Kyungshin Industrial Motherson Ltd., V. DCIT, Coy Circle-5(1),

ITA 166/DEL/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9990 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 27-07-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 16-01-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKRAM BATRA
• Assessee Lawyers: Y M SHARMA
• Keywords: Capital asset; Depreciation; Business expenditure; Rule of consistency; Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL I.T.A.NO. 166(DEL)/2006 ASSESSMENT YEAR: 2002-03 KYUNGSHIN INDUSTRIAL DY. COMMISSIONER OF INCOME MOTHERSON LTD., 43, COMMUNITY VS. T AX, CIRCLE 5(1), NEW DELHI. CENTRE, 3 RD FLOOR, BHAGERIA HOUSE, NEW FRIENDS COLONY, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI Y.M. SHARMA, C.A. RESPONDENT BY : SHRI VIKRAM BATRA, SR. DR ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE ASSESSEE EMANATES FROM T HE ORDER OF CIT(APPEALS)-VIII, NEW DELHI, PASSED ON 4.10.20 05 IN APPEAL NO. 32/05- 06, AND IT PERTAINS TO ASSESSMENT YEAR 2002 -03. THE CORRESPONDING ORDER OF ASSESSMENT WAS FRAMED BY THE DY. CIT , CIRCLE 5(1), NEW DELHI, THE ASSESSING OFFICER, ON 31.3.2005 UN DER THE PROVISIONS OF SECTION 143(3) OF THE INCOME-TAX ACT, 1961. THE ONLY SUBSTANTIVE GROUND TAKEN BY THE ASSESSEE IS THAT ON THE F ACTS AND IN THE CIRCUMSTANCES ITA NO. 166(DEL)/2006 2 OF THE CASE AND UNDER THE LAW, THE AO ERRE D IN DISALLOWING A SUM OF RS. 14.50 LAKH OUT OF THE ROYALTY PAYMENT. 2. THE FACTS OF THE CASE ARE THAT THE A SSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 29,25,936 /- ON 30.10.2002. IN THE COURSE OF HEARING, IT WAS NOTICED THAT THE ASSESSEE DEBITED A SUM OF RS. 58.00 LAKH TO THE PROFIT AND LOSS ACCO UNT AS PAYMENT OF ROYALTY. IT WAS SUBMITTED THAT THE ROYALTY HAS BEEN PAID TO THE JOINT VENTURE PARTNER @ 5% OF THE NET SALES. THE TAX WAS DEDUCTED ON SUCH PAYMENT @ 20%. THE ROYALTY WAS PAID ON THE BASIS OF THE QUANTUM OF SALES MADE BY THE ASSESSEE IN INDIA AND AB ROAD. THEREFORE, THE SAME CONSTITUTED REVENUE EXPENDITURE. THE AO CO NSIDERED THE FACTS OF THE CASE, THE AGREEMENT WITH THE JOINT VENTURE PARTNER, KIC LTD. (KIC FOR SHORT) OF SOUTH KOREA, AND THE DECISION O F HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEARS LTD. VS. CIT (1998) 232 ITR 359. IT WAS HELD THAT ON ACCOUNT OF ACQUISITI ON OF EXCLUSIVE PRIVILEGE FOR MANUFACTURING AND SELLING PRODUCTS, THE ASSESSEE DID ACQUIRE INTER-ALIA AN ADVANTAGE OF ENDURING NATURE AL SO. THEREFORE, A PART OF THE ROYALTY PAYMENT CONSTITUTED CAPITAL E XPENDITURE, WHICH WAS ITA NO. 166(DEL)/2006 3 QUANTIFIED AT 25% OF THE PAYMENT. THUS, AN AMO UNT OF RS. 14.50 LAKH WAS DISALLOWED IN COMPUTING THE TOTAL INCOME. 2.1 AGGRIEVED BY THIS ORDER, THE ASSESSEE FILE D APPEAL BEFORE THE CIT(APPEALS)-VIII, NEW DELHI. ONE OF THE GROU NDS, RELEVANT FOR OUR PURPOSE, WAS IN RELATION TO THE DISALLOWANCE OF RS. 14.50 LAKH OUT OF THE ROYALTY PAYMENT. THE ASSESSEE SOUGHT TO DISTINGUISH THE FACTS OF ITS CASE FROM THE FACTS OF THE CASE OF SOUT HERN SWITCH GEARS LTD. (SUPRA) AND CLAIMED THAT THE WHOLE OF THE EXPENDITURE WAS REVENUE IN NATURE. THE LEARNED CIT(APPEALS) ALSO REFERRED TO THE SALIENT FEATURES OF THE AGREEMENT WITH THE KIC, NAMEL Y, THAT :- I) THE TECHNICAL ASSISTANCE CONTEMPLATED IN TH E AGREEMENT COVERS ESTABLISHMENT OF FACTORY AND ITS OPERATION; II) THE ASSESSEE WAS FREE TO USE TECHNICAL INFORMATION FOR MANUFACTURING THE PRODUCTS AND SELL THEM EVEN AFTER EXPIRY OF THE AGREEMENT WITHOUT ANY ADDITIONAL PAYMENT; ITA NO. 166(DEL)/2006 4 III) THE KIC AGREED TO DISCLOSE TO THE ASS ESSEE ALL TECHNICAL IMPROVEMENTS IN THE PROCESS OF MANUFACTURE; IV) THE ASSESSEE GOT EXCLUSIVE RIGHT TO MANUF ACTURE, PROCESS, RE- ASSEMBLE, USE AND SELL PRODUCTS IN THE SA LES TERRITORY, BEING THE UNION OF INDIA; AND V) THE ASSESSEE WAS ENTITLED TO USE THE LOGO OF KIC. AFTER CONSIDERING THE FACTS OF THE CASE AND THE FACTS OF THE CASE OF SOUTHERN SWITCH GEARS LTD. (SUPRA), IT WAS CON CLUDED THAT THE FACTS WERE IN PARI-MATERIA. ACCORDINGLY, THE DISALL OWANCE MADE BY THE AO WAS UPHELD. 3. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AUTO W IRING HARNESS USED IN AUTOMOBILES. THESE HARNESSES HAVE TO BE CHANGED WITH EVERY CHANGE IN THE MODEL. IN ORDER TO MANUFACTURE THE WIRING HARNESSES, AN AGREEMENT WAS ENTERED INTO WITH THE KIC ON 21.10.1997, WHICH HAS BEEN PLACED IN THE PAPER BOOK ON PAGES 19 TO 33. UNDER THE ITA NO. 166(DEL)/2006 5 AGREEMENT, THE ROYALTY WAS PAYABLE ON SALES, WHICH MEANS THAT IF THERE WAS NO SALE, THERE WILL BE NO PAYMENT OF R OYALTY. HE REFERRED TO THE OBLIGATIONS OF THE KIC UNDER THE AGREEMENT, W HICH ARE CONTAINED IN ARTICLES 2.1 TO 2.10. THE KIC AGREED TO T RANSFER TO THE ASSESSEE THE TECHNICAL INFORMATION DEFINED IN ARTICLE 1.1 O F THE AGREEMENT FOR MANUFACTURE OF PRODUCTS IN INDIA. THE TECHNICA L INFORMATION WAS DEFINED TO MEAN AND INCLUDE THE EXISTING PATENT ED AND UN-PATENTED TECHNOLOGICAL KNOWLEDGE AND INVENTIONS, TRADE SECRETS, FORMULAE, MANUFACTURING PROCESS AND METHODS FOR THE M ANUFACTURE OF THE PRODUCTS, OR USED IN PRODUCE BY THE ASSESSEE , SUCH AS DESIGN; ASSEMBLY DATA; DRAWINGS, MODELS; METHODS; PRO CESS SPECIFICATIONS; MATERIAL SPECIFICATIONS; OPERATIONAL, ENGINEERING AND MANUFACTURING DATA; MACHINERY SPECIFICATIONS; PLANT LAY OUT AND COMPLETE QUALITY SYSTEMS RELATED TO THE PRODUCT. FURTHER, THE KIC GRANT ED TO THE ASSESSEE AN EXCLUSIVE RIGHT AND LICENCE TO MANUFACTURE, PR OCESS, ASSEMBLE AND USE AND SELL THE PRODUCTS IN THE SALES TERRIT ORY IN ACCORDANCE WITH THE TECHNICAL INFORMATION PROVIDED BY THE KIC ON S UCH TERMS AND CONDITIONS AS MENTIONED IN THE AGREEMENT. THE SALES TERRITORY WAS DEFINED TO MEAN THE TERRITORIES OF THE UNION OF INDIA. HOWEVER, FOR EXPORT OUTSIDE INDIA, THE ASSESSEE WAS R EQUIRED TO OBTAIN PRIOR ITA NO. 166(DEL)/2006 6 WRITTEN PERMISSION FROM THE KIC. THE KIC ALS O GRANTED TO THE ASSESSEE THE RIGHT TO USE ITS LOGO OR SUCH OTHER LOGO A S MUTUALLY AGREED. THE KIC ALSO UNDERTOOK TO PROVIDE THE ASSESSEE THE TECHNICAL SERVICES, WHICH WERE IN THE NATURE OF GUIDANCE, LATEST TECHNICAL AND ENGINEERING INSTRUCTIONS, IMPROVEMENTS, ADVICE SOUGHT BY ASSESSEE ON ITS PROBLEMS, CONSULTATION AND SUPERVISION INCLUDING THE PROVIS ION OF TECHNICIANS AS REQUIRED BY THE ASSESSEE AND TRAINING OF ITS PERSONNEL. THE KIC ALSO AGREED TO DISCLOSE TO THE ASSESSEE FREE OF C OST FROM TIME TO TIME THE IMPROVEMENTS IN TECHNICAL INFORMATION WHICH IT M AY HEREAFTER DEVELOP OR ACQUIRE. SIMILARLY, THE ASSESSEE WAS ALSO OBLIGED TO DISCLOSE TO THE KIC ALL SUCH IMPROVEMENTS AS DEVELOPED BY IT IN THE COURSE OF ITS BUSINESS OF MANUFACTURE. IT WAS ALSO AGREE D THAT THE ASSESSEE WILL BE AT LIBERTY TO MANUFACTURE AND SELL THE PRODUCTS EVEN AFTER THE EXPIRY OF THIS AGREEMENT WITHOUT PAYMENT OF ANY COST. THE LD. COUNSEL DREW OUR ATTENTION TOWARDS ARTICLE 7 REG ARDING CONSIDERATION WHICH PROVIDED THAT THE ASSESSEE SHALL PAY TO THE KIC A RUNNING ROYALTY @ 5% OF NET SALES IN THE TERRITORIES OF INDIA AND 7% OF NET SALES BY WAY OF EXPORTS. THE PAYMENT SHALL BE MADE AFTE R WITHHOLDING TAXES AND IT WILL BE THE RESPONSIBILITY OF THE ASSESSEE TO PAY THE TAXES TO THE AUTHORITIES. THE LEARNED COUNSEL ALSO DRAW OUR ATTENTION TO ARTICLE ITA NO. 166(DEL)/2006 7 1.6 WHICH DEFINES PLANT TO MEAN A PLANT TO BE DETAIL-DESIGNED, CONSTRUCTED AND OPERATED IN INDIA BY THE ASSES SEE IN COMPLIANCE WITH TECHNICAL INFORMATION FURNISHED BY THE KIC. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE ARTICLE 11 REGARDING TER MINATION, WHICH PROVIDED THAT IN CASE OF BREACH OF ITS OBLIGATION BY ANY PARTY, THE OTHER PARTY WILL HAVE THE RIGHT TO IMMEDIATE TERMINATION OF THE AGREEMENT BY WRITTEN NOTICE. THE AGREEMENT WAS TO BE VALID FOR A P ERIOD OF 7 YEARS FROM THE DATE OF AGREEMENT OR 5 YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, WHICHEVER IS EARLIER. HO WEVER, IT COULD BE EXTENDED BY MUTUAL AGREEMENT SUBJECT TO APPROV AL OF THE AUTHORITIES. 3.1 THE CASE OF THE LD. COUNSEL WAS THAT THE AGREEMENT WAS ENTERED INTO ON 21.10.1997. THEREFORE, IF THERE WAS A NY EXPENDITURE OF CAPITAL NATURE INVOLVED IN PAYMENT, SUCH CAPITALIZA TION SHOULD HAVE BEEN MADE RIGHT IN THE BEGINNING IN ASSESSMENT YE AR 1998-99. THERE COULD NOT HAVE BEEN ANY CAPITAL EXPENDITURE IN THIS YEAR AS NO PLANT WAS SET UP IN THIS YEAR. THE PAYMENT WAS ALLOWED IN TWO YEARS AND, THEREFORE, THE AUTHORITIES BELOW OUGHT NOT TO HAVE D ISALLOWED ANY PART OF THE PAYMENT IN THIS YEAR. AT THE TIME OF SETTING U P OF THE PLANT, SECTION 35AB WAS IN FORCE AND, THUS, THE ASSESSEE WAS ENTITLED TO ITA NO. 166(DEL)/2006 8 AMORTIZATION OF THE EXPENDITURE OVER 6 YEARS, WHICH WAS NOT DONE. AFTER THE DELETION OF SECTION 35AB, THE AS SESSEE BECAME ENTITLED TO THE DEDUCTION OF DEPRECIATION AND THE QUESTION WOULD BE THE YEAR OF CAPITALIZATION OF THE EXPENDITURE. HOWEVER, NO DEPRECIATION WAS ALLOWED TO THE ASSESSEE. IN OTHER WORDS, HIS CASE WAS THAT LOOKING TO THE PROVISIONS OF LAW CONTAINED IN SECTIONS 32 AND 35AB, THERE WOULD HARDLY BE ANY DIFFERENCE IN TAX LIABILITY OVER A PERIOD OF TIME EVEN IF A PORTION OF THE EXPENDITURE WAS TAKEN AS C APITAL EXPENDITURE. IT WAS ALSO HIS CASE THAT SINCE THE PAYMENT WAS RELA TED TO SALES, THE EXPENDITURE WAS REVENUE IN NATURE. 3.2 IN ORDER TO SUPPORT THE MAIN CONTENTION THA T THE EXPENDITURE WAS REVENUE IN NATURE, A NUMBER OF CASES WERE M ENTIONED IN THE PAPER BOOK. HOWEVER, THE CASES DISCUSSED BY THE LD. COUNS EL BEFORE US ARE MENTIONED HERE. HE RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. CIBA OF INDIA LTD. (1 968) 69 ITR 692. THE ASSESSEE WAS A SUBSIDIARY COMPANY OF A SWISS COMPANY, CIBA LTD., ENGAGED IN THE DEVELOPMENT, MANUFACTURE AND SALE OF MEDICINES AND PHARMACEUTICAL PREPARATIONS. UNDER THE AGREE MENT BETWEEN THE TWO COMPANIES, THE SWISS COMPANY DELIVERED TO THE ASSESSEE ALL PROCESSES, ITA NO. 166(DEL)/2006 9 FORMULAE, SCIENTIFIC DATA, WORKING RULES AND PRESCRIPTIONS USED FOR PROCESSING OR MANUFACTURING THE MEDICINES. THE ASSESSEE WAS GRANTED A LICENCE TO MANUFACTURE AND SELL THE MEDICI NES AND PHARMACEUTICAL PREPARATIONS, AS AFORESAID, IN INDIA AND ALSO TO USE CERTAIN TRADE MARKS BELONGING TO THE SWISS COMPANY, SUBJECT TO A NY EXISTING LICENCE HELD BY ANY OTHER THIRD PARTY ON THE DATE OF AG REEMENT OR TO WHICH SUCH LICENCE MAY BE GRANTED IN FUTURE. IN CONSIDER ATION, THE ASSESSEE WAS REQUIRED TO MAKE CONTRIBUTION OF 5%, 3% AND 2% RESPECTIVELY OF THE NET SALE PRICE OF THE PRODUCTS SOLD BY IT TOWARDS TECHNICAL CONSULTANCY AND TECHNICAL SERVICES AND RESEARCH; COST OF RA W-MATERIAL USED FOR EXPERIMENTAL WORK; AND ROYALTIES ON TRADE MARKS USED BY THE ASSESSEE RESPECTIVELY. THE ASSESSEE WAS REQUIRED TO RETURN ALL INFORMATION TO THE SWISS COMPANY ON TERMINATION OF THE AGREEMENT. IT WAS ALSO PROHIBITED FROM USE OF ANY PATENT OR TRADE MAR K UPON SUCH TERMINATION OF THE AGREEMENT. THE AGREEMENT WAS TO RE MAIN IN FORCE FOR FIVE YEARS BUT COULD BE CANCELLED AT THE INSTANCE OF ANY OF THE PARTIES. IT WAS HELD THAT THE ASSESSEE MERELY GOT ACC ESS TO TECHNICAL KNOWLEDGE WHICH WAS THERE AT THE COMMAND OF THE SWISS C OMPANY. THEREFORE, IT WAS MERELY A LICENSEE FOR A LIMITED PERIOD , DURING WHICH IT COULD ALSO USE PATENT AND TRADE MARKS BELONGING TO TH E SWISS COMPANY. ITA NO. 166(DEL)/2006 10 THEREFORE, THE CONTRIBUTION WAS ALLOWABLE AS BUSINESS EXPENDITURE. FURTHER, HE RELIED ON THE DECISION OF HON'B LE SUPREME COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS LTD. VS. CIT (1989 ) 177 ITR 377. IN THAT CASE, THE ASSESSEE PAID A LUMP SUM AM OUNT FOR OBTAINING TECHNICAL KNOW-HOW TO OBTAIN HIGHER YIELD A ND ALSO SUB-CULTURE OF HIGH YIELDING STRAIN OF PENICILLIN. THE ASSESSEE W AS ALREADY THERE IN THE BUSINESS OF MANUFACTURE OF PENICILLIN. IT WAS H ELD THAT THERE WAS NO EVIDENCE ON RECORD THAT THE ASSESSEE ACQUIR ED COMPLETELY NEW PLANT WITH A NEW PROCESS AND A NEW TECHNICAL KNO W-HOW. ITS BUSINESS CONTINUED TO BE THAT OF MANUFACTURING PENICILLI N. THE ACQUISITION OF THE KNOW-HOW WAS NOT ON AN EXCLUSIVE BASIS. THERE FORE, IMPROVEMENT IN THE TECHNOLOGY IN THE ALREADY EXISTING BUSINESS L ED TO EXPENDITURE OF REVENUE NATURE. RELIANCE WAS ALSO PLACED ON TH E DECISION OF HON'BLE SUPREME COURT IN THE CASE OF EMPITE JUTE LTD . VS. CIT, (1980) 124 ITR 1, IN WHICH IT WAS HELD THAT APART FROM THE TESTS OF ACQUISITION OF A CAPITAL ASSET, OBTAINING BENEFIT OF ENDURI NG NATURE, IT HAS ALSO TO BE SEEN WHETHER ANY BENEFIT ACCRUED IN THE CAPIT AL FIELD BY INCURRING THE EXPENDITURE. IF NOT, THE EXPENDITURE WILL BE REVENUE IN NATURE. RELIANCE WAS ALSO PLACED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SHRIRAM REFRIGERATION INDUSTRI ES LTD. VS. CIT (1981) ITA NO. 166(DEL)/2006 11 127 ITR 746, IN WHICH IT WAS HELD THAT THE LUMP SUM PAYMENT IN ADDITION TO THE PAYMENT OF ROYALTY BASED ON THE S ALES MADE BY THE ASSESSEE IN RESPECT OF THE LICENCE TO MANUFAC TURE AND SELL ANY PATENT RIGHT AND OTHER INFORMATION AND SERVICES AMOUNT ED TO REVENUE EXPENDITURE. RELIANCE WAS ALSO PLACED ON TH E DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SHRIRAM PIST ONS & RINGS LTD. VS. CIT (2008) 171 TAXMAN 81, IN WHICH IT WAS HELD THAT IN CASE OF RIGHT TO USE TECHNICAL KNOW-HOW, THE EXPENDITURE WOU LD BE REVENUE IN NATURE. 3.3 IN REPLY, THE LEARNED DR SUBMITTED THAT L OOKING TO THE TERMS OF THE AGREEMENT THE ASSESSEE GOT A BENEFI T OF ENDURING NATURE. ALTHOUGH THE MODELS MAY CHANGE, BUT THE BASIC TECHNOLOGY FOR MANUFACTURING AUTOMOBILE WIRING HARNESS REMAI N THE SAME. THE KIC ALSO ASSISTED THE ASSESSEE IN SETTING UP IT S PLANT. THE CLAUSE REGARDING TRANSFER OF TECHNOLOGY FROM ASSESSE E TO THE KIC WAS HYPOTHETICAL IN NATURE. THE ASSESSEE GOT A RIGHT TO MANUFACTURE THE WIRING HARNESS IN PERPETUITY WITHOUT ANY PAYMEN T ON TERMINATION OF AGREEMENT. THUS, THE FACTS WERE IDENTICAL T O THE FACTS OF THE CASE OF SOUTHERN SWITCH GEARS LTD. (SUPRA). THEREFORE, IT WAS ARGUED THAT THE ORDERS OF THE LOWER AUTHORITIES MAY BE UPHELD. ITA NO. 166(DEL)/2006 12 4. WE HAVE CONSIDERED THE FACTS OF THE CAS E AND RIVAL SUBMISSIONS. THE FACTS OF THE CASE ARE THAT THE ASSE SSEE ENTERED INTO AN AGREEMENT WITH THE KIC ON 21.10.1997 REGARDING TECHN ICAL ASSISTANCE AND LICENSING AGREEMENT. UNDER THIS AGREEMENT, THE KIC AGREED TO TRANSFER TO THE ASSESSEE TECHNICAL INFORMATION AS MENT IONED IN ARTICLE 1.1 THE DETAILS OF SUCH INFORMATION HAVE ALREADY BEEN ME NTIONED BY US. THIS TECHNICAL INFORMATION WAS PROVIDED ON AN EXC LUSIVE BASIS WITH A VIEW TO SET UP MANUFACTURING FACILITIES AND TO PR ODUCE AUTO WIRING HARNESS. THE ASSESSEE WAS GRANTED EXCLUSIVE RIGHTS TO SELL THE PRODUCTS IN THE TERRITORY OF INDIA. IT ALSO GOT RIGHTS TO S ELL THE PRODUCTS IN OTHER TERRITORIES AS MUTUALLY AGREED. THE ASSESS EE WAS ENTITLED TO RECEIVE ANY IMPROVEMENTS IN THE PROCESSES AND PRODUCTS ON A FREE BASIS DEPENDING UPON THE IMPROVEMENTS MADE BY KIC. THE ASSESSEE WAS ALSO REQUIRED TO TRANSMIT ANY IMPROVEMENT M ADE BY IT TO THE KIC. THE ASSESSEE WAS ALSO ENTITLED TO USE THE LOGO OF THE KIC OR SUCH OTHER LOGO AS MUTUALLY AGREED BETWEEN THE PARTIES . IN CONSIDERATION, THE ASSESSEE WAS REQUIRED TO PAY ROYALTY @ 5% OF N ET SALES IN THE TERRITORIES OF INDIA AND @ 7% OF NET SALES B Y WAY OF EXPORT OUTSIDE INDIA. THE AGREEMENT WAS TO REMAIN IN FO RCE FOR A PERIOD OF 5 YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. THE KIC WAS ALSO UNDER ITA NO. 166(DEL)/2006 13 OBLIGATION TO TRAIN THE TECHNICAL PERSONNEL OF THE ASSESSEE SUBJECT TO PAYMENT OF CERTAIN COSTS. THE ASSESSEE WAS ALSO ENTITLED TO USE THE TECHNICAL KNOWLEDGE AFTER TERMINATION OF THE AGREEMENT WITHOUT PAYMENT OF ANY COST. THE AGREEMENT WAS ACTE D UPON. IN THE INITIAL TWO YEARS, THE FULL DEDUCTION WAS ALLOWED TO T HE ASSESSEE IN RESPECT OF PAYMENT OF ROYALTY IN ASSESSMENTS MADE U/S 14 3(1) IN ONE YEAR AND 143(3) IN SECOND YEAR. THE QUESTION IS WHETHER, THE PAYMENTS CONSTITUTED A CAPITAL OR REVENUE EXPENDITURE 4. IN THE CASE OF CIBA OF INDIA LTD. (SUPRA) , THE ASSESSEE WAS REQUIRED TO MAKE CONTRIBUTION TO A SWISS COMPAN Y OF A PERCENTAGE OF SALE PRICE TOWARDS TECHNICAL SERVICES, RES EARCH WORK, COST OF MATERIALS USED IN RESEARCH AND ROYALTY. THE ASSESSEE DID NOT BECOME ENTITLE TO THE EXCLUSIVE SALE IN THE TERRITORIES OF INDIA IN THE PERIOD OF AGREEMENT AS THIS DEPENDED UPON THE PRE-EXISTI NG AGREEMENT. THUS, IT GOT ONLY ACCESS TO THE TECHNICAL KNOWLEDGE. THUS, IT WAS MERELY A LICENSEE OF THE KNOWLEDGE FOR A LIMITED PERIOD . THEREFORE, IT WAS HELD THAT THE ASSESSEE DID NOT OBTAIN ANY ADVAN TAGE OF ENDURING NATURE AND ALSO DID NOT ACQUIRE ANY CAPITAL ASSET. THE FACTS OF THE TWO CASES ARE DISTINGUISHABLE BECAUSE IN THE INSTA NT CASE, THE ASSESSEE ITA NO. 166(DEL)/2006 14 USED THE TECHNICAL KNOWLEDGE FOR SETTING U P OF THE BUSINESS; IT HAD EXCLUSIVE RIGHT TO SELL THE PRODUCTS IN THE T ERRITORIES OF INDIA; IT WAS ENTITLED TO NEW KNOWLEDGE ACQUIRED BY THE KIC DURING SUBSISTENCE OF THE AGREEMENT AND COULD CONTINUE TO USE THE KNOWLEDGE FREE OF COST EVEN AFTER THE LAPSE OF AGREEMENT. T HE FACTS OF THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. (SUPRA) ARE ALSO DISTINGUISHABLE AS THAT ASSESSEE WAS CARRYING ON THE BUSINESS OF MANUFACTURE OF ANTIBIOTICS AND THE ACQUISITION OF THE KNOW-H OW WAS ONLY TO OBTAIN HIGHER YIELD INCLUDING THE HIGHER YIELD IN THE SUB-CULTURES OF PENICILLIN. IN THE INSTANT CASE, THE KNOWLEDGE WAS ALSO USED FOR SETTING UP OF THE FACTORY FOR PRODUCTION OF AUTO WIRING HAR NESS FOR THE FIRST TIME. THE QUESTION IN THE CASE OF EMPIRE JUTE LTD. (SUPR A) WAS COMPLETELY DIFFERENT, AS IN THAT CASE THE MEMBERS OF THE TRADE ASSOCIATION DECIDED TO WORK THEIR LOOMS FOR LIMITED HOURS EVERY WEEK, RENDERING SURPLUS LOOM HOURS, WHICH WERE PURCHASED BY ANOTHER MEMBER FOR CARRYING ON THE EXISTING BUSINESS. THE COURT CAME TO T HE CONCLUSION THAT THE ARRANGEMENT WAS MADE TO CARRY OUT THE BUSINES S MORE EFFICIENTLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED. IN TH ESE CIRCUMSTANCES, IT WAS HELD THAT THE TEST OF BENEFIT OF ENDURING NATURE MAY FAIL AND, THUS, THE EXPENDITURE WAS HELD TO BE REVENUE IN NATURE. IN THE CASE OF SHRIRAM ITA NO. 166(DEL)/2006 15 REFRIGERATION INDUSTRIES LTD. (SUPRA), IT WAS M ENTIONED THAT EVEN THE LUMP SUM PAYMENT WAS MADE BY THE ASSESSEE TO WESTINGHOUSE FOR THE USE OF THE PARENT RIGHT FOR THE DURATION OF THE AGREEMENT FOR USE OF TECHNICAL INFORMATION AS MAY BE SUPPLIED BY W ESTINGHOUSE. THE LATTER DID NOT PART WITH THE TECHNICAL KNOWLEDGE ABSO LUTELY IN FAVOUR OF THE ASSESSEE. THEREFORE, IT WAS HELD THAT THE LUMP SUM PAYMENT MADE TO WESTINGHOUSE TO ENTER INTO THE AGREEMENT WA S FOR THE PURPOSE OF DAY- TO-DAY RUNNING OF THE BUSINESS. IN THIS CIRCU MSTANCE, IT WAS OF NO CONSEQUENCE THAT THE AGREEMENT WAS ENTE RED INTO AT THE TIME OF COMMENCEMENT OF BUSINESS. THE QUESTION IN THE CASE OF SHRIRAM PISTONS & RINGS LTD.(SUPRA) WAS WHETHER, THE WORD SO LD USED IN THE AGREEMENT AMOUNTED TO TRANSFER OF KNOW-HOW T O THE ASSESSEE OR MERELY LICENSING THE KNOW-HOW TO THE ASSESS EE? THE COURT CAME TO THE CONCLUSION THAT SINCE THERE WAS NO AB SOLUTE TRANSFER OF ANY RIGHT IN THE DOCUMENTATION GIVEN TO THE ASSESSEE AND I T DID NOT HAVE A FREE HAND TO SUB-LICENCE THE KNOW-HOW, IT WAS A C ASE OF MERE RIGHT TO USE TECHNICAL KNOW-HOW AND NO SALE HAD TAKEN PLA CE. THUS, THE EXPENDITURE WAS HELD TO BE REVENUE EXPENDITU RE. ITA NO. 166(DEL)/2006 16 4.2 THE HON'BLE SUPREME COURT UPHELD THE DECI SION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SOUTHE RN SWITCH GEARS LTD.(1984) 148 ITR 272. THIS CASE WAS HE AVILY RELIED UPON BY THE REVENUE. IN THAT CASE, THE ASSESSEE ENTERED INTO A COLLABORATION AGREEMENT WITH BRUSH ELECTRICAL ENGINEERING CO. LT D., UNDER WHICH THE LATTER COMPANY AGREED TO PROVIDE TECHNICA L AID AND INFORMATION IN THE FIELD OF MANUFACTURE OF LOW TENSION SWITCH GE ARS, HIGH TENSION SWITCH GEARS ETC. AND THE RIGHT TO SELL SUCH PRODUCTS . THE FOREIGN COMPANY AGREED TO KEEP THE INDIAN COMPANY POSTED WITH LATEST AND MODERN DEVELOPMENT IN THE FIELD AND TO TRAIN ITS PERS ONNEL. THE ASSESSEE AGREED TO PAY A LUMP SUM FEE OF POUNDS 20000, IN EQUAL INSTALMENTS OF POUNDS 4000 PER YEAR. APART FROM THAT, THE ASSESSEE WAS ALSO REQUIRED TO PAY ROYALTY IN RESPECT OF SALES WITHIN INDIA @ 2-1/2% OF THE NET SALES ON LOW TENSION SWITCH GEARS AN D @ 5% OF THE NET SALES OF HIGH TENSION SWITCH GEARS. THE HONBLE MADRA S HIGH COURT POINTED OUT THAT THE AGREEMENT COVERED TECHNICAL AID AND ASSISTANCE FOR ESTABLISHMENT, STARTING OF WORK AND OPERATING TH E FACTORY FOR MANUFACTURE OF TRANSFORMERS OF ALL KINDS. THE FOREIGN COM PANY MADE AVAILABLE TO THE ASSESSEE ITS PROCEDURES, DESIGNS, EXPERIENCE A ND TECHNICAL KNOW-HOW IN THE RELATED FIELD. THE ASSESSEE COULD USE THIS KNOWLEDGE EVEN AFTER ITA NO. 166(DEL)/2006 17 THE EXPIRY OF PERIOD OF THE AGREEMENT. IT WAS HELD THAT THE ASSESSEE HAD ACQUIRED KNOWLEDGE WHICH WAS ADVANTAGE OF ENDURING NATURE. APART FROM THAT, THE ASSESSEE ALSO ACQUIRED EXCLUSIVE RIGHT TO MANUFACTURE AND SELL THE SWITCH GEARS WITHOU T ANY OBJECTION FROM THE FOREIGN COMPANY, WHICH BY ITSELF WAS AN ADVAN TAGE OF ENDURING NATURE. THE COURT ALSO MENTIONED THAT THE ACQU ISITION OF SUCH A RIGHT HAD BEEN RIGHTLY TREATED PARTLY TOWARDS CAPITAL AN D PARTLY TOWARDS REVENUE BY THE TRIBUNAL, 25% OF THE PAYMENT BEING AS CAPIT AL EXPENDITURE. THIS FINDING WAS UPHELD. 4.3 HAVING CONSIDERED VARIOUS CASES AS AB OVE, WE FIND THAT THE FACTS OF THE CASE ARE NEAREST TO THE FACTS OF THE CASE OF SOUTHERN SWITCH GEARS LTD., DECIDED BY THE HONBLE MADRAS HIGH COURT, WHICH WAS UPHELD BY HON'BLE SUPREME COURT. IN THIS CAS E ALSO, DRAWINGS AND DESIGNS WERE TO BE USED FOR SETTING UP OF T HE PLANT, AN EXCLUSIVE RIGHT WAS GIVEN TO THE ASSESSEE FOR SALE WIT HIN THE TERRITORIES OF INDIA, AND THE ASSESSEE COULD USE THE KNOWLEDGE EVEN AFTER EXPIRY OF THE AGREEMENT. IN VIEW THEREOF, WE AGREE WITH THE LOWER AUTHORITIES THAT A PART OF THE EXPENDITURE COULD BE TOWARDS THE CAPITAL EXPENDITURE. IN THIS CONNECTION, IT MAY ALSO BE MENTIONED THAT THE PA YMENT BEING A ITA NO. 166(DEL)/2006 18 PERCENTAGE OF THE SALES DOES NOT ALTER THIS CONCLUSION FOR THE REASON THAT THIS IS ONLY A METHOD OF CALCULATION OF T HE ROYALTY. THUS, AS THE FACTS ARE IN PARI-MATERIA WITH THE FACTS OF THE CASE OF SOUTHERN SWITCH GEARS LTD., IT IS HELD THAT THE LOWER AUTH ORITIES WERE RIGHT IN COMING TO THE CONCLUSION THAT 25% OF THE EXPENDITURE WAS IN THE CAPITAL FIELD. 4.4 IT WAS ALSO THE CASE OF THE LD. COUNSEL THAT THE EXPENDITURE WAS ALLOWED IN TWO YEARS BY THE AO. HOWEVER, WE ARE OF THE VIEW THAT THE RULE OF CONSISTENCY CANNOT BE INVOKED IN THIS CASE BECAUSE AFTER REALIZING THE MISTAKE, THE PROCEEDINGS FOR THI RD YEAR WERE REOPENED TO DISALLOW A PART OF THE EXPENDITURE AS CAPIT AL EXPENDITURE. 4.5 IT WAS ALSO THE CASE OF THE ASSESSEE TH AT THE WHOLE OF THE EXPENDITURE OUGHT TO HAVE BEEN CAPITALIZED IN THE FIRST YEAR. IN SUCH A CASE, THE ASSESSEE WOULD BE ENTITLED TO GE T DEDUCTION OF THE EXPENDITURE U/S 35AB IN SIX YEARS. ALTERNATIVE LY, IF IT WAS CAPITALIZED IN RESPECTIVE YEARS, THE ASSESSEE WOULD BE E NTITLED TO DEDUCTION U/S 35AB FOR AND UP TO ASSESSMENT YEAR 1998-99 AND DEDUCTION OF DEPRECIATION ON CAPITAL EXPENDITURE THEREAFTER. WE ARE OF THE VIEW THAT THESE MATTERS WERE NOT TAKEN UP BEFORE THE LOWER AUTHORITIES AND, ITA NO. 166(DEL)/2006 19 THUS, THEY DO NOT ARISE OUT OF THE ORDERS OF THE LOWER AUTHORITIES. THEREFORE, WE DO NOT FIND ANY REASON TO GO I NTO THESE MATTERS. 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 7 TH AUGUST, 2009. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 7 TH AUGUST, 2009. SP SATIA COPY OF THE ORDER FORWARDED TO:- KYUNGSHIN INDUSTRIAL MOTHERSON LTD., NEW DELHI. DY. CIT, CIRCLE 5(1), NEW DELHI. CIT CIT(A) THE DR, ITAT, NEW DELHI. ASSISTANT REGIST RAR.