IS APPLICABLE. THEREFORE, PROVISION OF SECTION 80AB IS OF NO ASSIS TANCE IN RESOLVING THE PROBLEM IN HAND. [PARA 23] THE ASSESSEE FURTHER CONTENDED THAT WHERE THE LEGIS LATURE INTENDED TO DEDUCT THE AMOUNT OF DEDUCTION OUT OF SOME OTHER DEDUCTION , A DIFFERENT PHRASEOLOGY WAS USED. BY REFERRING TO SUB-SECTION (5) OF SECTION 80 HHB; SUB-SECTION (4) OF SECTION 80HHBA; AND SUB-SECTION (4) OF SECTION 80-IE, THE A SSESSEE FURTHER SUBMITTED THAT IN ALL THESE PROVISIONS, THE LEGISLATURE HAS S PECIFICALLY USED N ON-OBSTANTE C LAUSE WHEREAS NO OVERRIDING EFFECT HAS BEEN GIVEN I N SECTION 80-IA OR 80-IB. THE DIFFERENCE IN LANGUAGE CLEARLY POINTED OUT THAT THE LEGISLATURE DID NOT INTEND THAT DEDUCTION ALLOWED UNDER ABOVE PROVISIONS SHOULD BE DEDUCTED FROM RELIEF PERMITTED BY OTHER SECTIONS. [PARA 24] THERE WAS NO SUBSTANCE IN THE ABOVE ARGUMENT. IT IS A SETTLED LAW THAT LEGISLATURE ADOPTS DIFFERENT WAYS AND MEANS IN ORDE R TO ACHIEVE ITS GOAL AND THERE IS NO JUSTIFICATION FOR INSISTENCE ON IDENTIC AL LANGUAGE. WHAT IS REQUIRED TO BE SEEN IS THE LANGUAGE EMPLOYED, WHICH, IF CLEAR A ND UNAMBIGUOUS, IS TO BE GIVEN EFFECT TO. [PARA 25] IT WAS CONTENDED THAT PROVISION OF SECTION 80HHC WA S A SPECIAL PROVISION PROVIDING AN INCENTIVE TO EXPORTERS EARNING PRECIOU S FOREIGN EXCHANGE FOR THE COUNTRY WHEREAS SECTION 80-IA OR 80-IB COVERS A TOT ALLY DIFFERENT FIELD. THEREFORE, READING OF PROVISION OF SECTION 80-IA(9) IN SECTION 80HHC WOULD ONLY LEAD TO AN APPARENT CONFLICT. [PARA 26] THERE WAS NO FORCE IN ABOVE SUBMISSIONS. OF COURSE ALL THE PROVISIONS SHOULD BE READ TOGETHER AND GIVEN A HARMONIOUS CONSTRUCTION. ALL PROVISIONS ARE INTER- RELATED AND CANNOT BE READ DE HORS, ONE AND OTHER. THE SPECIAL BENCH IN THE CASE OF ROGINI GARMENTS (SUPRA) HAS HELD THAT THE RESTRICTION IMPOSED BY SUB- SECTION (9) ON ACCOUNT OF SECTION 80-IA IS TO BE RE AD IN ALL THE PROVISIONS OF CHAPTER VI-A AND IT IS NOT POSSIBLE TO IGNORE THE R ESTRICTION THAT PROFIT AND GAINS CLAIMED AND ALLOWED AS EXEMPT UNDER SUB-SECTION (9) , (TO THE EXTENT ALLOWED) CANNOT BE ALLOWED UNDER ANY OTHER PROVISION OF CHAP TER C. ABOVE CONSTRUCTION IN ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 18 - READING RESTRICTION IN ALL RELEVANT PROVISIONS UNDE R CHAPTER C, IS LEADING TO NO CONTRADICTION OR ABSURDITY AND IS REASONABLE. IT IS THE LEGISLATIVE POLICY NOT TO ALLOW REPEATED DEDUCTION OF SAME PROFIT UNDER SECTIONS O F DEDUCTIONS IN CHAPTER VI-A. THEREFORE, THERE IS NO CONFLICT OR CONTRADICTION I N GIVING EFFECT TO THE LEGISLATIVE MANDATE. DOING OTHERWISE WOULD, NO DOUBT, BE DOING VIOLENCE TO THE CLEAR LANGUAGE. THE ARGUMENT WAS, ACCORDINGLY, TO BE REJE CTED. [PARA 27] THE ASSESSEE ALSO LAID STRESS TO NOTES OF OBJECTS A ND REASONS PERTAINING TO INTRODUCTION OF SUB-SECTIONS (9) AND (13) IN SECTIO NS 80-IA AND 80-IB. ATTENTION WAS ALSO DRAWN TO CIRCULAR OF THE CBDT NO. 772, DAT ED 23-12-1998 TO EMPHASISE THAT THE LEGISLATURE ONLY INTENDED TO LIMIT DEDUCTI ON UNDER ALL THE PROVISIONS TO 100 PER CENT OF ELIGIBLE PROFIT. IT WAS NOT INTENDED TO IMPOSE RESTRICTION OR DEDUCT PROFIT ALLOWED UNDER SECTION 80-IA /80-IB FROM DEDUCTION P ERMISSIBLE UNDER SECTION 80HHC. [PARA 28] THE NOTES ON OBJECTS AND ACCOMPANYING REASONS ARE O NLY AIDS TO CONSTRUCTION. SUCH AIDS TO CONSTRUCTION ARE NEEDED WHEN LITERAL R EADING OF PROVISION LEADS TO AMBIGUOUS RESULTS OR ABSURDITY. WHERE LANGUAGE IS C LEAR AND THERE IS NO AMBIGUITY OR ABSURDITY, NOTES ON CLAUSES NEED NOT B E REFERRED TO. THEREFORE, ON FACTS, THERE WAS NO SUPPORT FOR THE ASSESSEE FROM N OTES ON CLAUSES OF THE FINANCE ACT. AS REGARDS CIRCULAR NO. 772, DATED 23- 12-1998, AS ALREADY HELD THAT THE SAID CIRCULAR WAS DEALING WITH RESTRICTION ( B ) WHICH PROVIDED THAT DEDUCTION (UNDER OTHER PROVISION WITH HEADING C), SHALL IN NO CASE EXCEED PROFITS AND GAINS OF BUSINESS OR HOTEL, AS THE CASE MAY BE. TH E ABOVE PORTION OF THE SECTION IS SEPARATED FROM THE OTHER PORTION OF THE SUB-SECT ION BY WORD AND. IT IS, THEREFORE, CLEAR THAT THERE ARE TWO RESTRICTIONS IN THE SUB-SECTION AND CIRCULAR OF THE BOARD IS DEALING ONLY WITH THE SECOND RESTRICTI ON. IT IS DIFFICULT TO ACCEPT THAT CIRCULAR WAS ISSUED TO DO AWAY WITH FIRST RESTRICTI ON INCORPORATED IN THE PROVISIONS. THERE IS ABSOLUTELY NO JUSTIFICATION FOR ALLOWING R EPEATED DEDUCTIONS ON PROFIT AND GAIN ON WHICH DEDUCTION HAS BEEN ALLOWED UNDER SECT ION 80-IA OR 80-IB OF THE ACT. [PARA 29] THE LANGUAGE USED IN SECTION 80-IA(9)/80-IB(9A) IS CLEAR AND UNAMBIGUOUS AND IS REQUIRED TO BE GIVEN EFFECT TO. DEDUCTION OF PROFIT S AND GAINS ALLOWED UNDER SECTION 80-IA/80-IB IS NOT TO BE ALLOWED AGAIN UNDE R ANY OTHER PROVISION. THERE IS THEN FURTHER RESTRICTION ON TOTAL DEDUCTION NOT EXC EEDING ELIGIBLE PROFIT OF THE UNDERTAKING. [PARA 32] FURTHER RESTRICTION CONTAINED IN SECTION 80-IA OR 8 0-IB NOT TO ALLOW REPEATED DEDUCTIONS ARE APPLICABLE TO SAME PROFIT. THIS IS M ORE THAN CLEAR FROM USE OF WORDS SUCH PROFIT IN SECTION 80-IA/ 80-IB. IN OTH ER WORDS, THERE HAS TO BE IDENTITY OF PROFITS ON WHICH DEDUCTION UNDER MORE THAN ONE PROVISION UNDER CHAPTER VI-A IS CLAIMED BY THE ASSESSEE. THE PROVISIONS ARE APPL ICABLE WHERE ON THE PROFIT OF THE UNDERTAKING OR ENTERPRISE, DEDUCTION IS CLAIMED UNDER SECTION 80-IA OR 80-IB AND THEN ON THE SAME PROFIT OF THE UNDERTAKING, DED UCTION UNDER OTHER PROVISIONS LIKE 80HHC IS CLAIMED. IN SUCH CASES, RESTRICTION C ONTAINED IN ABOVE PROVISIONS WOULD APPLY. IF PROFITS ARE DERIVED FROM SEPARATE U NDERTAKINGS, RESTRICTION CONTAINED IN ABOVE PROVISION WOULD NOT BE APPLICABL E. [PARA 33] ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 19 - THE ASSESSEE FURTHER CONTENDED THAT SECTION 80-IA(9 ) CANNOT CONTROL THE MECHANISM OF COMPUTING THE DEDUCTION UNDER SECTION 80HHC(3). IT FURTHER SUBMITTED THAT WHERE IT WAS FOUND THAT PROVISION AL LOWING DEDUCTION ON ASSUMPTION IS APPLICABLE, THEN THOSE PROVISIONS ARE TO BE INTERPRETED LIBERALLY. [PARA 34] SAID CONTENTION COULD NOT BE ACCEPTED AS ALL STATUT ORY PROVISIONS ARE INTER-RELATED AND ARE PARTS OF ONE SCHEME. THIS CANNOT BE READ DE HORS ONE AND OTHER. RESTRICTION IMPOSED IN SECTION 80-IA(9)/80-IB(9A) I S TO BE READ IN ALL SECTIONS AND GIVEN EFFECT TO. THIS WOULD ONLY GIVE A HARMONIOUS READING. [PARA 35] THUS, DEDUCTION TO BE ALLOWED UNDER ANY OTHER PROVI SION OF CHAPTER VI-A WITH THE HEADING C, (WHICH INCLUDES SECTIONS 80H, 80HHC, E TC.) IS TO BE REDUCED BY AN AMOUNT OF DEDUCTION ALLOWED UNDER SECTION 80-IA/80- IB. [PARA 37] 23. AS A RESULT, WE RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER TO WORK OUT ADMISSIBLE DEDUCTION AFTER APPLYING THE PR OVISION OF SECTION 801B(9A). THE APPEAL FILED BY THE ASSESSEE IS, AC CORDINGLY, TREATED AS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. REVENUES APPEAL, ITA NO.1677/AHD/2005 24. THE FACTS OF THE ISSUE RAISED BY THE REVENUE AR E THAT ONE RIDER INC USA HAD OBTAINED THE TECHNICAL ASSISTANCE FROM CLUE TT PEABODY & CO. IN RESPECT OF ARROW BRAND OF GARMENTS. THE ASSESSEE -COMPANY WAS EARLIER KNOW AS HORIZON APPARELS PVT.LTD. AND IT HAD ENTERE D INTO AGREEMENT WITH RIDER INC. USA FOR TECHNICAL ASSISTANCE VIDE AGREEM ENT DATED 31 ST MARCH- 1992 FOR MANUFACTURE OF READYMADE GARMENT UNDER AR ROW BRAND. SUBSEQUENTLY RIDE INC. USA HAD ASSIGNED ITS LICENCE OBTAINED FROM CLUETT ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 20 - PEABODY & CO TO M/S.ARVIND WORLDWIDE INC. ACCORDIN GLY, WHEN THE AGREEMENT DATED 31 ST MARCH-1992, EXPIRED ON 31 ST MARCH-1999, NEW AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE-COM PANY AND M/S.ARVIND WORLDWIDE INC. USA. UNDER ABOVE REFERR ED AGREEMENT, THE ASSESSEE-COMPANY HAS TO PAY ROYALTY ON THE SALES MA DE BY IT. THE ASSESSEE-COMPANY HAD AS PER THIS AGREEMENT INCURRED EXPENDITURE ON ROYALTY AMOUNTING TO RS.1,63,68,485/-. 25. THE ASSESSING OFFICER DISALLOWED THE SAME BY 1/ 4 TH BEING RS.40,92,000/- BY HOLDING THAT ROYALTY PAYMENT IS O F CAPITAL NATURE IN THE FORM OF CONTINUOUS INFLOW OF KNOW-HOW AND TECHNICAL ASSISTANCE AND OTHER RELATED INTANGIBLE VALUABLE INFORMATION. THUS, AS SESSEE HAS OBTAINED ENDURING BENEFIT AND AVAILED EXCLUSIVE RIGHT IN THE DEFINED MARKET. THE ASSESSING OFFICER EXAMINED THE PROVISIONS OF ORIGIN AL TECHNICAL ASSISTANCE AGREEMENT DATED 31/03/1992 BETWEEN RIDER INC. AND HORIZON APPAREL PVT.LTD. (NOW KNOWN AS ARVIND CLOTHING LIM ITED). THE PARAGRAPHS RELIED ON BY THE ASSESSING OFFICER WERE AS UNDER:- 1.2 'TECHNICAL KNOW-HOW SHALL MEAN CLUETT'S SECRET PATTERNS, PROCESSES, TECHNIQUES, MANUFACTURING PROCEDURES, MODELS, STAND ARDS, AND SPECIFICATION, ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 21 - STYLING AND INFORMATION AS TO MACHINES AND MACHINE PARTS USED IN THE COMMERCIAL MANUFACTURE AND QUALITY CONTROL OF THE LICENSED PRO DUCTS EXISTING ON THE DATE OF THIS AGREEMENT AND THEREAFTER DURING THE PENDENCY OF THI S AGREEMENT. THE TERM SHALL INCLUDE THE IMPROVEMENTS FURNISHED BY CLUETT, BUT S HALL NOT INCLUDE ANY TECHNICAL INFORMATION OR DATA WHICH RIDER IS DIRECTLY OR INDI RECTLY PRECLUDED FROM DISCLOSING BY VIRTUE OF APPLICABLE LAWS AND REGULATIONS. S.TECHNICAL ASSISTANCE AND TECHNICAL KNOW-HOW LICEN SE 3. 1 RIDER SHALL DISCLOSE AND MAKE AVAILABLE TO HOR IZON A LIST OF MACHINERY AND EQUIPMENT REQUIRED TO MANUFACTURE OF THE LICENSED P RODUCTS. RIDER FURTHER AGREES TO ADVISE AND ASSIST HORIZON IN THE PURCHASE OF MAC HINERY AND EQUIPMENT WHETHER TO BE PURCHASED OUTSIDE INDIA OR FROM INDIGENOUS SO URCES. 3.2 RIDER SHALL ARRANGE ON APPROPRIATE NOTICE AND U NDER SUCH CONDITIONS AS W//' UNREASONABLY INTERFERE WITH THE OPERATIONS OF THE P LANT INVOLVED, QUALIFIED AND COMPETENT EMPLOYEES OF HORIZON TO VISIT THE MANUFAC TURING PLANTS AND OFFICES OF CLUETT OR THOSE OF ITS LICENSEES OUTSIDE INDIA IN O RDER TO BECOME FAMILIAR WITH THE METHODS OF MANUFACTURING THE LICENSED PRODUCTS. THE NUMBER OF THE EMPLOYEES AND THE PERIOD OF THEIR STAY AT ANY SUCH PLANT SHAL L BE MUTUALLY AGREED UPON BY THE PARTIES. CLUETT SHALL BE ENTITLED TO REQUIRE EACH O F THE HORIZON'S EMPLOYEES TO ENTER INTO A CONFIDENTIALITY AGREEMENT NOT TO DISCLOSE AN Y INFORMATION CONCERNING THE BUSINESS OR PRODUCTS OF CLUETT TO ANY PERSON AND TO DISCLOSE THE TECHNICAL KNOW HOW ONLY TO THE EMPLOYEES OF HORIZON WHOSE DUTIES R EQUIRE THEM TO KNOW THE SAME IN CONNECTION WITH THE MANUFACTURE OF THE LICE NSED PRODUCTS, AND WHO HAVE BOUND THEMSELVES UNDER WRITTEN AGREEMENTS WITH HORI ZON TO TREAT THE TECHNICAL KNOW HOW AND OTHER TECHNICAL INFORMATION AS CONFIDE NTIAL. 3.3 HORIZON'S EMPLOYEES SHALL, WHILE AT ANY SUCH PL ANT, OBSERVE A// OF THE WORK REGULATIONS OF CLUETT OR ANY OF ITS LICENSEES, AS T HE CASE MAY BE, BUT THEY SHALL BE CONSIDERED AS EMPLOYEES OF HORIZON FOR ALL PURPOSES . HORIZON SHALL BE SOLELY RESPONSIBLE FOR THE SALARIES, TRAVELLING, LIVING, M EDICAL AND OTHER COSTS, CHARGES AND EXPENSES WHATSOEVER OF THE SAID EMPLOYEES. CLUETT D OES NOT ASSUME ANY RESPONSIBILITY NOR SHALL INCUR ANY LIABILITY FOR TH E DEATH OF OR INJURY TO ANY OF THE HORIZON S EMPLOYEES DURING ANY SUCH VISIT. 3.4 SUBJECT TO THE PROVISIONS OF SECTION 3.5, HEREO F, RIDER SHALL, AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME, DURING THE TERM OF T HIS AGREEMENT MAKE AVAILABLE TO HORIZON THE SERVICES OF SUCH NUMBER OF QUALIFIED AN D COMPETENT TECHNICIANS (WHO SHALL BE EMPLOYEES CLUETT PURSUANT TO THE AFORESAID TECHNICAL ASSISTANT AGREEMENT BETWEEN RIDER AND CLUETT) AND FOR SUCH PERIODS AS MAYBE AGREED UPON BETWEEN RIDER AND HORIZON TO ASSIST AND ADVISE HORIZON AND TRAIN ITS EMPLOYEES WITH RESPECT TO THE MANUFACTURE OF LICENS ED PRODUCTS. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 22 - 3.5 HORIZON SHALL BE RESPONSIBLE FOR OBTAINING ALL REQUIRED VISAS AND PERMISSION FROM THE RESERVE BANK OF INDIA, AS MAYBE NECESSARY, FOR SENDING HORIZON'S EMPLOYEES TO CLUETT'S PLANTS OR THOSE OF ITS LICENS EES AND FOR RIDER'S REPRESENTATIVES FOR PERFORMING SERVICES IN INDIA. 3.6. TECHNICAL KNOW-HOW LICENSE: IN CONSIDERATION FOR THE FEES TO BE PAID THEREOF, PURSUANT TO THE PARAGRAPH-4 THEREOF, RIDER HEREBY G RANTS TO HORIZON: (A) AN EXCLUSIVE LICENSE TO USE THE TECHNICAL KNOW- HOW OR TO GRANT TO ITS APPROVED SUBCONTRACTORS A SUB-LICENSE TO MANUFACTUR E AND/OR SELL THE LICENSED PRODUCTS IN THE TERRITORY HAVING SUCH TRADEMARKS AS ARE APPROVED BY CLUETT PURSUANT TO A TRADEMARK LICENSE AGREEMENT BETWEEN CLUETT & HORI ZON. (B) A NON EXCLUSIVE LICENSE TO EXPORT /HE LICENSED PRODUCTS INTO ALL COUNTRIES OF THE WORLD; PROVIDED HOWEVER HORIZON AND RIDER SNAIL NOT EXPORT THE LICENSED PRODUCTS BEARING THE 'ARROW TRADEMARK' AND/OR ANY SUBSIDIARY TRADEMARK OF CLUETT NOR SHALL HORIZON OR RIDER STATE LICENSED PRODUCTS EMBODY THE TECHNICAL KNOW-HOW USED IN THE MANUFACTURE OF ARROW BRANDED PRODUCTS IN ANY AD VERTISEMENT (WHICH SHALL INCLUDE SOLICITATION TO PROSPECTIVE COSTUMERS). RIDER SHALL NOT GRANT AND SHALL INSURE THAT CLUETT DOES NOT GRANT TO ANY OTHER PERSON A LICENSE TO MANUFACTURE THE LICENSED PRODUCTS IN I NDIA OR TO USE THE TECHNICAL KNOW-HOW IN INDIA, EXCEPT THAT CLUETT MAY GRANT SUC H LICENSE TO PERSONS OTHER THAN HORIZON AND RIDER SOLELY FOR EXPORT TO AN AFFILIATE D COMPANY OR COMPANIES OF CLUETT. 4. CONSIDERATION 4.1 HORIZON SHALL PAY A LUMP SUM TECHNICAL KNOW HOW FEES OF US DOLLAR 3 LACS SUBJECT TO APPLICABLE INDIAN TAXES TO RIDER IN CONS IDERATION OF TECHNICAL KNOW HOW. DRAWING, DESIGNS, DOCUMENTATION ETC. WHICH SHALL BE PAID IN THREE INSTALLMENTS AS DETAILED BELOW: (A) US $ 1,00,000/- SUBJECT TO TAX WITHIN 15 DAYS O F THE DATE WHEN THE AGREEMENT IS FILED WITH RBI AND CAPITAL GOODS CLEAR ANCE IF ANY IS OBTAINED. (B) US $ 1,00,000/- SUBJECT TO TAX ON DELIVERY OF T ECHNICAL DOCUMENTATION. (C) US $ 1.00.000/- SUBJECT TO TAX ON THE COMMENCEM ENT OF THE COMMERCIAL PRODUCTION OR FOUR YEARS AFTER THE AGREEMENT IS FIL ED WITH RBI WHICHEVER IS EARLIER. 4.2.1 EXPORT SALES. HORIZON HEREBY AGREES TO EXPORT LICENSED PRODUCTS F ROM INDIA ACCORDING TO THE FOLLOWING TERMS: ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 23 - SUCH EXPORT SHALL BE MEASURED ACCORDING TO QUANTITY VOLUME THEREOF, TO BE AT LEAST THREE TIMES THE VOLUME OF LICENSED PRODUCTS SOLD BY HORIZON IN INDIA. 4.2.2 IN CONSIDERATION FOR THE RIGHTS OF GRANTED HE REUNDER HORIZON SHALL PAY TO RIDER A ROYALTY ON EXPORTED LICENSED PRODUCTS AT TH E RATE OF 8%(EIGHT PERCENT) OF THE NET SALES VALUE OF SUCH EXPLODED PRODUCTS SUBJE CT TO APPLICABLE INDIAN TAXES. THE TERM NET SAFES VALUE FOR THE PURPOSE OF PAYMENT OF ROYALTY SHALL BE AS PER THE RULES AND REGULATIONS OF THE GOVERNMENT OF INDIA IN THIS REGARD. SUCH ROYALTY SHALL BE PAID WITHIN 30 DAYS FOLLOWING THE END OF EACH CA LENDAR QUARTER AND SHALL BE APPLICABLE TO THE IMMEDIATELY PRECEDING QUARTER. .. .. 7. TERM AND TERMINATION 7.1 SUBJECT TO EARLIER TERMINATION AS PROVIDED IN S ECTION 7.2, 7.3 AND 7.4 HEREOF, THIS AGREEMENT SHALL BECOME EFFECTIVE FROM THE EFFE CTIVE DATE AND SHALL CONTINUE IN FORCE AND EFFECT FOR: (A) AN INITIAL TERM OF 5 (FIVE) YEARS FROM THE DATE THE AGREEMENT IS FILED WITH RBI OR 5 (FIVE) YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION PROVIDED PRODUCTION IS NOT DELAYED BEYOND 3 YEARS O F THE DATE THE AGREEMENT IS FILED WITH RBI I.E. A MAXIMUM PERIOD OF 3 YEARS FRO M THE DATE THE AGREEMENT IS FILED WITH RBI. . . (B) A SECOND TERM OF FIVE (5) YEARS AT HORIZON'S OP TION PROVIDED THAT EARNED ROYALTY FROM THE SALES OF LICENSED PRODUCTS DURING THE FOURTH CONTRACT YEAR SHALL BE AT LEAST $ 350,000 AND FURTHER PROVIDED THAT HOR IZON SHALL PROVIDE WRITTEN NOTICE TO CLUETT WITHIN 60 DAYS FOLLOWING THE END O F SAID FOURTH CONTRACT YEAR THAT IT WISHES TO RENEW THIS AGREEMENT FOR AN ADDI TIONAL FIVE (5) YEARS. 7.2 RIDER SHALL BE ENTITLED TO TERMINATE THIS AGR EEMENT BY WRITTEN NOTICE IN THE EVENT OF ANY OF THE FOLLOWING:- (A) ANY MATERIAL BREACH OF THIS AGREEMENT BY HORIZO N INCLUDING THE FAILURE TO PAY THE FEES SET FORTH IN PARAGRAPH 4.2. 2 HEREOF WHICH IS NOT CURED WITHIN SIXTY (60) DAYS AFTER THE DATE OF WRITTEN NO TICE OF DEFAULT, PROVIDED HOWEVER THAT HORIZON SHALL NOT BE ENTITLED TO CURE A DEFECT UNDER PARAGRAPH 42.2 MORE THAN TWICE. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 24 - (B) IF HORIZON FAILS TO OBTAIN ANY LICENSE OR PERMI T FROM THE GOVERNMENT OF INDIA AS MAY BE REQUIRED FOR THE MANUFACTURE OF THE LICENSED PRODUCTS, O OR IF SUCH HCENSE OR PERMIT IS REVOKED OR SUSPENDED; (C) IF HORIZON FAILS TO RENDER IS FIRST COMMER CIAL INVOICE FOR THE LICENSED PRODUCTS WITHIN TWENTY-FOUR (24) MONTHS FR OM THE DATE OF THIS AGREEMENT. (D) IF HORIZON SHOULD FAILS TO MANUFACTURE THE LICENSED PRODUCTS FOR A CONTINUOUS PERIOD OF SIX (6) MONTHS. (E) IF HORIZON SHALL BE WOUND UP OR AN EFFECTIVE RE SOLUTION SHALL BE PASSED FOR WINDING UP OF HORIZON. (F) IF HORIZON IS DECLARED AN INSOLVENT OR BA NKRUPT; (G) IF A TRUSTEE OR RECEIVER IS APPOINTED TO T AKE OVER THE ASSETS OF HORIZON (H) IF THERE SHALL BE ANY CHANGE IN THE OWNERSHIP O R CONF.-O/ OF HORIZON 7.3 HORIZON SHALL BE ENTITLED TO TERMINATE THI S AGREEMENT FORTHWITH BY WRITTEN NOTICE IN THE EVENT OF ANY OF THE FOLLOWING: (A) IF THE GOVERNMENT OF INDIA PROHIBITS THE USE OF ANY OF THE TRADEMARKS, WHICH ARE FINALISED WITH RIDER FOR USAGE ON LICENSED PROD UCTS. (B) ANY MATERIAL BREACH OF THIS AGREEMENT BY RIDER WHICH IS NOT CURED WITHIN SIXTY (60) DAYS AFTER THE DATE OF WRITTEN NOTICE O F DEFAULT. 7.4 IN ME EVENT OR TERMINATION OR THIS AGREEMEN T PURSUANT TO SECTION 72 OR 7.3(A) THEREFORE, ALL RIGHTS IN THE TECHNICAL KNOW-HOW AND OTHER INFORMATION SHALL REVERT TO RIDER AND HORI7ON SHALL CEASE TO USE THE SAME IN SO FAR AS THE USAGE OF PROPRIETARY ITEMS, PATTERNS AND DESIGNS MAY BE CONC ERNED IN THE MANUFACTURE AND SAFE OF LICENSED PRODUCTS. HORIZON SHALL IMMEDIATEL Y RETURN TO RIDER ALL OF THE ORIGINAL DOCUMENTS AND OTHER MATERIALS IN WHICH THE TECHNICA L KNOW HOW OR ANY PART THEREOF HAS BEEN RECORDED AS WELL AS ALL COPIES AND NOTES M ADE THEREFROM. 75 THE TERMINATION OF THIS AGREEMENT FOR ANY CAUSE WHATSOEVER SHALL IN NO WAY INTERFERE WITH, AFFECT OR PREVENT THE COLLECTION BY RIDER OF ANY AND ALL SUMS DUE PURSUANT TO THIS AGREEMENT. 3.2 THE AMENDED TECHNICAL ASSISTANCE AGREEMENT IS PRODU CED AS UNDER: AMENDMENT TO TECHNICAL ASSISTANCE AGREEMENT ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 25 - THIS AMENDMENT TO THE TECHNICAL ASSISTANCE AGREEMEN T MADE AS OF THIS 2&' DAY OF JULY, 1999 INTERRED BY AND BETWEEN ARVIND CLOTHING LIMITED, A COMPANY REGISTERED UNDER THE COMPANY'S ACT 1956 AND HAVING IT'S REGIST ERED OFFICE AT ARVIND MILLS PREMISES, NARODA ROAD. RAIFWAYPURA, POST, AHMEDABAD -560025(HEREINAFTER CALLED ACL) AND ARVIND WORLDWIDE INC. A DALEWARE CORPORATION HAVING ITS PRINCIPAL OFFICE AT 130. WEST, 42 ND STREET, NEW YORK, N.Y.(HEREINAFTER CALLED AWI) WITNESSETH: .. .. NOW THEREFORE FOR AND IN CONSIDERATION OF THE COVEN ANT HEREIN CONTAINED . ACL AND AWI HERETO AGREES AS FOLLOWS: 1. THE TERM OF THE TECHNICAL ASSISTANCE AGREEMENT BE EXTENDED FOR ANOTHER TERM OF FIVE YEARS FROM 1 ST APRIL 1999 TO 31 ST MARCH 2004. 2 CLAUSE 4.2.2 OF TECHNICAL ASSISTANCE AGREEMENT BE DELETED AND REPLACED WITH THE FOLLOWING CLAUSE WITH RETROSPECTIVE EFFECT FROM 1' APRIL 1996. 4.2.2 IN CONSIDERATION FOR THE RIGHTS OF GRANTED HE REUNDER ACL SHALL PAY TO AWI A ROYALTY ON BOTH DOMESTIC AND EXPORT SATES OF LICENS ED PRODUCTS AT THE RATE OF 4%(EIGHT PERCENT) OF THE NET SALES VALUE OF SUCH LICENSED PR ODUCTS SUBJECT TO APPLICABLE INDIAN TAXES. THE TERM NET SALES VALUE FOR THE PURPOSE OF PAYMENT OF ROYALTY SHALL BE AS PER THE RULES AND REGULATIONS OF THE RESERVE BANK OF IN DIA IN THIS REGARD. SUCH ROYALTY SHALL BE PAID WITHIN 30 DAYS FOLLOWING THE END OF EACH CA LENDAR QUARTER AND SHALL BE APPLICABLE TO THE IMMEDIATELY PRECEDING QUARTER. 25.1. BY ANALYZING THE ABOVE AGREEMENT, THE ASSESSI NG OFFICER INFERRED THAT:- (I) ASSESSEE GETS EXCLUSIVE RIGHTS OF SALE OF ARRO W BRAND PRODUCTS IN INDIA. (II) IT GETS CONTINUOUS INFLOW OF TECHNOLOGY IN THE FORM OF KNOW- HOW. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 26 - (III) THE KNOW-HOW GIVES AN ENDURING BENEFITS TO TH E ASSESSEE. IT GETS EXCLUSIVE PRIVILEGE OF MANUFACTURING AND SELLI NG THE PRODUCT IN LIEU OF CONSIDERATION. THERE IS A LONG -TERM AND EXCLUSIVE RIGHT GIVEN TO THE ASSESSEE. (IV) THE DECISION OF HON'BLE SUPREME COURT IN THE C ASE OF SOUTHERN SWITCHGEAR LTD. VS. CIT (1998) 232 ITR 359 (SC) IS APPLICABLE AND, THEREFORE, PART OF THE EXPENDITURE IS CAPITAL IN NATURE. 25.2. THE ASSESSING OFFICER FURTHER RELIED ON THE F OLLOWING DECISIONS:- SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. TRANSFORMER & SWITCHGEAR LTD. VS. CIT (1976) 103 ITR 352 2. FENNER WOODROFFE & CO.LTD. VS. CIT (1976) 102 ITR 665 3. M.R.ELECTRONIC COMPONENTS LTD. VS. CIT (1982) 136 ITR 305 25.3. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED 1/4 TH OF THE TOTAL CLAIM TREATING IT AS CAPITAL IN NATURE. 26. THE LEARNED CIT(APPEALS) DELETED THE ADDITION B Y OBSERVING AS UNDER:- 2.3. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT AND ALSO THE FACTS OF THE CASE AND DIFFERENT CASE LAWS RELIED UPON BY THE ASSESSING OFFICER AS ALSO BY THE APPELLANT. IT IS SEEN THAT ORIGINALLY R IDER HAD ENTERED INTO AN AGREEMENT WITH HORIZON APPAREL PVT. LTD. IN THE YEA R 1992. RIDER WAS GRANTED THE RIGHT AND LICENCE FROM CLUETT TO SUB-LI CENCE ITS LICENCE TO MANUFACTURE IN INDIA IN ACCORDANCE WITH AND USING T HE TECHNICAL KNOW HOW. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 27 - THE AGREEMENT BETWEEN THE RIDER AND HORIZON WAS FOR A PERIOD OF 5 YEARS. HORIZON WAS RENAMED AS ARVIND CLOTHING. RIDER HAD S UBSEQUENTLY ASSIGNED ITS RIGHTS UNDER TECHNICAL ASSISTANCE AGREEMENT WIT H CLUETT TO M/S. ARVIND WORLDWIDE INC. THUS THE AGREEMENT CAM'S INTO BETWEE N ARVIND WORLDWIDE AND ARVIND CLOTHING. FROM; 1-4-1999, THE AGREEMENT HAS BEEN RENEWED BETWEEN ARVIND CLOTHING AND ARVIND WORLDWIDE FOR A PERIOD OF 5 YEARS, IT IS ALSO SEEN THAT THE BENEFITS CONFERRED ON THE ASSESS EE BY ENTERING INTO AGREEMENT WITH ARVIND WORLDWIDE INC. ARE FOR LIMITE D PERIOD WHEN ':HE AGREEMENT EXISTS. NO BENEFIT WOULD, THEREFORE, BE A VAILABLE AFTER THE TERMINATION OF THE AGREEMENT. THE FACTS OF THE APPE LLANT'S CASE ARE ALSO DISTINGUISHABLE FROM THE FACTO OF THE CASE OF SOUTH ERN SWITCH GEARS LTD.(SSGL) RELIED UPON BY THE ASSESSING OFFICER. IN THE CASE OF SSGL, THE ASSESSES HAD A TIGHT TO USE METHOD OF PRODUCTION PR OCEDURE, EXPERIMENTS, IMPROVEMENTS ETC. MADE AVAILABLE TO THEM IN PURSUAN CE OF THE AGREEMENT EVEN AFTER THE EXPIRY OF THE PERIOD OF AGREEMENT WH EREAS NO SUCH RIGHTS HAVE BEEN CONFERRED UPON THE ASSESSEE COMPANY BY AR VIND WORLDWIDE LNC.. FURTHER, IN THE CASE OF SSGL, BRUSH HAD ALSO SUPPLIED THE INDIAN COMPANY GRANT OF PATENT RIGHT APART FROM THE TECHNI CAL KNOW HOW WHEREAS NO SUCH PATENT RIGHTS HAVE BEEN GRANTED IN THE APPE LLANT'S CASE. IT IS FURTHER SEEN THAT THE CASE OF APPELLANT IS COVERED BY VARIO US JUDGMENTS IN ITS FAVOUR. IN THE CASE OF CIT VS. POWER BUILD LTD. (GU J.) 244 ITR 19 IT HAS BEEN HELD THAT PAYMENT MADE TOWARDS ROYALTY TO COLLABORA TORS FOR USE OF TECHNICAL KNOW HOW OBTAINED BY THE ASSESSES IN THE COURSE OF ITS EXISTING BUSINESS WAS REVENUE EXPENDITURE EVEN THOUGH ASSESS EE WAS ENTITLED TO RETAIN THE KNOW-HOW BEYOND THE PERIOD OF AGREEMENT WITHOUT ANY EXTRA PAYMENT. SIMILAR VIEWS HAVE BEEN EXPRESSED IN THE C ASE OF CIT VS. GUJARAT CARBON LTD. 254 ITR 295 WHEREIN IT HAS BEEN HELD TH AT THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE AMOUNT OF ROYALTY PAID TO COLLABORATOR IS REVENUE EXPENDITURE. IN THE CASE OF SHARMA ENGINE V ALVE LTD. 138 ITR 216, IT HAS BEEN HELD BY THE HON'BLE DELHI HIGH COU RT THAT WHAT HAS TO BE SEEN IN EACH CASE IS THE SUBSTANCE OF THE MATTER AN D NOT THE WORDS USED, SURROUNDING CIRCUMSTANCES AND THE NATURE OF EXPENDI TURE IN COMING TO THE CONCLUSION OF THE ROYALTY PAYMENT. IN THE CASE BEFO RE THE HON'BLE HIGH COURT, THE PERIOD OF THE AGREEMENT WAS LIMITED FOR 10 YEARS THOUGH IT WAS AUTOMATICALLY RENEWABLE THEREAFTER AND COULD BE TER MINATED WITH 6 MONTHS NOTICE. IN THIS CASE, THE ASSESSEE HAD AN EXCLUSIVE RIGHT TO MANUFACTURE IN INDIA AND THE SPECIFIED COUNTRIES AND ALSO AN EXCLU SIVE LICENSE TO USE AND SELL THE VALVES SO MANUFACTURE IN THE SPECIFIED COU NTRIES ON PAYMENT OF ROYALTY OF 1% LINKED WITH THE NET SELLING VALUE. TH E COURT OBSERVED THAT EVEN THE VALVES MANUFACTURED BY BLW IN GERMANY COUL D BE SOLD BY THE ASSESSEE IN SPECIFIED COUNTRIES BUT HERE TOO ROYALT Y WILL HAVE TO BE PAID AND THE PAYMENT OF ROYALTY WOULD THEREFORE APPEAR TO BE RECURRING AND CURRENT EXPENDITURE CONNECTED WITH THE SALES OF THE VALVES. ACCORDING TO THE COURT, EXPENDITURE MUST BE TREATED AS REVENUE EXPENDITURE. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 28 - HAVING REGARD TO THE AFORESAID FACTS AND CIRCUMSTAN CES OF THE CASE AND THE CASE LAWS CONSIDERED IT CLEARLY APPEARS THAT PAYMEN T OF ROYALTY BY THE ASSESSEE TO ARVIND WORLDWIDE INC. IS IN THE NATURE OF REVENUE EXPENDITURE WHICH IS ALLOWABLE U/S.37(1) OF THE I.T. ACT. THE ADDITION MADE ON THIS ACCOUNT IS, THEREFORE, ORDERED TO BE DELETED. 27. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTAT IVE VEHEMENTLY RELIED ON THE ORDER OF THE ASSESSING OFFICER AND SU BMITTED THAT EXPENDITURE INCURRED IS CAPITAL IN NATURE. THE ASSESSEE GETS E XCLUSIVE PRIVILEGE. IT IS PARTLY CAPITAL PARTLY REVENUE. THE ASSESSING OFFI CER HAS ONLY DISALLOWED 25% OF THE ROYALTY. THE CASE IS SIMILAR TO THE CAS E OF HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD. (SSG L). HE ALSO DISCUSSED IN DETAIL VARIOUS DECISIONS REFERRED TO BY THE ASSE SSING OFFICER IN HIS ORDER. 28. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE, ON THE OTHER HAND, SUBMITTED THAT ASSESSEE HAS GOT ONLY RIGHT TO USE THE BRAND NAME AND NOT THE RIGHT TO MANUFACTURE. IT IS PAYING ROYALTY ON THE BASIS OF SALES. HE SUBMITTED THAT THERE ARE TWO STAGES OF PAYMENT IN T ECHNOLOGY TRANSFER, ONE RELATES TO SUPPLY OF KNOW-HOW AND OTHER RELATES TO FEES/ROYALTY FOR ITS USE. THE FORMER ONE IS OBTAINED BY MAKING LUMP SUM PAYME NT WHICH IS COVERED U/S.35AB OF THE I.T. ACT, 1961, WHEREAS LAT ER PAYMENT IS TOWARDS USE OF THE KNOW-HOW OR USE OF THE BRAND NAME WHICH IS GENERALLY ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 29 - DETERMINED WITH REFERENCE TO TIME FRAME AND TURNOVE R. THIS TYPE OF THE EXPENDITURE IS ALWAYS REVENUE IN NATURE. ACCORDIN G TO HIM, THE DECISION RELIED ON BY THE LD. ASSESSING OFFICER IN THE CASE OF SOUTHERN SWITCHGEAR LTD.(SUPRA) IS DISTINGUISHED ON FACTS. IN THAT CA SE, FOREIGN COMPANY WAS PROVIDING TO INDIAN COMPANY TECHNICAL AID AND INFOR MATION IN THE MANUFACTURE OF LOW TENSION SWITCH GEAR AND HIGH TEN SION SWITCH GEAR, ETC. AND THE INDIAN COMPANY ALSO HAD THE RIGHT TO SELL S UCH PRODUCTS. THE FOREIGN COMPANY HAD AGREED TO KEEP THE INDIAN COMPA NY UPDATED WITH THE LATEST MODERN DEVELOPMENT IN THE FIELD OF SWITCH GE ARS AND TRANSFORMERS AND ALSO TO TRAIN NECESSARY PERSONNEL AT UK FACTORY . THE INDIAN COMPANY EVEN AFTER THE EXPIRY OF THE PERIOD OF THE AGREEMEN T COULD USE THE MODELS FOR PRODUCTION PROCEDURE, EXPERIMENT, IMPROVEMENT, ETC . WHICH HAD BEEN MADE AVAILABLE TO IT IN PURSUANCE OF THE AGREEMENT BUT SUBJECT ONLY TO THE CONDITION THAT IT HAS OBLIGATION TO KEEP THEM SECRE T EVEN AFTER THE TERMINATION. BUT IN THE PRESENT CASE, RIDER INC. USA IS PROVIDING SUFFICIENT FINANCES, TECHNICAL INFORMATION, MERCHAN DISE, COUNCELLING AND ADVERTISING ADVICE FOR MANUFACTURING AND MARKETING OF THE LICENSED PRODUCTS IN THE LICENSED TERRITORY. NO RIGHT HAS BEEN GIVEN TO THE PRESENT ASSESSEE BEYOND THE PERIOD OF AGREEMENT. THE CASE OF THE ASSESSEE IS ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 30 - SQUARELY COVERED BY THE DECISION OF HON'BLE JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT VS. POWER BUILD LTD. 244 ITR 19 (GU J.) AND OF CIT VS. ZAVERCHAND GAEKWAD (P.) LTD. (2006) 202 CTR 94 (GU J.), WHEREIN IT HAS BEEN HELD THAT ROYALTY PAID @ 2% OF NET SALES WOULD BE OF THE NATURE OF REVENUE EXPENDITURE. HE, FURTHER REFERRED TO THE D ECISION OF CIT VS. JYOTI ELECTRIC MOTORS LTD. 255 ITR 345(GUJ.), WHEREIN IT HAS BEEN HELD THAT WHEN ASSESSEE IS GRANTED NON-EXCLUSIVE LICENCE TO M ANUFACTURE ELECTRICAL MOTORS AND ROYALTY IS PAYABLE ON THE BASIS OF PERC ENTAGE OF SALE PRICE OF PRODUCTS MANUFACTURED, THE PAYMENT WOULD BE ALLOWAB LE IN THE NATURE OF BUSINESS EXPENDITURE. HE ALSO REFERRED TO THE DECI SION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. SWARAJ E NGINES LTD. (2008) 301 ITR 284 (P&H) AND OF CIT VS. GUJARAT CARBON LTD . 254 ITR 294 (GUJ.) FOR THE SIMILAR PROPOSITION. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS ALSO REFERRED, FOR THE BENEFIT, TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CI T VS. WAVIN (INDIA) LTD. (1999) 236 ITR 314 (SC). 29. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE THEN SUBMITTED THAT SUCH ROYALTY PAYMENTS WERE MADE IN E ARLIER ASSESSMENT ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 31 - YEARS ALSO AND ASSESSING OFFICER HAS NOT DISALLOWED ANY PART OF THE CLAIM FOR ASSESSMENT YEARS 1996-97 & 1997-98. THE ASSESS ING OFFICER SHOULD HAVE TAKEN A CONSISTENT VIEW. 30. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. THE UNDISPUTED FACTS FROM THE READING OF THE AGREEMENT AS REPRODUC ED ABOVE ARE AS UNDER:- (I) M/S.CLUETT PEABODY & CO.INC. 48W, 38 TH STREET, NEW YORK 10018 HAD GIVEN LICENCE FOR TECHNICAL ASSISTANCE T O M/S.RIDER INC., 1222, BLUEBERRY, COURT EDISON, NJ-08617. (II) M/S.CLUETT PEOBODY & CO.INC. AGREED TO ALLOW M /S.RIDER INC. TO GIVE SUB-LICENCE TO M/S.HORIZON APPAREL PVT.LTD. WHICH IS THE OLD NAME OF THE PRESENT-ASSESSEE. (III) THE RIDER INC. WOULD MAKE AVAILABLE TO HORIZO N APPAREL PVT.LTD. A LIST OF MACHINERY AND EQUIPMENT TO MANU FACTURE LICENSED PRODUCTS. IT CAN BE PURCHASED FROM OUTSID E INDIA OR FROM INDIGENOUS SOURCES; TO PROVIDE VISIT OF EMPLOY EES OF ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 32 - HORIZON APPAREL PVT.LTD. TO THE FACTORY OF RIDEN IN C. AND TO MAKE THEM KNOW THE TECHNICAL KNOW-HOW OF MANUFACTU RING PROCESS, SUCH AS, SHIRTS SPORTS-SHIRTS, CASUAL-SHI RTS, NIGHT- SHIRTS, SWEATERS, JACKETS, NECK-WEAR AND OTHER GARM ENTS. (IV) THE RIDER INC. WOULD PROVIDE SERVICES OF ITS O WN TECHNICIANS TO THE ASSESSEE. IN CONSIDERATION OF THE FEES PAI D, THE TECHNICAL KNOW-HOW LICENCE IS PROVIDED FOR EXCLUSIV E USE OR TO BE IT GRANTED TO APPROVE SUB-CONTRACTOR ON SUB -LICENCE BASIS. (V) A NON-EXCLUSIVE LICENCE TO EXPORT THE LICENSED PRODUCTS INTO ALL COUNTRIES. (VI) NOT TO GRANT A LICENCE TO MANUFACTURE THE LICE NSED PRODUCTS IN INDIA OR TO USE THE TECHNICAL KNOW-HOW IN INDIA EXC EPT TO ITS OWN AFFILIATED COMPANY OF RIDER INC. AND CLEUTT PEA BODY & CO.INC. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 33 - (VII) MANUFACTURING OF THE LICENSED PRODUCTS WOULD BE DONE ACCORDING TO TECHNICAL KNOW-HOW AND STANDARDS SET IN BUY RIDEN INC. / CLEUTT PEABODY & CO.INC. (VIII) AGREEMENT WOULD BE FOR INITIAL FIVE YEARS WH ICH IS EXTENDABLE TO ANOTHER FIVE YEARS. (IX) ON TERMINATION OF THE AGREEMENT, RIGHTS IN THE TECHNICAL KNOW- HOW AND OTHER INFORMATION SHALL REVERT TO RIDER IN C. AND THE ASSESSEE COULD CEASE TO USE THE SAME. THE EMBROIDE RY ITEMS, PATTERNS AND DESIGNS SHALL BE RETURNED TO RIDER INC . ALONGWITH ALL THE ORIGINAL DOCUMENTS AND OTHER MATERIAL IN WH ICH THE TECHNICAL KNOW-HOW IS RECORDED. (X) AS A CONSIDERATION, A ROYALTY ON BOTH DOMESTIC AND EXPORT SALES OF LICENSED PRODUCTS @ 4% OF THE NET SALES W OULD BE PAID BY THE ASSESSEE. IN ADDITION, HORIZON APPAREL PVT.LTD. SHALL PAY LUMP-SUM AMOUNT OF 3 LACS US DOLLARS IN T HREE INSTALLMENTS. 31. THUS, A READING OF AGREEMENT INDICATED THA T THE PAYMENTS ARE IN TWO PARTS; ONE IS LUMP-SUM PAYMENT OF 3 LACS US DOLLAR S AND OTHER IS ACTUAL ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 34 - PAYMENT BASED ON DOMESTIC AND EXPORTED SALES AT CER TAIN PERCENTAGE THEREOF. FIRST PAYMENT IS ADMITTEDLY CAPITAL IN NA TURE. THE LD. ASSESSING OFFICER HAS NOT POINTED OUT WHETHER PAYMENT MADE TH IS YEAR, OF ANY PART OF LUMP-SUM AMOUNT WAS CONSIDERED BY HIM FOR DISALL OWANCE. SO FAR AS LEGAL POSITION IS CONCERNED, LUMP-SUM PAYMENT IS MA DE CLEARLY TO GET AN ENDURING BENEFIT FOR THE DURATION FOR WHICH AGREEME NT WILL SUBSIST. THE ASSESSEE IS GETTING TECHNICAL KNOW-HOW PROVIDING EN DURING BENEFIT FOR THE PERIOD OF THE AGREEMENT. THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD. VS. CIT (SUPRA) HAD CONFI RMED THE ORDER OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SO UTHERN SWITCH GEAR LTD.(1972) 148 ITR 272 (MAD.). IN THAT CASE, HON 'BLE MADRAS HIGH COURT NOTED THAT MAIN CONDITIONS AGREED UPON WERE AS UNDER:- (I) AN EXCLUSIVE LICENSE TO MANUFACTURE, USE AND SALE THE CONTINUANCE OF THIS AGREEMENT THE SCHEDULED PRODUCT WITHIN INDIA. (II) A NON-EXCLUSIVE LICENSE TO SELL THE SCHED ULED PRODUCTS IN THE EXPORT TERRITORIES SUBJECT ALWAYS HOWEVER TO THE PR OVISIONS OF THIS AGREEMENT AND TO ANY RESTRICTIONS OR OBLIGATIO NS FROM TIME TO TIME UPON BRUSH IN RESPECT OF SUCH LETTERS PATEN T. SUCH LICENSE OR LICENSES SHALL NOT IN SUCH REASONABLE FO RM AS SSGL MAY REQUIRE SO AS TO ENABLE IT TO HAVE THE FULL BEN EFIT IN ACCORDANCE WITH THE PROVISIONS OF THIS CLAUSE AND D URING THE CONTINUANCE. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 35 - (III) BRUSH HEREBY AGREES AND UNDERTAKES THAT IT WILL NOT DURING THE CONTINUANCE OF THE AGREEMENT MANUFACTURE IN IND IA ANY SCHEDULED PRODUCTS OR GRANT OR FURNISH OR MAKE AVAI LABLE TO ANY OTHER PERSON, FIRM OR COMPANY ANY MANUFACTURING INF ORMATION, LICENSE, RIGHTS AND DATA FOR SCHEDULED PRODUCTS IN INDIA. (IV) UPON THE TERMINATION OF THE AGREEMENT ANY LI CENSE, PERMISSION, AUTHORITIES GRANTED BY BRUSH IN FAVOUR OF SSGL IN RESPECT OF ANY PATENT OR SIMILAR RIGHTS SHALL DETER MINE AND SSGL SHALL FORTHWITH RETURN TO BRUSH AIL COPIES OF DRAWINGS, SPECIFICATIONS, INFORMATION AND OTHER DATA IN THE P OSSESSION OR UNDER THE CONTROL OF SSGL RELATING IN WHOLE OR IN P ART TO THE DESIGNS OR INTENTIONS WHICH ARE THE SUBJECT OF PATE NT OR SIMILAR RIGHT OWNED OR CONTROLLED BY BRUSH IN INDIA. 32. IN CONSIDERATION OF ABOVE THAT ASSESSEE HAS AG REED TO PAY 20,000 STERLING POUNDS IN EQUAL INSTALLMENTS OF 4,000 POU NDS AND, FURTHER, ROYALTY ON PERCENTAGE OF NET INVOICE PRICE, WHICH VARIED FOR DIFFERENT TYPE OF LICENSED PRODUCTS. FURTHER, THOUGH THE DURATION OF AGREEMENT WAS OF FIVE YEARS, BUT THE ASSESSEE COULD USE, EVEN AFTER EXPIRY OF PERIOD OF FIVE YEARS, THE METHOD OF PRODUCTION, PROCEDURE, EXPERIE NCE, ETC. THUS, THERE WAS ACQUISITION OF KNOWLEDGE OF ENDURING NATURE. T HE FOREIGN COMPANY HAD AGREED NOT TO MANUFACTURE IN INDIA ANY OF THE SCHEDULED PRODUCTS OR TO GRANT OR TO MAKE AVAILABLE TO ANY OTHER PERSON, FI RM OR COMPANY ANY MANUFACTURING INFORMATION LICENCE OR RIGHTS, FOR AN Y OF THE SCHEDULED PRODUCTS IN INDIA. THUS, EXCLUSIVE BENEFIT WAS CON FIRMED ON THAT ASSESSEE- ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 36 - COMPANY TO MANUFACTURE AND SALE THE SCHEDULED PRODU CTS. THE CONFERMENT OF AN EXCLUSIVE BENEFIT TO MANUFACTURE THE SCHEDULE D PRODUCTS WHICH WERE THE SUBJECT MATTER OF AGREEMENT COULD NOT BE SAID T O BE A PART OF KNOW- HOW AGREEMENT THE RIGHT TO MAKE OR MANUFACTURE GOO DS EXCLUSIVELY IN INDIA SHOULD BE TAKEN TO BE AN INDEPENDENT RIGHT SE CURED BY THE ASSESSEE FROM THE FOREIGN COMPANY WHICH IS OF AN ENDURING NA TURE. 33. FROM THE READING OF ABOVE JUDGEMENTS, WE NOTICE THAT WHERE TECHNICAL KNOW-HOW IS OBTAINED AND THE BENEFIT PERM EATES/SPILLS BEYOND THE PERIOD OF THE AGREEMENT, THE ASSESSEE GETS END URING BENEFIT. BUT IN THE PRESENT CASE, IT IS CLEAR FROM THE AGREEMENTS THAT SUCH RIGHT TO USE THE TECHNICAL KNOW-HOW WOULD CEASE THE MOMENT AGREEMENT IS TERMINATED. THE ASSESSEE DOES NOT GET ANY RIGHT TO MANUFACTURE THE LICENSED PRODUCT AND SALE THEM IN INDIA OR ABROAD AFTER THE TERMINAT ION OF THE AGREEMENT. THEREFORE, AS RIGHTLY OBSERVED BY THE LEARNED CIT( APPEALS) THIS DECISION WOULD NOT BE APPLICABLE ON THE FACTS OF THE PRESENT CASE. 34. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE JUDGMENTS REFERRED TO BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. IN BRIEF, THE HEADS NOTES OF THOSE JUDGE MENTS ARE AS UNDER:- ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 37 - (A) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. JYOTI ELECTRIC MOTORS LTD. 255 ITR 345 (GUJ.) WHERE THE ASSESSEE, WHICH WAS MANUFACTURING MOTORS , PAID THE SUM OF RS. 50,000 TOWARDS TECHNICAL REPORT FEES FOR ASCERT AINING FEASIBILITY OF MANUFACTURING MOTORS OF KINDS DIFFERENT FROM THOSE MANUFACTURED BY IT : HELD, THAT THE AMOUNT WAS REVENUE EXPENDITURE AND T HE ASSESSEE WAS ENTITLED TO DEDUCTION IN RELATION THERETO IN COMPUT ING ITS PROFITS. UNDER AN AGREEMENT DATED SEPTEMBER 1, 1972, WITH JYOTI LTD., THE ASSESSEE WAS GRANTED A NON-EXCLUSIVE LICENCE TO MANUFACTURE ELEC TRIC MOTORS WHICH WERE MANUFACTURED BY JYOTI LTD., AND FOR THIS PURPO SE JYOTI LTD. WAS TO RENDER TECHNICAL AND OTHER EXPERIENCED GUIDANCE TO THE ASSESSEE. JYOTI LTD. RESERVED THE RIGHT TO GRANT SIMILAR LICENCES T O ANY OTHER PARTIES. THOUGH THE PERIOD OF THE AGREEMENT WAS TEN YEARS AN D COULD BE EXTENDED FOR A FURTHER PERIOD AND THE AGREEMENT WAS TO CONTI NUE IN FORCE UNTIL IT WAS TERMINATED, THE AGREEMENT WAS LIABLE TO BE TERM INATED EVEN EARLIER THAN THE STIPULATED DATE, AND UPON TERMINATION THE ASSESSEE WAS REQUIRED TO RETURN TO JYOTI LTD. ALL THE TECHNICAL DOCUMENTA TION WITHIN ONE MONTH IN THE EVENT OF TERMINATION OR LAPSE OF THE AGREEMENT. THE ASSESSEE HAD TO SELL ITS PRODUCTS SOLELY THROUGH THE SOLE SELLING A GENT APPOINTED BY JYOTI LTD. THE ASSESSEE WAS TO PAY ROYALTY AT THE RATE OF 7 PER CENT. ON THE NET SALE PRICE OF THE PRODUCTS MANUFACTURED IN TERMS OF THE AGREEMENT : HELD,_ THAT THE ASSESSEE DID NOT ACQUIRE ANY ENDURI NG ADVANTAGE : IT HAD MERELY BEEN GRANTED A NON-EXCLUSIVE LICENCE FOR THE USE OF AN ASSET. THE ROYALTY WAS PAYABLE ON THE BASIS OF THE SALES WHICH THE LICENSEE WOULD MAKE AND THE PAYMENT WAS STRICTLY LINKED WITH THE Q UANTUM OF SALES AND WOULD VARY WITH THE QUANTUM OF SALES. THE AMOUNT OF ROYALTY PAID BY THE ASSESSEE WAS REVENUE EXPENDITURE AND ALLOWABLE AS A DEDUCTION IN COMPUTING ITS PROFITS. JYOTI ELECTRIC MOTORS LTD. V. CIT [1999] 237 ITR 28 0 (GUJ) EXPLAINED. HELD,_ALSO, THAT THE AMOUNT OF KNOW-HOW FEES OF RS. 3 LAKHS AND ROYALTY OF RS.1,03,068 PAID BY THE ASSESSEE UNDER AGREEMENT JANUARY 1, 1981, WERE ALLOWABLE AS REVENUE EXPENDITURE. DECISION OF THE GUJARAT HIGH COURT IN INCOME-TAX AP PLICATION NO. 269 OF 1999, DATED NOVEMBER 3, 1999, FOLLOWED. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 38 - (B) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. GUJAR AT CARBON LTD. 254 ITR 295 (GUJ.). THE ASSESSEE-COMPANY HAD ENTERED INTO TWO AGREEMEN TS WITH A COLLABORATOR FOR OBTAINING TECHNICAL KNOW-HOW AS WE LL AS VARIOUS SERVICES IN RESPECT OF SPOT ASSISTANCE TO PROMOTE SALE OF FU RNISHED CARBON BLACK MANUFACTURED BY THE ASSESSEE. UNDER THE FIRST AGREE MENT, IN ADDITION TO A LUMP-SUM PAYMENT, THE ASSESSEE HAD TO PAY THE COLLA BORATOR A ROYALTY BASED ON FIGURES OF SALES FOR A PERIOD OF FIVE YEAR S IN RETURN FOR VARIOUS AFTER-INSTALLATION SERVICES BY TECHNICALLY QUALIFIE D PERSONS FOR SPOT TECHNICAL ASSISTANCE TO BE RENDERED BY THE COLLABOR ATOR. THERE WAS NO PROVISION IN THAT AGREEMENT REQUIRING THE ASSESSEE TO RETURN THE DESIGNS, ETC., AFTER THE EXPIRY OF THE PERIOD OF FIVE YEARS. UNDER THE SECOND AGREEMENT, THE ASSESSEE WAS REQUIRED TO PAY A ROYAL TY OF 3 PER CENT. OF THE NET EX-FACTORY SALE PRICE FOR THE SUPPLY OF INFORMA TION ON DAY-TO-DAY DEVELOPMENTS IN THE RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE AND PERTAINING TO THE RESEARCH CARRIED OUT BY THE COLLA BORATOR. THE APPELLATE TRIBUNAL HELD (I) THAT THE ROYALTY UNDER THE FIRST AGREEMENT PERTAINED TO SERVICES IN RESPECT OF THE STAGE AFTER INSTALLATION OF THE PLANT ; AND (II) THAT THE SUPPLY OF INFORMATION UNDER THE SECOND AGREEMEN T AS REGARDS DAY-TO- DAY DEVELOPMENTS IN VIEW OF THE RESEARCH CARRIED OU T BY THE COLLABORATOR WAS ONLY FOR THE PURPOSE OF OBTAINING INFORMATION A S TO THE RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE AND, THEREFOR E, PAYMENTS OF ROYALTY UNDER BOTH THE AGREEMENTS WERE DIRECTLY REL ATABLE TO SERVICES WHICH WERE IN THE REVENUE FIELD AND WERE ALLOWABLE AS REVENUE EXPENDITURE. ON A REFERENCE : HELD, AFFIRMING THE DECISION OF THE APPELLATE TRIBUNAL, THAT THE AMOUNTS PAID BY THE ASSESSEE TOWARDS ROYALTY TO THE COLLABO RATORS WERE REVENUE EXPENDITURE. THAT THERE WAS NO PROVISION IN THE FIR ST AGREEMENT FOR RETURN THE DESIGNS, ETC., DID NOT AFFECT THE NATURE OF THE ROYALTY PAYABLE. BY THE COURT : WHENEVER ANY PARTY CHALLENGES THE IN TERPRETATION OF ANY DOCUMENT, PRIMARILY IT WOULD BE THE DUTY OF THAT PA RTY TO PLACE SUCH DOCUMENT ON RECORD SO AS TO ENABLE THE COURT TO APP RECIATE WHETHER THE LOWER AUTHORITIES HAVE RIGHTLY READ THE DOCUMENT. ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 39 - (C) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. WAVIN (INDIA) LTD. 236 ITR 314(SC.) HELD, _ THAT, IN THE INSTANT CASE, THE EXPENDITURE WAS IN CURRED TO OBTAIN BENEFIT OF RESEARCH AND DEVELOPMENT MADE BY THE FOR EIGN COMPANY. THE TECHNICAL INFORMATION GIVEN TO THE INDIAN COMPANY W AS 'NON-EXCLUSIVE' AND 'NON-TRANSFERABLE'. IN OTHER WORDS, THIS WAS NO T AN OUT AND OUT SALE OF TECHNICAL KNOW-HOW. THE ASSESSEE WAS MERELY GIVEN A NON-EXCLUSIVE AND NON-TRANSFERABLE RIGHT OF USER OF THE TECHNICAL INF ORMATION. THE EXPENDITURE WAS DEDUCTIBLE. DECISION OF THE MADRAS HIGH COURT IN CIT V. WAVIN I NDIA LTD. [1983] 143 ITR 281 AFFIRMED. (D) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. SWARA J ENGINES LTD. (2008) 301 ITR 284 (P&H) THE PRE-REQUISITE FOR APPLICATION OF SECTION 35AB OF THE INCOME-TAX ACT, 1961, IS THAT THE PAYMENT HAS TO BE AS LUMP SUM CON SIDERATION FOR ACQUIRING ANY KNOW-HOW. HELD, ACCORDINGLY, DISMISSING THE APPEAL, THAT THE PRE-CO NDITION FOR APPLICATION OF SECTION 35AB WAS TOTALLY MISSING IN THE ASSESSEES CASE AS THE PAYMENT BEING MADE TO K WAS NOT LUMP SUM PAYMEN T FOR ACQUIRING OF THE KNOW-HOW RATHER IT WAS PAYABLE PERIODICALLY ON THE BASIS OF PERCENTAGE OF INVOICED PRICE DEPENDING UPON THE NUM BER OF ENGINES MANUFACTURED. THIS WAS NOT A CASE OF OUTRIGHT SALE OF TECHNICAL KNOW- HOW. THUS, THE ROYALTY PAYMENTS MADE BY THE ASSESSE E UNDER THE AGREEMENT DID NOT FALL WITHIN THE DOMAIN OF SECTION 35AB. CIT V. WAVIN (INDIA) LTD. [1999] 236 ITR 314 (SC) A PPLIED. (E) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. POWER BUILD LTD. 355 ITR 19 (GUJ.) THE ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTUR ING VARIOUS TYPES OF MOTORS AND WEIGHING MACHINES CLAIMED DEDUCTION OF T HE PAYMENT MADE TOWARDS ROYALTY TO THE COLLABORATORS. THE INCOME-TA X OFFICER FOUND THAT IN VIEW OF THE AMENDED AGREEMENT THE ASSESSEE WAS ENTI TLED TO RETAIN ALL THE TECHNICAL DATA, DESIGN, DOCUMENTATION, ETC., AND TH ERE WAS ALSO NO ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 40 - RESTRICTION ON MANUFACTURE. ACCORDINGLY, THE INCOME -TAX OFFICER NEGATIVED THE CLAIM OF THE ASSESSEE. THE TRIBUNAL A LLOWED THE EXPENDITURE. ON A REFERENCE: HELD, THAT IN VIEW OF THE TRIBUNAL'S FINDING THAT THE AS SESSEE WAS NOT A NEW UNIT ENGAGED IN MANUFACTURING VARIOUS TYPES OF MOTORS AND WEIGHING MACHINES AND THE ADVANTAGE AND BENEFIT WAS ACQUIRED ONLY FOR RUNNING THE EXISTING BUSINESS, THE AMOUNT PAID WAS ALLOWABL E AS REVENUE EXPENDITURE. CIT V. SAYAJI IRON AND ENGINEERING CO. LTD. [1994] 210 ITR 950 (GUJ) ANDCIT V. SUHRID GEIGY LTD. [1996] 220 ITR 153 (GUJ ) FOLLOWED. 35. AS A RESULT, WE HOLD THAT THE ENTIRE EXPENDITUR E MADE BY THE ASSESSEE THIS YEAR IS REVENUE IN NATURE AND DISALLOWANCE NE ED NOT BE MADE EVEN OF 1/4 TH . NOTWITHSTANDING, THE REVENUE HAS TAKEN A VIEW I N THE EARLIER ASSESSMENT YEARS, I.E. 1996-97 & 1997-98 THAT THE E NTIRE PAYMENT IS OF REVENUE IN NATURE AND NO DISALLOWANCE OUT OF SUCH P AYMENTS HAD BEEN MADE. THEREFORE, THERE IS NO REASON FOR TAKING A D IFFERENT VIEW THAN TAKEN BY THE DEPARTMENT IN EARLIER ASSESSMENT YEARS. WE ARE FORTIFIED IN OUR VIEW BY THE DECISION OF HON'BLE SUPREME COURT IN TH E CASE OF RADHASWAMY SATSANG VS. CIT (1992) 193 ITR 321 (SC), OF CIT VS. DALMIA PROMOTORS PVT.LTD. (2006) 281 ITR 346 (DELHI ), OF CIT VS. SOOD HARVESTOR (2008) 304 ITR 279 (P&H) AND OF CIT VS. D YNAVISION LTD. (2004) 256 ITR 289 (MAD.). ITA NO.1471/AHD/2005 (BY ASS ESSEE) & ITA NO.1677/AHD/2005 (BY REVENUE) ARVIND CLOTHING LTD. VS. ACIT ASST.YEAR 2001-02 - 41 - 36. IN VIEW OF ABOVE DISCUSSION, WE UPHOLD THE ORDE R OF THE LEARNED CIT(APPEALS) AND DISMISS THE APPEAL FILED BY THE RE VENUE. 37. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES, WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 06/11/2009. SD/- SD/- ( R.V. EASWAR ) ( D.C. AGRAWAL ) VICE PRESIDENT ACC OUNTANT MEMBER AHMEDABAD; DATED 06/11/2009 T.C. NAIR COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-V, AHMEDABAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD