ACIT, New Delhi V. M/s Continental India Ltd., Meerut

ITA 207/DEL/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 1212 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 15-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; Revenue expenditure; Set aside
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AN D SHRI DR. M.L.MEENA, ACCOUNTANT MEMBER ITA NO.207/DEL./2016, A.Y. 2010-11 A.C.I.T VS. M/S . CONTINENTAL INDIA LTD. CIRCLE -6 92), (FORMERLY KNOWN AS MODI TYRES COMPANY PVT. LTD. NH-58, ROORKEE ROAD, MODIPURAM NEW DELHI MEERUT PAN : AAFCM5366B (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. RIHIT JAIN, ADV., SH. DE EPESH JAIN, C.A REVENUE BY : SMT. RINKU SINGH, SR. DR DATE OF HEARING : 05.02.2019 DATE OF ORDER : 19.03.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT ASSISTANT COMMISSIONER OF IN COME TAX, NEW DELHI (HEREINAFTER REFERRED TO AS 'THE REVENUE') BY FILIN G THE AFORESAID APPEAL, SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 15/10 /2015 PASSED BY LD. COMMISSIONER OF INCOME TAX(APPEALS)-14, NEW DELHI QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT : ITA NO. 207/DEL./2016 2 THE ASSESSING OFFICER, ASSTT. COMMISSIONER OF INCO ME TAX CIRCLE 6(2), NEW DELHI IS DIRECTED TO FILE APPE AL IN THE ABOVE MENTIONED CASE BEFORE THE ITAT, NEW DELHI ON THE FOLLOWING GROUNDS OF APPEAL. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING TH E ADDITION OF RS. 2,13,40,735/- ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR WARRANTY IGNORING THE FACTS THAT THE PROVISION MADE IS ON ESTIMATE BASIS AND THE RELIABILITY AND CORRECTNESS OF THE BASIS CANNOT BE ASCERTAINED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN FACTS AND I N LAW IN DELETING THE ADDITION OF RS. 2,97,93,143/- ON AC COUNT OF DISALLOWANCE OF TECHNICAL KNOW-HOW / ROYALTY IGNORING THE FACT THAT SECTION 32(1)(II) PROVIDES F OR DEPRECIATION @ 25% IN CASE OF INTANGIBLE ASSETS WHE RE THE TECHNICAL KNOW-HOW IS SPECIFICALLY INCLUDED UND ER THIS CATEGORY. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) O F APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. BRIEFLY STATED THAT FACTS NECESSARY FOR ADJUDICA TION OF THE CONTROVERSY AT HAND ARE : ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAS MADE THE PROVISION FOR WARRANTY OF RS. 2,13,40,735/ - BY DEBITING THE SAME TO P & L ACCOUNT. DECLINING THE CONTENTION RAI SED BY THE ASSESSEE, AO PROCEEDED TO DISALLOW THE AMOUNT OF RS. 2,13,40, 735/- CREATED AND CHARGED TO P & L ACCOUNT BY THE ASSESSEE ON THE GRO UND THAT THE PROVISION IS MADE MERELY ON ESTIMATED BASIS, AND AS SUCH RELIABILITY AND CORRECTNESS OF BASIS CANNOT BE ASCERTAINED. ITA NO. 207/DEL./2016 3 3. ASSESSING OFFICER ALSO NOTICED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 2,97,93,143/- TO ITS P & L ACCOUNT ON ACCOUNT OF TECHNICAL KNOW-HOW. DECLINING THE CONTENTION RAISED BY THE AS SESSEE THAT EXPENSES ON TECHNICAL KNOW-HOW IS IN THE NATURE OF REVENUE E XPENDITURE DISALLOWED THE SAME U/S 37 OF THE ACT, HOWEVER, CLASSIFIED THE TECHNICAL KNOW-HOW AS AN INTANGIBLE ASSETS AND GRANTED DEPRECIATION AT 25% AND THEREBY MADE ADDITION OF RS. 2,23,44,857/-. 4. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A ) BY WAY OF FILING THE APPEAL WHO HAS DELETED THE ADDITION BY PARTLY A LLOWING THE APPEAL. FEELING AGGRIEVED THE REVENUE HAS COME UP BEFORE TH E TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 5. WE HAVE HEARD THE LD. DR FOR THE REVENUE AN D GONE THROUGH THE ORDER PASSED BY THE LOWER REVENUE AUTHORITY. GROUND NO. 1 : 6. UNDISPUTEDLY ASSESSEE HAS MADE PROVISION QUA WAR RANTY CHARGES PAYABLE UNDER THE TERMS OF SALES AND SUCH PROVISION HAS BEEN MADE IN ORDER TO MEET FUTURE REQUIREMENT ARISING ON ACCOUNT OF WARRANTY CLAUSE IN THE SALE AGREEMENT. IT IS ALSO NOT IN DISPUTE THAT THE YEAR UNDER ASSESSMENT IS THE FIRST YEAR OF OPERATION IN WHICH SALE IS MAD E AND PROVISION FOR WARRANTY IS CREATED AND CHARGED TO P & L ACCOUNT. I T IS ALSO NOT IN DISPUTE THAT THERE IS NO HISTORICAL DATA ON RECORD TO WORK OUT WARRANTY EXPENSES. ITA NO. 207/DEL./2016 4 7. IT IS CONTENDED BY THE LD. AR FOR ASSESSEE THAT IN SUCH SITUATION PROVISION HAS TO BE MADE ON THE BASIS OF FAIR AND S CIENTIFIC APPROACH AND RELIED UPON DECISION RENDERED BY HONBLE SUPREME CO URT OF INDIA IN CASE CITED AS ROTARK CONTROLS INDIA LTD. VS. CIT 314 ITR 62 (SC ). IT IS FURTHER CONTENDED THAT LD. AR FOR ASSESSEE THAT PRO VISION WAS MADE BEFORE AUDITING THE FINANCIALS OF THE ASSESSEE. IT IS FURTHER CONTENDED THAT IN SUCH LIKE SITUATION ESTIMATE HAS TO BE MADE ON T HE BASIS OF PAST EVENT OF SALES WHICH IS WORKED OUT AT 0.55% OF THE TOTAL TUR N OVER. 8. HOWEVER ON THE OTHER HAND LD. SR. DR FOR THE REV ENUE RELIED UPON ASSESSMENT ORDER. 9. HONBLE SUPREME COURT OF INDIA IN CASE OF ROTARK CONTROLS INDIA LTD. VS. CIT 314 ITR 62 (SC) (SUPRA) DECIDED THE ISSUE, AS TO HOW A PROVISION FOR WARRANTY AS A RESULT OF PAST EVENT IS TO BE MEASURED. OPERATIVE PART OF THE JUDGMENT IS AS UNDER :- 10. WHAT IS A PROVISION? THIS IS THE QUESTION WHIC H NEEDS TO BE ANSWERED. A PROVISION IS A LIABILITY WHICH CA N BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTI MATION. A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE H AS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNI ZED. 11. LIABILITY IS DEFINED AS A PRESENT OBLIGATION AR ISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYI NG ECONOMIC BENEFITS. ITA NO. 207/DEL./2016 5 12. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTF LOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FRO M PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PR OVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MU ST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHE RE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIE S OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERIN G THE SAID OBLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTI TUTE A CONTINGENT LIABILITY NOT ENTITLED TO DEDUCTION UNDE R SECTION 37 OF THE SAID ACT. HOWEVER, WHEN THERE IS MANUFACTUR E AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEF ECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT O BLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIV E TO SETTLING THAT OBLIGATION. IN THE PRESENT CASE, THE APPELLANT HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS. THEY ARE IN THE BUSINESS FROM ASSESSMENT YEARS 1983- 84 ONWARDS. VALVE ACTUATORS ARE SOPHISTICATED GOODS. O VER THE YEARS APPELLANT HAS BEEN MANUFACTURING VALVE ACTUAT ORS IN LARGE NUMBERS. THE STATISTICAL DATA INDICATES TH AT EVERY YEAR SOME OF THESE MANUFACTURED ACTUATORS ARE FOUND TO BE DEFECTIVE. THE STATISTICAL DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPAR ED TO BUY VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE, WARRANTY BECAME INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS, WARRANTY STOOD A TTACHED TO THE SALE PRICE OF THE PRODUCT. THESE ASPECTS ARE IMPORTANT. AS STATED ABOVE, OBLIGATIONS ARISING FRO M PAST EVENTS HAVE TO BE RECOGNIZED AS PROVISIONS. THESE P AST EVENTS ARE KNOWN AS OBLIGATING EVENTS. IN THE PRESE NT CASE, THEREFORE, WARRANTY PROVISION NEEDS TO BE RECOGNIZE D BECAUSE THE APPELLANT IS AN ENTERPRISE HAVING A PRE SENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES. LASTLY, A RELIABLE ESTIMATE CAN BE MA DE OF THE AMOUNT OF THE OBLIGATION. IN SHORT, ALL THREE CONDI TIONS FOR RECOGNITION OF A PROVISION ARE SATISFIED IN THIS CA SE. ITA NO. 207/DEL./2016 6 13. IN THIS CASE WE ARE CONCERNED WITH PRODUCT WARR ANTIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DEALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWING OPTIONS : (A) ACCOUNT FOR WARRA NTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; (B) IT MAKES A PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PROVIDES FOR WARRANTY AT 2% OF TU RNOVER OF THE COMPANY BASED ON PAST EXPERIENCE (HISTORICAL TR END). THE FIRST OPTION IS UNSUSTAINABLE SINCE IT WOULD TA NTAMOUNT TO ACCOUNTING FOR WARRANTY EXPENSES ON CASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMPANIES ACT AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUAL CONC EPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS INSISTING ON THE FIRST OPTION WHICH, AS STATED ABOV E, IS ERRONEOUS AS IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAPPROPRIATE SINCE IT DOES NOT REFL ECT THE EXPECTED WARRANTY COSTS IN RESPECT OF REVENUE ALREA DY RECOGNIZED (ACCRUED). IN OTHER WORDS, IT IS NOT BAS ED ON MATCHING CONCEPT. UNDER THE MATCHING CONCEPT, IF RE VENUE IS RECOGNIZED THE COST INCURRED TO EARN THAT REVENU E INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED F OR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COST S ARE AN INTEGRAL PART OF THAT SALE PRICE THEN THE APPELL ANT HAS TO PROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR, OTHERWISE THE MATCHING CONCEPT FAILS . IN SUCH A CASE THE SECOND OPTION IS ALSO INAPPROPRIATE . UNDER THE CIRCUMSTANCES, THE THIRD OPTION IS MOST APPROPR IATE BECAUSE IT FULFILLS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HISTORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTI NG SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATUR E OF THE SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. THUS, TH E DECISION ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANTY PROVISIONING POLICY IS REQUIRED PARTICULAR LY IF THE EXPERIENCE SUGGESTS THAT WARRANTY PROVISIONS ARE GE NERALLY REVERSED IF THEY REMAINED UNUTILIZED AT THE END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE, THE C OMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AG AINST IT. ON THIS BASIS A SENSIBLE ESTIMATE SHOULD BE MAD E. THE ITA NO. 207/DEL./2016 7 WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT YEAR END OF FUTURE WARRANTYEXPENSES. SU CH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REAC HES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBAB ILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERA BLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMAT ION AMOUNT. WHETHER THIS SHOULD BE DONE THROUGH A PRO R ATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKI NG IS ROBUST THEN THE QUESTION OF REVERSAL IN THE SUBSEQU ENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIG NIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE APPELLANT-ENTERPRISE BECAUSE IT HAS INCURRED A PRES ENT OBLIGATION AS A RESULT OF PAST EVENTS. THERE IS ALS O AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE OF THE OB LIGATION WAS ALSO POSSIBLE. THEREFORE, THE APPELLANT HAS INC URRED A LIABILITY, ON THE FACTS AND CIRCUMSTANCES OF THIS C ASE, DURING THE RELEVANT ASSESSMENT YEAR WHICH WAS ENTIT LED TO DEDUCTION UNDER SECTION 37 OF THE 1961 ACT. THEREFORE, ALL THE THREE CONDITIONS FOR RECOGNIZING A LIABILITY FO R THE PURPOSES OF PROVISIONING STANDS SATISFIED IN THIS C ASE. IT IS IMPORTANT TO NOTE THAT THERE ARE FOUR IMPORTANT ASP ECTS OF PROVISIONING. THEY ARE - PROVISIONING WHICH RELATES TO PRESENT OBLIGATION, IT ARISES OUT OF OBLIGATING EVE NTS, IT INVOLVES OUTFLOW OF RESOURCES AND LASTLY IT INVOLVE S RELIABLE ESTIMATION OF OBLIGATION. KEEPING IN MIND ALL THE F OUR ASPECTS, WE ARE OF THE VIEW THAT THE HIGH COURT SHO ULD NOT TO HAVE INTERFERED WITH THE DECISION OF THE TRIBUNA L IN THIS CASE. 10. RATIO OF ROTARK CONTROLS INDIA LTD. VS. CIT 314 ITR 62 (SC) (SUPRA) IS PROVISION FOR LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. THE LD. AR FOR TH E ASSESSEE CONTENDED THAT THE COMPANY HAS MADE A PROVISION FOR WARRANTY ON SCIENTIFIC BASIS BY MAKING COMPLETE TRAIL OF SALES MADE TO M/S. AVTAR T YRES AND THIS ITA NO. 207/DEL./2016 8 PROVISION WAS MADE BEFORE AUDITING THE FINANCIAL OF THE ASSESSEE AND DREW OUR ATTENTION TOWARDS LETTER DATED DECEMBER 26, 201 2 AVAILABLE AT PAGE 67 OF THE PAPER BOOK WRITTEN TO THE AO. 11. ALONG WITH LETTER, ASSESSEE HAS GIVEN COMPLETE DETAIL OF THE SALE MADE DURING THE YEAR UNDER ASSESSMENT. ASSESSEE HAS ALSO BROUGHT ON RECORD BEFORE LD. CIT(A) COPY OF RELEVANT EXTRACT O F COMPLAINTS REGISTERED QUA THE SALES MADE TO AVATAR TYRES AS A NNEXURE 5. ASSESSEE ALSO BROUGHT ON RECORD RELEVANT EXTRACT OF CLAIM IN SPECTION REGISTER / CLAIMED DEFECT IDENTIFICATION QUA THE COMPLAINT FIL ED BY THE PURCHASERS OF THE TYRE AS ANNEXURE 6 AND ALSO BROUGHT ON RECORD LETTER ISSUED FOR REPLACEMENT REWARD IN RESPECT OF AFORESAID COMPLAIN T AS ANNEXURE 7, COPY OF RELEVANT LEDGER EXTRACT QUA AFORESAID WARRA NTY REWARD AND COPY OF NEW INVOICE ISSUED POST WARRANTY AWARD REDUCING THE WARRANTY CLAIM FOR PRODUCT PRICE AS ANNEXURE 9. 12. LD. CIT(A) ON THE BASIS OF ACCOUNT LEDGER, COMP LAINT REGISTER, SALE INVOICE QUA SALES MADE TO AVATAR TYRES, RELEVANT EX TRACT OF CLAIM INSPECTION REGISTER / CLAIM DEFECT IDENTIFICATION, COPY OF LETTER ISSUED FOR REPLACING REWARD COPY OF NEW INVOICE ISSUED POST AF ORESAID WARRANTY AWARD ETC. REACHED THE CONCLUSION THAT THE PROVISIO N FOR WARRANTY EXPENSES MADE BY THE ASSESSEE IN THE BOOKS OF ACCOU NTS QUA THE YEAR UNDER ASSESSMENT WAS CREATED OUT OF ACTUAL WARRANTY EXPENSES ON ITA NO. 207/DEL./2016 9 SCIENTIFIC BASIS IN VIEW OF RATIO OF ROTARK CONTROLS INDIA LTD. VS. CIT 314 ITR 62 (SC) (SUPRA). 13. SO WHEN THE YEAR UNDER ASSESSMENT IS FIRST YEAR OF OPERATION OF THE ASSESSEE WHO IS MANUFACTURER AND TRADER OF TYRES OF HEAVY VEHICLES SOLD ALONG WITH WARRANTY AND WAS UNDER OBLIGATION OF REP LACEMENT OF THE TYRE SOLD DURING THE WARRANTY PERIOD ON FREE OF COST, IF ANY COMPONENT IS FOUND TO BE SUFFERING FROM MANUFACTURING DEFECT, THE BASI S FOR CREATING PROVISION FOR WARRANTY IS SCIENTIFIC ONE. 14. SO WHEN THE PROVISION OF WARRANTY EXPENSES HAS BEEN MADE ON THE BASIS OF ACTUAL WARRANTY EXPENSES MET OUT DURING TH E PERIOD 01.04.2010 TO 25.09.2010 QUA THE PRODUCT SOLD DURING THE YEAR UND ER ASSESSMENT THE ENTIRE ESTIMATE IS BASED ON THE SCIENTIFIC BASIS. M OREOVER THE PROVISION FOR WARRANTY MADE BY THE ASSESSEE HAS BEEN DULY AUDITED AT THE TIME OF AUDITING THE FINANCIALS OF COMPANY. SO IN THESE CIR CUMSTANCES WE ARE OF THE CONSIDERED VIEW THAT LD. CIT(A) HAS RIGHTLY DEL ETED THE ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR W ARRANTY. CONSEQUENTLY GROUND NO. 1 IS DETERMINED AGAINST THE ASSESSEE. GROUND NO. 2 15. LD. CIT(A) DELETED THE ADDITION OF RS. 2,97,93, 143/- ON ACCOUNT OF DISALLOWANCE OF TECHNICAL KNOW-HOW / ROYALTY MADE BY THE AO U/S 32(1)(II), WHICH IS NOW UNDER CHALLENGE BEFORE THE TRIBUNAL. ITA NO. 207/DEL./2016 10 16. UNDISPUTEDLY THE ASSESSEE COMPANY HAS ENTERED I NTO TECHNICAL ASSISTANCE AGREEMENT (TAA) DATED 14.08.2008 WITH CO NTINENTAL AG, GERMANY FOR PROVISION OF NON-EXCLUSIVE AND NON-TRAN SFERABLE LICENSE FOR USE OF TECHNOLOGY FOR MANUFACTURING OF TYRES IN IND IA. IT IS ALSO NOT IN DISPUTE THAT PAYMENT FOR USE OF SUCH LICENSE AS PE R THE CONTRACT WAS FIXED AT EUROS 4,00,000 PER ANNUM, SUBJECT TO MAXIMUM PRO DUCTION OF 4,00,000 UNITS. THE ASSESSEE COMPANY SHALL MAKE FURTHER PAYM ENT OF EURO 1.5 PER UNIT FOR PRODUCTION BEYOND, 400,000/- UNITS. IT IS ALSO NOT IN DISPUTE THAT DURING THE YEAR UNDER ASSESSMENT THE ASSESSEES PR ODUCTION WAS LESS THAN 4,00,000 UNIT, THUS, MADE THE PAYMENT OF 4,00,000 E UROS ONLY. 17. THE LD. AR FOR THE ASSESSEE CONTENDED THAT WHEN THE ASSESSEE WAS AUTHORIZED TO UTILIZE KNOW HOW RECEIVED IN A LI MITED AND RESTRICTED MANNER FOR ITS BUSINESS PURPOSE ONLY HAVING NO RIGH T TO TRANSFER THE SAME OR TO MAKE COPIES THEREOF OR TO USE THE DATE AND D RAWINGS FOR ANY PURPOSE OTHER THAN THE MANUFACTURE OF TYRES IN OWN BUSINESS AND ON TERMINATION OF THE AGREEMENT, THE ASSESSEE WAS REQUIRED TO DISCONT INUE USE OF THE TECHNOLOGY, HENCE, ACQUIRED NO PROPRIETARY RIGHT IN THE KNOW-HOW RECEIVED FROM CONTINENTAL AG AND RELIED UPON DECISI ON RENDERED BY DELHI HIGH COURT IN CIT VS. SHARDA MOTOR INDUSTRIES LTD. 319 ITR 109 (DEL. HC), CIT VS. HERO HONDA MOTORS LTD. 372 ITR 4 81 (DEL.HC). 18. THE LD. DR SUPPORTED THE ASSESSMENT ORDER BY RE LYING UPON DECISION RENDERED BY HONBLE SUPREME COURT HONDA SIEL CAR INDIA ITA NO. 207/DEL./2016 11 LTD., AND DECISION RENDERED BY CO-ORDINATE BENCH OF TRI BUNAL IN CASE CITED AS SEMOCO ELECTRICAL PVT. LTD. 19. HONBLE DELHI HIGH COURT IN CASE OF SHARDA MOTORS INDUSTRIES LTD. (SUPRA) DECIDED THE IDENTICAL ISSUE OF TRANSFER OF TECHNIC AL KNOW- HOW AND ALLOWED THE PAYMENT OF THE SAME AS REVENUE EXPENDITURE BY RELYING UPON DECISION RENDERED BY HONBLE DELHI HIG H COURT IN CASE CITED AS CIT VS. J.K.SYNTHETICS LTD. [2009] 309 ITR 371 (DEL HI) BY RETURNING FOLLOWING FINDINGS :- 5. IN CIT V. J. K. SYNTHETICS LTD. : [2009] 309 IT R 371 (DELHI), AFTER ELABORATELY DISCUSSING THE ENTIRE CA SE LAW ON THE SUBJECT, THE COURT CULLED OUT THE BROAD PRINCIP LES TO DETERMINE AS TO WHETHER EXPENDITURE IN A PARTICULAR CASE WOULD BE CAPITAL OR REVENUE EXPENDITURE. ONE OF THE PRINCIPLES ENUMERATED THEREIN READS AS UNDER (PAGES 412- 413): (V) EXPENDITURE INCURRED FOR GRANT OF LICENCE WHICH ACCORDS 'ACCESS' TO TECHNICAL KNOWLEDGE, AS AGAINST 'ABSOLU TE' TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION WOU LD ORDINARILY BE TREATED AS REVENUE EXPENDITURE. IN OR DER TO SIFT, IN A MANNER OF SPEAKING, THE GRAIN FROM THE C HAFF, ONE WOULD HAVE TO CLOSELY LOOK AT THE ATTENDANT CIRCUMS TANCES, SUCH AS: (A) THE TENURE OF THE LICENCE, (B) THE RIGHT, IF ANY, IN THE LICENSEE TO CREATE FU RTHER RIGHTS IN FAVOUR OF THIRD PARTIES, (C) THE PROHIBITION, IF ANY, IN PARTING WITH A CONF IDENTIAL INFORMATION RECEIVED UNDER THE LICENCE TO THIRD PAR TIES WITHOUT THE CONSENT OF THE LICENSOR, (D) WHETHER THE LICENCE TRANSFERS THE 'FRUITS OF RE SEARCH' OF THE LICENSOR, 'ONCE FOR ALL', ITA NO. 207/DEL./2016 12 (E) WHETHER ON EXPIRY OF THE LICENCE THE LICENSEE I S REQUIRED TO RETURN BACK THE PLANS AND DESIGNS OBTAINED UNDER THE LICENCE TO THE LICENSOR EVEN THOUGH THE LICENSEE MA Y CONTINUE TO MANUFACTURE THE PRODUCT, IN RESPECT OF WHICH 'ACCESS' TO KNOWLEDGE WAS OBTAINED DURING THE SUBSI STENCE OF THE LICENCE. (F) WHETHER ANY SECRET OR PROCESS OF MANUFACTURE WA S SOLD BY THE LICENSOR TO THE LICENSEE. EXPENDITURE ON OBT AINING ACCESS TO SUCH SECRET PROCESS WOULD ORDINARILY BE C ONSTRUED AS CAPITAL IN NATURE ; 6. IN THE PRESENT CASE, ON FACTS, IT WAS, INTER ALI A, FOUND AS FOLLOWS: (A) IN THAT CASE THE GRANT OF TECHNICAL AID WAS FOR SETTING UP OF THE FACTORY COMBINED WITH THE RIGHT TO SELL PROD UCTS WHILE IN OUR CASE OUR COMPANY IS ALREADY PRODUCING EXHAUST SYSTEMS AND THE TECHNOLOGY AGREEMENT WAS NO T FOR SETTING UP OF THE FACTORY. (B) IN THE CITED CASE THE FOREIGN COMPANY WHO GAVE THE TECHNOLOGY AGREED NOT TO MANUFACTURE SIMILAR PRODUC TS IN INDIA WHILE THERE IS NO SUCH REGULATION IN OUR AGRE EMENT. (C) IN THE CITED CASE THE TECHNICAL KNOWLEDGE OBTAI NED WAS HELD TO GIVE AN ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE-COMPANY AND AS IT HAD THE RIGHT TO CONTINU E TO MANUFACTURE THE PRODUCT EVEN AFTER TERMINATION OF T HE AGREEMENT. WHILE IN OUR CASE THE DESIGN PATENT APPL IES TO THE FOREIGN COMPANY AND WE ARE ONLY LICENSED TO PRO DUCE THE GOODS FOR HYUNDAI CAR AND WE CANNOT CONTINUE TO PRODUCE THE GOODS IF THE AGREEMENT IS TERMINATED. T HIS ITSELF IS A MAJOR DIFFERENCE BETWEEN THE CASE CITED BY YOUR HONOUR AND THE FACTS OF OUR CASE. ON THE FACTS AND AFTER APPLYING THE AFORESAID PRIN CIPLE, IT BECOMES CRYSTAL CLEAR THAT THE EXPENDITURE IS OF RE VENUE NATURE. 20. IN A SIMILAR SET OF FACTS AND CIRCUMSTANCES, HO NBLE DELHI HIGH COURT IN CASE CITED AS HERO HONDA MOTORS LTD (SUPRA) . HELD THE ITA NO. 207/DEL./2016 13 PAYMENT MADE BY THE ASSESSEE FOR USING TECHNOLOGY L ICENSED BY HERO HONDA MOTORS AS REVENUE EXPENDITURE BY RETURNING F OLLOWING FINDINGS :- SECTION 37(1) OF THE INCOME TAX ACT, 1961- BUSINESS EXPENDITURE-ALLOWABILITY OF (ROYALTY)- ASSESSMENT YEARS 2000-01 TO 2002-03- ASSESSEE WAS JOINT VENTURE BETWEEN HERO GROUP AND HONDA, JAPAN, FOR MANUFACTURE AND SALE OF MOTORCYCLE USING TECHNOLOGY LICENCED BY HONDA ASSESSEE AND HONDA THEREUPON ENTERED INTO AN AGREEMENT CALLED LICENCE AND TECHN ICAL ASSISTANCE AGREEMENT IN TERMS OF WHICH ASSESSEE PA ID ROYALTY TO HONDA- ASSESSEE CLAIMED DEDUCTION OF SAI D PAYMENT UNDER SECTION 37(1) ASSESSING OFFICER REJ ECTED ASSESSEES CLAIM HOLDING THAT IT WAS IN NATURE OF C APITAL EXPENDITURE- TRIBUNAL, HOWEVER, ALLOWED ASSESSSEES CLAIM WHETHER SINCE PAYMENT IN QUESTION WAS FOR ACQUIRI NG RIGHTS TO USE TECHNICAL KNOW HOW AND OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS IN KNOW HOW REMAINED W ITH HONDA JAPAN, TRIBUNAL WAS JUSTIFIED IN HOLDING THAT SAID PAYMENT WAS TO BE ALLOWED AS REVENUE EXPENDITURE HELD, YES [PARAS 16 AND 21] [IN FAVOUR OF ASSESSEE] 21. FOLLOWING THE RATIO OF THE JUDGMENT CIT VS. SHARDA MOTOR INDUSTRIES LTD., CIT VS. HERO HONDA MOTORS LTD. (SU PRA), WE ARE OF THE CONSIDERED VIEW THAT ASSESSEE COMPANY SATISFIED THE TEST THAT TRANSFER OF TECHNICAL KNOW HOW / ROYALTY BY THE CONTINENTAL AG TO THE ASSESSEE COMPANY WAS NON-EXCLUSIVE AND NON-TRANSFERABLE L ICENCE FOR THE USE OF TECHNOLOGY FOR MANUFACTURING OF TYRES IN INDIA, WHI CH WAS ONLY A PRODUCTION LICENCE AND FOR LIMITED PURPOSE FOR USE FOR MANUFACTURING OF TYRES. EVEN THE TERMINATION CLAUSE 11.8 IS VERY CAT EGORIC THAT IMMEDIATELY UPON TERMINATION OF THE AGREEMENT THE ASSESSEE SHAL L DELIVERED TO THE CONTINENTAL AG STATEMENT OF PRODUCT SOLD OR DISPOSE D OF TO THE EFFECTIVE ITA NO. 207/DEL./2016 14 DATE OF TERMINATION WHICH HAVE NOT ALREADY BEEN ACC OUNTED FOR AND SHALL PAY TO THE CONTINENTAL AMOUNT OF ROYALTIES DUE IN R ESPECT THEREOF, ASSESSEE SHALL IMMEDIATELY RETURN TO CONTINENTAL ALL DOCUMEN TS, ORIGINAL DATA AND TECHNOLOGY RELATED TO TECHNOLOGY AND INFORMATION FO R MANUFACTURING AND DESIGN OF PRODUCTS PLACED AT ITS DISPOSAL BY THE CO NTINENTAL AG UNDER THIS AGREEMENT. 22. WE ARE OF THE CONSIDERED VIEW THAT THE EXPENDIT URE INCURRED BY THE ASSESSEE IN ACCORDANCE WITH TEA AGREEMENT PERTAININ G TO THE TECHNICAL KNOW-HOW IS QUANTIFIED ON THE BASIS OF SALE / PRODUCTION EFFECTED BY USING SUCH TECHNICAL KNOW-HOW IS OF REVENUE NATURE AND AS SUCH ALLOWABLE AS BUSINESS DEDUCTION. LD. CIT(A) HAS ALS O RELIED UPON CIRCULAR NO. 21 OF 1969 ISSUED BY CBDT / CLARIFIED THAT WHE N A LICENCE IS OBTAINED FOR USER OF TECHNICAL KNOWLEDGE FROM A FOREIGN PART ICIPANT FOR A LIMITED PERIOD TOGETHER WITH OR WITHOUT THE RIGHT TO USE TH E PATENTS AND TRADEMARKS OF THE FOREIGN PARTY, THE PAYMENT WOULD NOT BRING I NTO EXISTENCE AN ASSET OF ENDURING ADVANTAGE TO THE INDIAN PARTY. SO IN VI EW OF THE MATTER DECISION RELIED UPON BY LD. DR VIZ. HONDA SIEL CAR INDIA LTD. V. ACIT, SEMOCO ELECTRICAL PVT. LTD. ARE NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE. CONSEQUENTLY, WE FIND NO ILLEGALITY OR PERVERSITY IN THE FINDINGS RETURNED BY LD. CIT(A). HENCE, GROUND NO. 2 IS DETERMINED AGAINST THE REVENUE. ITA NO. 207/DEL./2016 15 23. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, PRESE NT APPEAL FILED BY THE REVENUE IS HEREBY DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 19 TH MARCH, 2019. SD/- SD/- (DR. M.L.MEENA) ( KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 19 /03/ 2019 *BR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A)-XXVI, NEW DELHI. 5. CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI DATE OF DICTATION 21.02.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 22.02.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 19.03.2019 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 19.03.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 19.03.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT ITA NO. 207/DEL./2016 16 REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER