D.C.I.T. Cir-06, Kolkata, Kolkata V. M/s. I. F. G. L Refractories Ltd., Kolkata

ITA 1913/KOL/2008

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100013 (ITAT-KOLKATA)
• Duration Of Justice: 6 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 25-08-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 01-10-2009
• Court: TRIBUNAL
• Department Lawyers: ANIL KUMAR PANDE
• Assessee Lawyers: S K TULSIYAN
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOL KATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI WASEEM AHMED , AM] I.T.A NO. 1913/KOL/2008 ASSESSMENT YEAR: 2005-06 DEPUTY COMMISSIONER OF INCOME-TAX, VS. M/S. I.F.G .L REFRACTORIES LTD. CIRCLE-6, KOLKATA. (PAN: AAACI6003L) ( APPELLANT ) ( RESPONDENT ) DATE OF HEARING: 04.11.2015 DATE OF PRONOUNCEMENT: 13.11.2015 FOR THE APPELLANT: SHRI ANIL KUMAR PANDE, JCIT, SR . DR FOR THE RESPONDENT: SHRI S. K. TULSIYAN, ADVOCATE ORDER PER SHRI MAHAVIR SINGH, JM: THIS APPEAL BY REVENUE IS ARISING OUT OF ORDER OF C IT(A)-VI, KOLKATA IN APPEAL NO.276/CIT(A)-VI/07-08/C-6 DATED 24.07.2008. ASSESS MENT WAS FRAMED BY ADDL. CIT, RANGE-6, KOLKATA U/S. 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR AY 2005-06 VIDE ITS ORDER DATED 30.11.20 07. 2. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE BY AO ON ACCOUNT OF WRITE OFF OF TECHNICAL KNOW-HOW. FOR THIS, REVENUE HAS RAISED FOLLOWING EFFECTIVE GROUND NOS. 2 AND 3: 2. THAT LD. CIT(A) HAD ERRED IN LAW AND AS WELL A S ON FACTS IN DELETING THE DISALLOWANCE OF RS.53,51,012/-, MADE BY THE AO, ON ACCOUNT OF WRITE OFF OF TECHNICAL KNOW- HOW, WHERE SUCH INTANGIBLE ASSET WAS VERY MUCH IN EXISTENCE AS ON 0 1.04.2004. 3. THAT LD. CIT(A) HAD ERRED IN LAW AND AS WELL AS ON FACTS IN HOLDING THAT TECHNICAL KNOW HOW FEES PAID BY THE ASSESSEE AS REVENUE EXPENDITUR E WHEREAS THE ASSESSEE ITSELF CLAIMED DEPRECIATION OVER IT FOR TWO CONSECUTIVE ASSESSMENT YEARS. 3. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE CLAIM ED DEDUCTION OF TECHNICAL KNOWHOW RELATING TO SLIDING NOZZLE REFRACTORIES OBTAINED FR OM M/S. KROSAKI HARIMA CORPORATION, JAPAN AMOUNTING TO RS.53,51,012/- AS REVENUE EXPEND ITURE. THE AO ON PERUSAL OF RECORDS AND SUBMISSION OF THE ASSESSEE OBSERVED THAT THE AS SESSEE HAS ACQUIRED INTANGIBLE ASSET DURING FY 2002-03 RELEVANT TO AY 2003-04 FOR A TOTA L CONSIDERATION OF RS.80,77,002/-. BUT ONE-SIXTH OF SUCH EXPENDITURE AMOUNTING TO RS.1 3,46,167/- WAS CLAIMED AS DEDUCTION ON ACCOUNT OF AMORTIZATION OF EXPENSES @ ONE-SIXTH AND BALANCE WAS CAPITALIZED UNDER TECHNICAL KNOWHOW IN THE GROUP OF INTANGIBLE ASSET AND CLAIMED DEPRECIATION @ 25% ON SUCH ASSETS. ACCORDING TO AO, IN THE RELEVANT AY 2 005-06, THE ASSESSEE TOOK OUT THE 2 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 WDV OF SUCH INTANGIBLE ASSET AT RS.53,51,012/- FROM THE BLOCK OF ASSETS OF INTANGIBLE ASSET AND CLAIMED THE ENTIRE AMOUNT AS DEDUCTION WH ILE COMPUTING TOTAL INCOME. ACCORDING TO AO, THIS IS NOT ALLOWABLE DEDUCTION AN D HE DISALLOWED THE SAME BY OBSERVING AS UNDER: UNDER THE ABOVE CIRCUMSTANCES WHEN THE ASSESSEE D ISCLOSED THE ABOVE KNOW-HOW UNDER THE BLOCK INTANGIBLE ASSET AS ON 31.03.2004 AND T HE SAME WAS EXISTENT AS ON 01.04.2004, AS DISCUSSED ABOVE, THE WRITING OFF OF THE BALANCE WDV/UNAMORTIZED AMOUNT OF RS.53,51,012/- IS NOT ALLOWED AND DEPRECIATION AT T HE PRESCRIBED RATE OF 25% IS ALLOWED (FOR LESS THAN 180 DAYS) ON THE ORIGINAL VALUE OF T HE ASSET I.E. RS.80,77,002/- SINCE THE ABOVE ASSET WAS FIRST TIME PUT TO USE ON AND FROM 1 ST FEB., 2005. THE CLAIM OF DEPRECIATION/WRITE OFF ON SUCH ASSET IN THE ASSTT. YEARS 2003-04 AND 04-05 IS NOT ALLOWABLE AND ASSESSEE S REMEDIAL MEASURE IN THOSE YEARS ARE BEING INITIATED. 4. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT( A), WHO AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING IN PARA 2.4 AS UNDER: 2.4. I HAVE CONSIDERED THE SUBMISSION OF A/R OF THE APPELLANT AND FINDING OF A.O. IT IS VERY MUCH CLEAR FROM THE FACTS OF CASE THAT ENTIRE EXPENSES INCURRED ON ACCOUNT OF TECHNICAL KNOWHOW BECAME OBSOLETE AND THEREBY WRITT EN OFF. THE TECHNICAL KNOWHOW FEES INCURRED BY THE APPELLANT DID NOT BRING INTO EXISTE NCE ANY ASSET AND WERE INCURRED FOR GAINING TECHNICAL KNOWLEDGE AGAINST PAYMENT OF FEES . THE AFORESAID EXPENDITURE WAS OF REVENUE IN NATURE AND HENCE DEDUCTIBLE IN ITS ENTIR ETY AS A REVENUE EXPENDITURE. THE AFORESAID EXPENDITURE INCURRED BY APPELLANT DID NOT BRING INTO EXISTENCE ANY ASSET. I AGREE WITH THE CONTENTION OF THE APPELLANT AND ALSO JUDIC IAL VIEWS CITED BY THE APPELLANT IN STATEMENT OF FACTS OF CASE FILED. CONSIDERING THE F ACTS AND CIRCUMSTANCES OF THE CASE, I AM INCLINED TO ACCEPT THE SUBMISSION OF A/R OF THE APP ELLANT THAT THE APPELLANT IS ENTITLED TO CLAIM SUCH EXPENSES WRITTEN OFF AS REVENUE EXPENDIT URE, INSTEAD OF DEPRECIATION AS ALLOWED BY AO. IN VIEW OF THE ABOVE, ACCORDINGLY, AO IS DIR ECTED TO ALLOW THE CLAIM OF RS.53,51,012/- ON ACCOUNT OF WRITE OFF OF TECHNICAL KNOWHOW FEE AND DEPRECIATION OF RS.10,09,625/- ALLOWED SHALL BE WITHDRAWN. ACCORDIN GLY, GROUND NO. 4 IS AL1OWED. AGGRIEVED, NOW REVENUE IS IN APPEAL BEFORE US. 5. BEFORE US LD. SR. DR ARGUED THAT THE ASSESSEE HA S PURCHASED/ACQUIRED TECHNICAL KNOW-HOW AND IN AY 2003-04 IT HAS CAPITALIZED THE A SSET AND CLAIMED 1/6 TH OF SUCH EXPENDITURE AS AN AMORTIZATION OF EXPENSES AND SUBS EQUENTLY CLAIMED DEPRECIATION @ 25% ON SUCH ASSETS IN AY 2004-05. HE ARGUED THAT O NCE THE ASSET IS CAPITALIZED AND CLAIMED DEPRECIATION ON THE SAME, DIFFERENT TREATME NT CANNOT BE GIVEN AND THIS CANNOT BE CLAIMED AS REVENUE EXPENDITURE. ACCORDING TO LD. SR . DR, THE ASSESSEE HAS ACQUIRED A CAPITAL ASSET AND IS DERIVING ENDURING BENEFIT OUT OF IT. HENCE, THE EXPENSE CANNOT BE CLAIMED AS CAPITAL IN NATURE. ACCORDINGLY, HE URGE D THE BENCH TO RESTORE THE ORDER OF AO. 6. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE SUPPORTED THE ORDER OF CIT(A). 7. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFA CTURING OF SPECIALIZED REFRACTORIES 3 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 AND OPERATING SYSTEMS USED BY PRODUCERS OF IRON & S TEEL. THE ASSESSEE IN PURSUANCE TO THE TECHNOLOGICAL UP-GRADATION, ENTERED INTO A TECH NICAL ASSISTANCE AGREEMENT WITH KROSAKI HARIMA CORPORATION (KHC), BY VIRTUE OF WHICH, THE A SSESSEE WAS GRANTED A LICENSE TO USE THE TECHNICAL KNOWHOW OF KHC IN ITS MANUFACTURING O PERATIONS. IN CONSIDERATION OF KHC'S DISCLOSURE OF SUCH TECHNICAL INFORMATION, ASS ESSEE PAID A SUM OF RS. 80,77,002/- PAYABLE IN THREE INSTALLMENTS BUT WAS DISCHARGED IN FY 2002-03 ITSELF AND IN THE SAME YEAR THE ASSESSEE CLAIMED 1/6TH OF THE SAID EXPENDI TURE U/S 35AB OF THE ACT. FURTHER, ASSESSEE PAID ROYALTY CALCULATED AS 3% OF THE NET S ALES PRICE OF THE PRODUCTS SOLD BY THE ASSESSEE IN DOMESTIC MARKET AND 3% OF THE NET SALES PRICES OF ALL EXPORT REFRACTORY PRODUCTS OF SNR MANUFACTURED AND SOLD BY IFGL IN OV ERSEAS MARKET. THE ASSESSEE CLAIMED TO HAVE REALISED IN FY 2003-04, THAT SEC. 3 5AB OF THE ACT WAS ONLY APPLICABLE TO ASSESSMENT YEAR COMMENCING ON OR BEFORE 1.4.1998 AN D HENCE WAS NOT APPLICABLE TO THE ASSESSEE. THEREFORE, ASSESSEE ERRONEOUSLY CLAIMED D EPRECIATION @ 25% ON UNAMORTIZED EXPENDITURE, WHICH WAS SHOWN UNDER THE HEAD 'FIXED ASSETS' OF THE BALANCE SHEET. FINALLY IN FY 2004-05 RELEVANT TO THIS AY 2005-06, THE ASSE SSEE WROTE OFF THE ENTIRE BALANCE OF THE UNAMORTIZED KNOW-HOW FEES AT RS. 53,51,012/- AN D CLAIMED THE SAME AS REVENUE EXPENDITURE. THE ASSESSEE BEFORE AO CLAIMED THAT TE CHNICAL KNOW-HOW FEE WAS IN THE NATURE OF REVENUE EXPENDITURE FOR THE REASON THAT T HE SAME WAS INCURRED TO OBTAIN A LICENSE TO USE THE KNOW-HOW WHICH WAS ACTUALLY OWNED BY THE THIRD PARTY I.E. KHC. THEREFORE THE SAID EXPENDITURE DOES NOT BRING INTO EXISTENCE ANY CAPITAL ASSET AND HENCE IS REVENUE IN NATURE. BUT THE AO WAS NOT CONVINCED AND TREATED TH E EXPENDITURE AS CAPITAL IN NATURE. 8. WE FIND FROM THE FACTS OF THE CASE THAT INITIALL Y COMPANY WAS OF THE VIEW THAT THE BENEFIT, FROM SUCH REVENUE EXPENDITURE INCURRED ON ACCOUNT OF SUCH TECHNOLOGY, WOULD BE AVAILABLE AT LEAST FOR THREE TO FIVE YEARS AND ACCO RDINGLY THE ASSESSEE DID NOT CLAIM THE ENTIRE EXPENDITURE IN THE SAME YEAR AND DECIDED TO CLAIM 1/6TH IN THE FIRST YEAR AND DEFER THE AMORTIZATION OF THE REST TO THE SUCCEEDING YEAR S. HOWEVER, IN COURSE OF IN-HOUSE APPRAISAL OF TECHNOLOGIES, IT WAS REALIZED THAT THE SAID TECHNOLOGY HAD BECOME OBSOLETE AND SUBSTANTIAL BENEFITS WERE NO LONGER EXPECTED TO BE RECEIVED THERE FROM, HENCE, THE ASSESSEE WROTE OFF THE BALANCE OF THE UNAMORTIZED T ECHNICAL FEES IN THE RELEVANT AY. THE ASSESSEE IN SUPPORT OF SUCH CLAIM OF OBSOLESCENCE O F TECHNOLOGY FURNISHED A NOTE, FROM WHICH IT IS FOUND THAT COMMERCIAL PRODUCTION OF PRO DUCTS HAD COMMENCED FROM LST FEBRUARY 2005. SECONDLY, TECHNICAL ADVISOR RECOMMEN DED WRITE OFF OF THE UNAMORTIZED PORTION AS ON 1.4.2004. WE FIND THAT THE AO ADDED B ACK THE ENTIRE SUM WRITTEN OFF BY THE 4 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 ASSESSEE AND ALLOWED ONLY 50% OF DEPRECIATION @ 25% OF THE TOTAL LUMP SUM PAYMENT I.E RS. 80,77,002/-. HE FURTHER HELD THAT SINCE THE PRO DUCTION BEGAN ON 1.2.2005, THE ASSESSEE WAS NOT ENTITLED TO DEPRECIATION IN AY 2003-04 & 20 04-05 ALSO. FROM THE ABOVE FACTS, IT IS CLEAR THAT THE AMOUNT WAS NOT WRITTEN OFF ON 1.4 .2004 BUT WAS WRITTEN OFF ON 3L.3.2005, WHICH WAS SUBSEQUENT TO COMMENCEMENT OF PRODUCTION. THIS IS SUBSTANTIATED BY THE FACT THAT THE LETTER OF TECHNICAL ADVISOR IS DATED 31.3. 2005, WHICH SHOWS THAT IN-HOUSE APPRAISAL OF TECHNOLOGIES TOOK PLACE IN THE YEAR END IN THE C OURSE OF WHICH THE WRITING OFF WAS DONE. 9. SECONDLY, THE ASSESSEE HAD CLAIMED DEPRECIATION ON THE SAME IN AY 2004-05 AND HAD SHOWN THE UNAMORTIZED AMOUNT UNDER THE HEAD 'FI XED ASSETS' OF THE BALANCE SHEET, HOWEVER, TREATMENT GIVEN BY THE ASSESSEE IN THE BOO KS OF ACCOUNTS IS NOT CONCLUSIVE. THE TRUE NATURE OF THE EXPENDITURE CAN BE DETERMINED FR OM THE FACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE LET US NOW DETERMINE THE TRUE NATUR E OF THE EXPENDITURE IN THE LIGHT OF FACTS OF THE CASE AND THE LEGAL POSITION AS ARGUED BY ASS ESSEE. THE FIRST CASE LAW RELIED ON BY LD. COUNSEL OF THE ASSESSEE IS THE JUDGMENT OF THE SUPREME COURT IN CASE OF ASSAM BENGAL CEMENT CO. LTD. V. CIT (1955) 27 ITR 34 (SC) WHERE THE HON'BLE COURT WHILE DRAWING A LINE BETWEEN CAPITAL AND REVENUE EXPENDIT URE HAD OBSERVED THAT 'IN CASES WHERE THE EXPENDITURE IS MADE FOR THE INITIAL OUTLA Y OR FOR EXTENSION OF A BUSINESS OR A SUBSTANTIAL REPLACEMENT OF THE EQUIPMENT, THERE IS NO DOUBT THAT IT IS CAPITAL EXPENDITURE. A CAPITAL ASSET OF THE BUSINESS IS EITHER ACQUIRED OR EXTENDED OR SUBSTANTIALLY REPLACED AND THAT OUTLAY WHATEVER BE ITS SOURCE WHETHER IT I S DRAWN FROM THE CAPITAL OR THE INCOME OF THE CONCERN IS CERTAINLY IN THE NATURE OF CAPITA L EXPENDITURE. THE QUESTION HOWEVER ARISES FOR CONSIDERATION WHERE EXPENDITURE IS INCUR RED WHILE THE BUSINESS IS GOING ON AND IS NOT INCURRED EITHER FOR EXTENSION OF THE BUSINES S OR FOR THE SUBSTANTIAL REPLACEMENT OF ITS EQUIPMENT. SUCH EXPENDITURE CAN BE LOOKED AT EITHER FROM THE POINT OF VIEW OF WHAT IS ACQUIRED OR FROM THE POINT OF VIEW OF WHAT IS THE S OURCE FROM WHICH THE EXPENDITURE IS INCURRED. IF THE EXPENDITURE IS MADE FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS IT IS PROPERLY ATTRIBUTABLE TO CAPITAL AND IS OF THE NATURE OF CAPITAL EXPENDITURE. IF ON THE OTHER HAND IT IS MADE NOT FOR THE PURPOSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET O R ADVANTAGE BUT FOR RUNNING THE BUSINESS OR WORKING IT WITH A VIEW TO PRODUCE THE P ROFITS IT IS A REVENUE EXPENDITURE. ' IN VIEW OF THE ABOVE POSITION, LET US NOW DETERMINE , WHETHER THE EXPENDITURE ON ACCOUNT OF TECHNICAL KNOW FEES, IN THE ASSESSEE'S CASE, FAL LS UNDER ANY OF THE ABOVE TWO CATEGORIES, 5 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 IF NOT THEN THE SAME SHOULD BE HELD TO BE REVENUE I N NATURE. FROM THE ABOVE, IT IS CLEAR THAT AN EXPENDITURE REGARDLESS OF ITS SOURCE BEING CAPIT AL OR INCOME, WILL BE HELD TO BE ON CAPITAL ACCOUNT IF: (I) IT IS MADE FOR INITIAL OUTLAY OR EXTENSION OF B USINESS OR A SUBSTANTIAL REPLACEMENT OF THE EQUIPMENT OR; (II) IT BRINGS INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS WE FIND THAT HONBLE SUPREME COURT HELD THAT IF THE EXPENDITURE DOES NOT BRING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BE NEFIT OF THE BUSINESS, THE SAME SHALL BE REVENUE IN NATURE. WITH REGARD TO THIS, LET US FIRS TLY DETERMINE WHETHER THE EXPENDITURE WAS IN PURSUANCE OF A NEW LINE OF BUSINESS OR NOT. IN THIS REGARD IT IS POINTED OUT THAT UNDER THE AGREEMENT THE ASSESSEE WAS PERMITTED TO M ANUFACTURE SNR PRODUCTS USING KHC'S TECHNOLOGY, AS PER CLAUSE 2 OF ARTICLE 1 OF T HE AGREEMENT. FURTHER, THE ASSESSEE WAS ALREADY ENGAGED IN THE MANUFACTURING OF SNR PRODUCT S AS IS EVIDENT FROM THE CLAUSE OF AGREEMENT THAT' .... IFGL HAS BEEN SUPPLYING THEIR PRODUCT OF SNR INTO THE MAJOR STEEL MILLS IN LOWER PRICE ..... THEREFORE, IT IS CLEAR THAT WITH THE NEW TECHNOLOGY, THE ASSESSEE WAS NOT PRODUCING A NEW PRODUCT, RATHER THE ASSESSE E WAS PRODUCING THE SAME PRODUCT BUT WITH IMPROVED TECHNOLOGY. THUS, FROM THE ABOVE IT I S CLEAR THAT THE EXPENDITURE ON ACCOUNT OF KNOW-HOW WAS NOT IN PURSUANCE OF A NEW L INE OF BUSINESS. FURTHER, THE SAID EXPENDITURE WAS NOT ACCOUNT OF AN INITIAL OUTLAY OR EXTENSION OF BUSINESS. NEITHER WAS THE EXPENDITURE INCURRED TO REPLACE ANY EQUIPMENT. THER EFORE, IT IS CLEAR THAT THE ASSESSEE'S CASE DOES NOT FALL UNDER CATEGORY (I). 10. NOW, WHETHER THE AFORESAID EXPENDITURE BROUGHT INTO EXISTENCE AN ASSET FOR THE ENDURING BENEFIT OF THE BUSINESS, IT WOULD BE APPRO PRIATE TO ANALYSE THE TERMS AND CONDITIONS OF THE SAID AGREEMENT. ON PERUSAL OF TH E TERMS AND CONDITIONS OF THE AGREEMENT THE FOLLOWING FACTS HAVE BEEN NOTED: (I) KHC HAD GRANTED A SIMILAR LICENSE TO OTHER LICE NSEES ALSO: THIS FACT IS EVIDENT FROM CLAUSE 2 TO ARTICLE 2 WHICH READS AS 'KHC AND ITS L ICENSEES CAN EXPORT OR SELL ITS PRODUCTS OF SNR IN INDIA, UPON THE CUSTOMER'S REQUEST '. FUR THER, EVEN ASSESSEE AS PER CLAUSE 1 TO THE ARTICLE 2 WAS ENTITLED TO NON EXCLUSIVELY SELL THE PRODUCTS IN THE COUNTRIES WORLDWIDE EXCEPT JAPAN, KOREA AND TAIWAN, LIKE THE OTHER LICE NSEES WERE ENTITLED TO SELL THEIR 6 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 PRODUCTS IN INDIA. THE ASSESSEE DID NOT HAVE THE RI GHT TO SUB-TRANSFER THE LICENSE, READ CLAUSE 4 OF ARTICLE 2 OF THE AGREEMENT. (II) THE ASSESSEE WAS NOT ENTITLED TO APPLY OR REGI STER ANY INDUSTRIAL PROPERTY RIGHT IN RESPECT OF ANY SUBSEQUENT TECHNOLOGICAL IMPROVEMENT (ACHIEVED BY KHC) LICENSED UNDER THE AGREEMENT. (CLAUSE 3 TO ARTICLE 12) (III) THE ASSESSEE WAS NOT ENTITLED TO APPLY OR REG ISTER ANY INDUSTRIAL PROPERTY RIGHT IN RESPECT OF THE ORIGINAL TECHNICAL KNOWHOW LICENSED UNDER THE AGREEMENT. (CLAUSE 1 TO ARTICLE 12) (IV) THE ASSESSEE WAS NOT TO SELL, ASSIGN, TRANSFER OR OTHERWISE DISPOSE OF ANY OF TECHNICAL INFORMATION FURNISHED BY KHC. IT WAS FURTHER REQUIR ED TO HOLD THE INFORMATION IN STRICTEST SECRECY AND TO TAKE ALL REASONABLE PRECAUTIONS TO P REVENT ANY DISCLOSURE OF THE TECHNICAL INFORMATION. (CLAUSE 1 TO ARTICLE 13) (V) THE ASSESSEE WAS REQUIRED TO PAY A ROYALTY CALC ULATED AS 3% OF THE NET SALES PRICE OF THE PRODUCTS SOLD BY THE ASSESSEE IN DOMESTIC MARKE T AND 3% OF THE NET SALES PRICES OF ALL EXPORT REFRACTORY PRODUCTS OF SNR MANUFACTURED AND SOLD BY IFGL IN OVERSEAS MARKET. (CLAUSE 2 OF ARTICLE 8) FROM THE ABOVE TERMS OF AGREEMENT, TWO THINGS ARE C LEAR: (I) FIRSTLY, THE FACT THAT THE ASSESSEE WAS PAYING A ROYALTY WHICH WAS LINKED TO THE SALES OF PRODUCTS, GOES ON TO PROVE THAT THE AGREEMENT WAS F OR USE OF KNOW-HOW IN RETURN OF WHICH THE ASSESSEE WAS PAYING ROYALTY TO THE LICENSOR. IN FACT THE AO HAS HIMSELF ALLOWED SUCH ROYALTY AGAINST REVENUE PROFITS. THE AFORESAID ALLO WANCE OF THE ROYALTY, READ CONSIDERATION FOR KNOW-HOW, BY THE AO PROVES THAT TRANSACTION WAS NOT FOR ACQUISITION OF KNOW-HOW, BUT FOR MERE USE OF KNOW-HOW. HAD THE TRANSACTION B EEN ON CAPITAL ACCOUNT, THE AO WOULD NOT HAVE ALLOWED THE RUNNING ROYALTY, AS THE SAME WOULD HAVE CONSTITUTED CONSIDERATION TOWARDS ACQUISITION OF KNOW-HOW. (II) SECONDLY, THE TECHNICAL KNOW WAS AT NO POINT I N TIME TRANSFERRED ABSOLUTELY IN FAVOUR OF THE ASSESSEE. ALL THE RIGHTS ATTACHED TO OWNERSH IP WERE STILL WITH KHC AND HAD NOT BEEN PASSED ON TO THE ASSESSEE WHICH WAS ONLY GIVEN THE RIGHTS OF A USER. BY DISCLOSING THE TECHNICAL INFORMATION KHC HAD NOT PARTED WITH ANY O F ITS ASSETS AND NEITHER HAD THE ASSESSEE ACQUIRED AN ASSET. 7 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 11. WE HAVE GONE THROUGH THE JUDGMENT OF HONBLE SU PREME COURT IN CASE OF CIT V CIBA OF INDIA LTD. (1968) 69 ITR 692 (SC) WHEREIN I T IS HELD THAT 'THE CONTRIBUTION WAS ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION L0( 2)(XV). THE ASSESSEE DID NOT UNDER THE AGREEMENT BECOME ENTITLED EXCLUSIVELY EVEN FOR THE PERIOD OF THE AGREEMENT, TO THE PATENTS AND TRADE MARK OF THE SWISS COMPANY; IT HAD MERELY ACCESS TO THE TECHNICA L KNOWLEDGE AND EXPERIENCE IN THE PHARMACEUTICAL FIELD WHICH THE SWISS COMPANY COMMANDED. THE ASSESS EE WAS ON THAT ACCOUNT A MERE LICENSEE FOR A LIMITED PERIOD OF THE TECHNICAL KNOWLEDGE OF THE SW ISS COMPANY WITH THE RIGHT TO USE THE PATENTS AND T RADE MARK OF THAT COMPANY. THE ASSESSEE ACQUIRED UNDER T HE AGREEMENT MERELY THE RIGHT TO DRAW, FOR THE PURPOSE OF CARRYING ON ITS BUSINESS AS A MANUFACTUR ER AND DEALER OF PHARMACEUTICAL PRODUCTS, UPON THE TECHNICAL KNOWLEDGE OF THE SWISS COMPANY FOR A LIMI TED PERIOD; BY MAKING THAT TECHNICAL KNOWLEDGE AVAILABLE THE SWISS COMPANY DID NOT PART WITH ANY A SSET OF ITS BUSINESS, NOR DID THE ASSESSEE ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR THE BE NEFIT OF ITS BUSINESS.' FURTHER THE SUPREME COURT IN CASE OF CIT V WAVIN (INDIA) LTD. (1999) 236 ITR 314 (SC) HELD THAT 'THE TECHNICAL INFORMATION GIVEN TO THE INDIAN COMPANY WAS 'NON-EX CLUSIVE' AND 'NON-TRANSFERABLE'. IN OTHER WORDS, TH IS IS NOT AN OUT AND OUT SALE OF TECHNICAL KNOW-HOW. T HE ASSESSEE WAS MERELY GIVEN A NON-EXCLUSIVE AND NO N- TRANSFERABLE RIGHT OF USER OF THE TECHNICAL INFORMA TION. EXPENDITURES IN THESE FACTS CANNOT BE SAID TO BE FOR ACQUISITION OF ANY ASSET AT ALL.' FROM THE READING OF THE ABOVE TWO JUDGMENTS, IT IS CLEAR THAT EXPENDITURE ON ACCOUNT OF KNOW-HOW CAN BE CAPITALIZED ONLY IF THE RELATED KNO W-HOW IS TRANSFERRED ABSOLUTELY OR EXCLUSIVELY IN FAVOUR OF THE ASSESSEE. MERE ACCESS TO THE KNOW-HOW FOR A CONSIDERATION CANNOT BE HELD TO BE A TRANSACTION ON CAPITAL ACCOU NT. BUT IN THE PRESENT CASE THE ASSESSEE AT NO POINT IN TIME BECAME EXCLUSIVELY ENTITLED TO THE TECHNICAL INFORMATION, WHICH WAS AVAILABLE TO KHC AND ITS OTHER LICENSEES, EVEN DURI NG THE CONTINUANCE OF THE AGREEMENT. THE ASSESSEE HAD MERE ACCESS TO THE SAID INFORMATIO N. UNDER THE AGREEMENT, THE ASSESSEE MERELY HAD A RIGHT TO DRAW, FOR THE PURPOSE OF CARR YING ON BUSINESS AS A MANUFACTURER OF SNR PRODUCTS, UPON THE TECHNICAL KNOWLEDGE OF KHC. FURTHER, BY MAKING THE TECHNOLOGY AVAILABLE, KHC DID NOT PART WITH ANY ASSETS OF ITS BUSINESS, NOR DID THE ASSESSEE ACQUIRE ANY ASSET OR ADVANTAGE OF AN ENDURING MATURE FOR TH E BENEFIT OF THE BUSINESS. ACCORDINGLY, BY APPLYING THE PRINCIPLES LAID OUT BY SUPREME COUR T IN CASE OF CIBA OF INDIA LTD. SUPRA & WAVIN (INDIA) LTD. SUPRA, WE CAN SAFELY INFER THA T THE EXPENDITURE INCURRED ON ACCOUNT OF TECHNICAL KNOW-HOW IS REVENUE IN NATURE AND HENC E IS DEDUCTIBLE UNDER THE ACT. 12. THUS IN THE LIGHT OF THE TERMS AND CONDITIONS O F THE AGREEMENT AND THE PRINCIPLE AS LAID OUT IN THE PRONOUNCEMENTS, AS DISCUSSED ABOVE, IT IS CLEAR THAT THE ASSESSEE HAD NOT ACQUIRED ANY CAPITAL ASSET BY INCURRING THE EXPENDI TURE ON ACCOUNT OF KNOW-HOW. BY 8 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 INCURRING THE EXPENDITURE THE ASSESSEE MERELY BECAM E ENTITLED TO THE USE OF THE KNOW-HOW SUBJECT TO THE TERMS AND CONDITIONS AS DISCUSSED IN THE AGREEMENT. HENCE, IT IS CLEAR THAT THE EXPENDITURE ON ACCOUNT OF KNOW-HOW WAS NEITHER IN PURSUANCE OF A NEW LINE OF BUSINESS NOR DID IT BRING INTO EXISTENCE ANY ASSET OF ENDURING NATURE. FURTHER, OUR ATTENTION WAS INVITED TO THE DECISION OF HONBLE SUPREME COUR T IN CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT (1989) 177 ITR 377 (SC), WHER EBY IT IS HELD THAT 'THE IMPROVISATION IN THE PROCESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINESS AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW OR FRESH VENTURE. THE FURTHER CIRCUMSTANCE THAT THE AGREEMENT PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE ASSESSEE'S ESTAB LISHED BUSINESS AND NOT TO A NEW PRODUCT INDICATES THAT WHAT WAS STIPULATED WAS AN IMPROVEME NT IN THE OPERATIONS OF THE EXISTING BUSINESS AND ITS EFFICIENCY AND, PROFITABILITY NOT REMOVED FROM THE AREA OF THE DAY-TO-DAY BUSINESS OF THE ASSESSEE 'S ESTABLISHED ENTERPRISE. IT APPEARS TO US THAT THE ANSWER TO THE QUESTIONS REFERRED SHOULD BE ON THE BASIS THAT THE FINANCIAL OUTLAY UNDER THE AGREEMENT WAS FOR THE BETTER CONDUCT AND IMPROVEMENT OF THE E XISTING BUSINESS AND SHOULD, THEREFORE, BE HELD TO BE REVENUE EXPENDITURE.' FROM THE ABOVE JUDGMENT IT IS FURTHER CLEAR WHEN AN ORGANIZATION MANUFACTURING A GIVEN PRODUCT, INCURS SOME EXPENDITURE ON IMPROVEMENT OF TECHNOLOGY USED IN THE MANUFACTURE OF THE SAID PRODUCT, THEN, SAID EXPENDITURE SHALL C ONSTITUTE AN EXPENDITURE INCURRED FOR BETTER CONDUCT OF BUSINESS AND HENCE SHALL BE REVEN UE IN NATURE. IN THE GIVEN CASE, THE ASSESSEE WAS ALREADY ENGAGED IN THE MANUFACTURE OF SNR PRODUCTS. THE ASSESSEE HAD MERELY INCURRED THE EXPENDITURE TO UPGRADE ITSELF T ECHNOLOGICALLY, I.E. TO PRODUCE THE SAME PRODUCT WITH A BETTER TECHNOLOGY THEREFORE, APPLYIN G THE PRINCIPLES AS LAID OUT ABOVE, WE ARE OF THE VIEW THAT THE SAID EXPENDITURE CONSTITUT ES REVENUE EXPENDITURE. ACCORDINGLY, WE CONFIRM THE ORDER OF CIT(A) AND THE ISSUE OF REVENU ES APPEAL IS DISMISSED. 13. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISS ED. 14. ORDER IS PRONOUNCED IN THE OPEN COURT ON 13.11. 2015 SD/- SD/- (WASEEM AHMED) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13TH NOVEMBER, 2015 JD. SR. P.S 9 ITA NO.1913/K/2008 IFGL REFRACTORIES LTD. AY 2005-06 COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT DCIT, CIRCLE-6, KOLKATA. 2 RESPONDENT M/S. I.F.G.L REFRACTORIES LTD., 3, N. S. ROAD, KOLKATA- 700001. 3 . THE CIT(A), KOLKATA 4. 5. CIT KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .