PME Power Solutions (I) Ltd., New Delhi V. CIT, New Delhi

ITA 288/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4199 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 23-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: AVDHESH BANSAL ACA
• Keywords: Tax effect
• Section: 143(3); 37; 263; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : F : NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER ITA NO.288/DEL/2011 ASSESSMENT YEAR : 2006-07 PME POWER SOLUTIONS (I) LTD., 26/36, EAST PATEL NAGAR, NEW DELHI. PAN : AAACP1698Q VS. CIT, DELHI-V, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, ADVOCATE & SHRI AVDHESH BANSAL, ACA REVENUE BY : SHRI ASHOK PANDEY, CIT, DR ORDER PER I.P. BANSAL, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DIRECTED AGAINST THE ORDER DATED 27 TH DECEMBER, 2010 PASSED BY CIT, DELHI-V, NEW DELHI U/S 263 OF THE INCOME TAX ACT, 1961 (THE ACT). THE GRO UNDS OF APPEAL READ AS UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE ORDER DATED 27.12.2010 PASSED BY THE COMMISSIONER OF INCOME TAX, DELHI-V (CIT) UNDER S ECTION 263 OF THE INCOME TAX ACT, 1961 (THE ACT) REVISING THE ASSESSMENT TO AN INCOME OF RS.3,75,28,005 IS BEYOND JURISDICTION, BAD IN LAW AND VOID AB INITIO. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT ERRED IN HOLDING THAT THE ASSESSMENT ORDER DATED 08.08.2008 PASSED UNDER SECTION 143(3) OF THE AC T WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E AND IN DIRECTING THE ASSESSING OFFICER TO MODIFY THE SA ME, BY BRINGING TO TAX ONE TIME TECHNOLOGY TRANSFER FEES, AMOUNTING TO RS.3,71,40,000. ITA NO.288/DEL/2011 2 AMOUNTING TO RS.3,71,40,000. 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT ERRED IN EXERCISING JURISDICTION UNDER SE CTION 263 OF THE ACT IN RESPECT OF THE SAID ISSUE, WITHOUT APPRECIATING THAT THE SAID ISSUE OF TAXABILITY OF ONE TIM E TECHNOLOGY TRANSFER FEES IS DEBATABLE OUSTING JURISDIC TION UNDER THE SAID SECTION. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW THE CIT ERRED IN EXERCISING REVISIONARY POWERS U NDER SECTION 263 OF THE ACT WITHOUT APPRECIATING THAT, ON THE SAID ISSUE, THE PROCEEDINGS UNDER SECTION 154 OF THE A CT HAD EARLIER BEEN DROPPED BY THE ASSESSING OFFICER. 3 THAT THE CIT ERRED ON FACTS AND IN LAW IN NOT APPREC IATING THAT THE TWIN CONDITIONS UNDER SECTION 263 OF THE ACT, VIZ. , ASSESSMENT ORDER BEING (I) ERRONEOUS AS WELL AS (II) PREJUDICIAL TO THE INTEREST OF REVENUE, WERE NOT SATISFIE D, IN AS MUCH AS, NO PREJUDICE IS CAUSED TO THE REVENUE IN RESPECT OF THE IMPUGNED ISSUE AS BALANCE AMOUNT OF ON E TIME TECHNOLOGY TRANSFER FEES HAS BEEN OFFERED FOR TAX IN THE SUBSEQUENT YEARS. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT ERRED IN HOLDING THAT THE ENTIRE ONE TIME TECHNOLOGY TRANSFER FEES RECEIVED BY THE APPELLANT IS TAXABLE IN THE YEAR OF RECEIPT, I.E., THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. 5. WITHOUT PREJUDICE TO THE AFORESAID, THE CIT ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION OF EXPENDITURE INCURRED BY THE APPELLANT IN SUBSEQUENT YEA RS IN CONNECTION WITH EARNING OF THE AFORESAID INCOME, ON THE MATCHING PRINCIPLE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VAR Y ANY OF THE ABOVE GROUNDS OF APPEAL BEFORE OR AT THE TIM E OF HEARING. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS ACTIVITY OF MANUFACTURING OF POWER DISTRIBUTION TRANSFORMERS. IT FILED ITS RETURN OF INCOME AT NIL ON 29 TH MARCH, 2007 WHICH WAS ASSESSED VIDE ORDER DATED 8 TH AUGUST, 2008 PASSED U/S 143 (3) OF THE ACT AT NIL INCO ME. THE ONLY ADDITION MADE TO THE INCOME OF THE ASSESSEE WAS WITH REG ARD TO DELAYED PAYMENT OF ESI AND PF AMOUNTING TO ` 3,88,0 05/- WHICH WAS ITA NO.288/DEL/2011 3 ADJUSTED AGAINST THE BROUGHT FORWARD LOSSES TO THE EXTEN T OF ASSESSABLE INCOME. 3. LATER ON, THE COMMISSIONER OF INCOME TAX-V, NEW DE LHI (CIT ) ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE DATED 9 TH DECEMBER, 2010 ON THE GROUND THAT THE ASSESSEE HAD ONLY CREDITED A SUM OF ` 92,85,000/- IN THE PROFIT & LOSS ACCOUNT UNDER OTHER INCOME AS A GAINST THE TOTAL RECEIPT OF ` 4,64,25,000/- RECEIVED BY THE ASSESSEE ON ACCOUNT OF ONE TIME TECHNOLOGY TRANSFER FEE AND THE REMAINING SUM OF ` 3,71,40,000/- WAS SHOWN IN THE BALANCE SHEET AS UNDER THE HEAD OTHER LIABILITIES. ACCORDING TO THE SHOW CAUSE NOTICE, LEARNED CIT HAS OB SERVED THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND, ACCORDING TO THE PROVISIONS OF SECTION 28 READ WITH SECTION 5 D ESCRIBING THE SCOPE OF TOTAL INCOME, THE ASSESSEE WAS LIABLE TO BE ASSESSED ON THE ENTIRE RECEIPTS OF ONE TIME TECHNOLOGY TRANSFER FEES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY WAS NEITHER A SKED FOR ANY EXPLANATION REGARDING THE ENTIRE ONE TIME T ECHNOLOGY TRANSFER FEES OF ` 4,64,25,000/- NOR ANY EXPLANATION IN THIS R EGARD WAS EVER FURNISHED BY THE ASSESSEE COMPANY. IN VIEW OF ALL THESE CIRCUMSTANCES, LEARNED CIT PROPOSED TO MODIFY/REVISE TH E SAID ASSESSMENT ORDER UNDER THE PROVISIONS OF SECTION 263 OF T HE ACT. COPY OF SHOW CAUSE NOTICE IS PLACED AT PAGES 4-6 OF THE PAPE R BOOK. IN RESPONSE TO THE AFOREMENTIONED SHOW CAUSE NOTICE, THE A SSESSEE HAS SUBMITTED A REPLY DATED 20 TH DECEMBER, 2010 COPY OF WHICH IS PLACED AT PAGES 1-3 OF THE PAPER BOOK. IN THE SAID REPLY, I T WAS THE CASE OF THE ASSESSEE THAT IT IS ENGAGED IN THE MANUFACTURING OF POWE R AND DISTRIBUTION OF TRANSFORMERS ALONG WITH SERVICING AND SA LES OF ELECTRICITY TRANSMISSION AND DISTRIBUTION PRODUCTS. IT WAS SUBMITTED T HAT THE ASSESSEE IS ALSO ENGAGED IN PROVIDING CONSULTANCY IN SETTIN G UP POWER RELATED PROJECTS IN FURTHERANCE OF ITS BUSINESS IT ENTER ED INTO AN AGREEMENT WITH ZESA ENTERPRISES OF ZIMBABWE FOR PROVI DING TECHNICAL ITA NO.288/DEL/2011 4 ASSISTANCE AND ALLIED SERVICES FOR PROVIDING NECESSARY DRA WINGS FOR REPAIR AND ASSEMBLING, OPERATING AND INSTRUCTION PROCE DURES AND MANUALS. IT WAS ALSO UNDER AN OBLIGATION TO CARRY OUT STUDIES OF THE CONTRACTS, REPAIRS AND MANUFACTURING FACILITIES AND WA S TO ASSIST IN THE PREPARATION OF SUCH DATA OR INFORMATION AS WAS REQUIRE D OR NECESSARY. THUS, IT WAS SUBMITTED THAT THE WORK ARISING OUT OF THE AGREEMENT WAS ENORMOUS AND SUCH AGREEMENT WAS ENTERED INTO FOR A PER IOD OF FIVE YEARS. THE ASSESSEE WAS REQUIRED TO INCUR HEAVY COST ON D AY-TO-DAY BASIS ON ITS EMPLOYEES ON THE MATERIAL OF SEARCH AND DEV ELOPMENT AND ON THE PROVISIONS FOR VARIOUS COMMITMENTS UNDERTAKEN TH ROUGH THE AGREEMENTS. THE ASSESSEE WAS ALSO RESPONSIBLE FOR DAMAGES AN D IN OTHER RELATED CLAIM BY THE THIRD PARTIES ARISING FROM DEFECTIVE TECHNICAL INFORMATION AND PARTS PROVIDED TO THE CONTRACTEE DUR ING THE TENURE OF SUCH AGREEMENT. THUS, IT WAS CLAIMED THAT THE ASSESSEE HA S TREATED ONLY 1/5 OF THE ENTIRE RECEIPTS AS INCOME PERTAINING TO THE YEAR UNDER CONSIDERATION AND THE BALANCE INCOME WAS DISTRIBUTED I N ANOTHER FOUR YEARS AS THE CONTRACT WAS TO PREVAIL FOR FIVE YEARS. IT WAS ALSO SUBMITTED THAT EARLIER PROCEEDINGS U/S 154/155 WERE IN ITIATED VIDE NOTICE DATED 31 ST MARCH, 2010 WHICH WERE DROPPED IN RESPONSE TO REPLY SUBMITTED BY THE ASSESSEE ON 27 TH APRIL, 2010. REFERENCE WAS MADE TO THE DECISION OF SPECIAL BENCH CHENNAI IN THE CASE OF ACIT/DCIT VS. MAHINDRA HOLIDAYS & RESORTS (I) LTD. 39 SOT 438 (2010) WHEREIN ON SIMILAR ISSUE REGARDING RECEIPT OF TIME SHARE MEMBERSHIP FEES IT WAS HELD THAT IT WAS NOT INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR ON ACCOUNT OF CONTRACTUAL OBLIGATION THAT WAS FASTENED T O RECEIPT I.E., TO PROVIDE SERVICES IN FUTURE OVER TERM OF CONTRACT. FI NALLY, IT WAS SUBMITTED THAT NO PREJUDICE HAS CAUSED TO THE REVENUE BY THE ACTION OF THE ASSESSEE IN NOT TREATING THE ENTIRE RECEIPT AS INCOM E IN THE CURRENT FINANCIAL YEAR AS THE ASSESSEE IS HAVING BROUGHT FORWARD LOSSES TO THE TUNE OF ` 13,16,18,770/- AND, IN THIS MANNER, IT WAS SUBMITTED THAT THE ORDER WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE IN TEREST OF REVENUE, ITA NO.288/DEL/2011 5 THEREFORE, POWERS U/S 263 COULD NOT BE INVOKED. HOWE VER, LEARNED CIT HAS REJECTED SUCH CONTENTION OF THE ASSESSEE AND HAS COME TO THE CONCLUSION THAT THE ENTIRE AMOUNT OF ` 4,64,25,000/- WAS REQUIRED TO BE BROUGHT TO THE TAX INSTEAD OF ONLY A SUM OF ` 92,85,0 00/- AND HE DIRECTED THE ASSESSING OFFICER TO MODIFY THE ORDER. H E ALSO DIRECTED THE ASSESSING OFFICER TO GIVE A CONSEQUENTIAL EFFECT TO ASSESSMENT YEARS 2007-08 TO 2010-11 BY REDUCING THE AMOUNT OF ` 92,85,000/- IN EACH OF THE SAID ASSESSMENT YEARS IN VIEW OF THE ASSESSMENT O F THE ENTIRE AMOUNT IN THE YEAR UNDER CONSIDERATION. IN TH IS MANNER, AN ADDITION OF ` 3,71,40,000/- HAS BEEN MADE BY LEARNED CIT (A). THE ASSESSEE IS AGGRIEVED WITH SUCH ORDER PASSED BY THE CIT AND HAS RAISED THE AFOREMENTIONED GROUNDS OF APPEAL. 4. AFTER NARRATING THE FACTS, IT WAS VEHEMENTLY PLEAD ED BY LEARNED AR THAT AS THE AGREEMENT WAS TO SUBSIST FOR A PERIOD OF FIVE YEARS, THE ASSESSEE HAD RIGHTLY SHOWN INCOME OF ` 92,85,000/- ON TH AT ACCOUNT BEING 1/5 TH OF THE TOTAL AMOUNT OF ` 4,64,25,000/- AND THE BAL ANCE AMOUNT WAS SHOWN AS A LIABILITY TO BE APPROPRIATED AGA INST THE FUTURE FOUR YEARS. HE SUBMITTED THAT ORIGINALLY THE ASSESSMENT WAS FRAMED U/S 143 (3) AND, THUS, THE ASSESSING OFFICER HAD ADOPTED A VIEW WHICH WAS A REASONABLE VIEW, HENCE, THE POWERS U/S 263 COULD NOT BE INVOKED BY THE CIT AS PER DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. MAX INDIA LTD. 268 ITR 1 28 (PB). 5. HE FURTHER REFERRED TO THE DECISION OF HONBLE DE LHI HIGH COURT IN THE CASE OF CIT VS. DINESH KUMAR GOYAL 197 TAXMAN 375 (DEL) TO CONTEND THAT IN ORDER TO PUT A SUM CHARGEABLE TO INC OME-TAX, IT SHOULD ACCRUE OR ARISE TO THE ASSESSEE DURING THE PREVIOUS YEAR; A RIGHT TO RECEIVE A PARTICULAR SUM UNDER AN AGREEMENT WOULD NO T SUFFICE UNLESS THAT RIGHT OCCURS BY RENDERING OF SERVICES AND NOT BY PROMISING OF SERVICES. HE SUBMITTED THAT IN ORDER TO BRING THE ENT IRE SUM IN THE ITA NO.288/DEL/2011 6 YEAR UNDER CONSIDERATION, THERE SHOULD BE EITHER ACCR UAL OR ARISING OF THE SAID SUM TO THE ASSESSEE. HE SUBMITTED THAT DUE TO TH E OBLIGATION OF THE ASSESSEE EXTENDED TO FIVE YEARS, THE ENTIRE AMOUN T COULD NOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE AND, THEREFORE, IT WAS RIGHTLY TAKEN BY THE ASSESSEE TO BE CHARGEABLE TO TAX AT 1/5 TH OF THE ENTIRE SUM AND THAT BEING A POSSIBLE VIEW TAKEN BY THE ASSESSEE, IT CANNOT BE SAID THAT POWER U/S 263 HAS RIGHTLY BEEN INVOKED BY TH E CIT. 6. HE FURTHER REFERRED TO THE DECISION OF HONBLE DE LHI HIGH COURT IN THE CASE OF SHRIRAM REFRIGERATION INDUSTRIES LTD. VS. C IT 127 ITR 746 TO CONTEND THAT LUMPSUM PAYMENT RECEIVED CANNOT BE A CR ITERIA TO ASSESS THE SAID INCOME IN ITS ENTIRETY IN THE YEAR OF RECEIP T. 7. HE FURTHER REFERRED TO THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF E.D. SASSOON & CO. LTD. VS. CIT 26 ITR 27 T O CONTEND THAT WHAT IS ASSESSABLE AS INCOME BEING TAXABLE IN A PARTICULA R YEAR, IT IS AN AMOUNT PAID OR RECEIVED EITHER ACTUALLY OR CONSTRUCT IVELY. IT WAS OBSERVED THAT ACCRUES, ARISES AND IS RECEIVED ARE THREE DISTINCT TERMS. SO FAR AS RECEIVING OF INCOME IS CONCERNED, TH ERE IS NO DIFFICULTY. THE WORD ACCRUE AND ARISE ARE ALSO N OT DEFINED IN THE ACT. THE WORD ACCRUE IS SYNONYMOUS WITH ARISING IN THE SE NSE OF SPRINGING AS A NATURAL GROWTH OR RESULT. BOTH THE WOR DS ARE USED IN CONTRADISTINCTION TO THE WORD RECEIVE AND INDICATE A RIGHT TO RECEIVE. THEY REPRESENT A STATE ANTERIOR TO THE POINT OF TIME WHEN THE INCOME BECOMES RECEIVABLE AND CONNOTE A CHARACTER OF THE IN COME WHICH IS MORE OR LESS INCOHATE . THUS, IT WAS HELD THAT WHAT IS SOUGHT TO BE TAXED MUST BE INCOME AND IT CANNOT BE TAXED UNLESS IT HAS ARRIVED AT A STAGE WHEN IT CAN BE CALLED INCOME. IT WAS FURTHER OBSERVED AS UNDER:- IT IS CLEAR THEREFORE THAT INCOME MAY ACCRUE TO AN ASSE SSEE WITHOUT THE ACTUAL RECEIPT OF THE SAME. IF THE ASSESSEE A CQUIRES ITA NO.288/DEL/2011 7 A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM THOUGH IT MAY BE RECEIVED LATER ON ITS BE ING ASCERTAINED. THE BASIC CONCEPTION IS THAT HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBODY. THERE MUST BE AS IS OTHERWIS E EXPRESSED DEBITUM IN PRAESENTI , SOLVENDUM IN FUTURO ; SEE W.S. TRY LTD. V. JOHNSON (INSPECTOR OF TAXES), AND WEBB V. STENTON AND OTHERS, GARNISHEES. UNLESS AND UNTIL THERE IS CRE ATED IN FAVOUR OF THE ASSESSEE A DEBT DUE BY SOMEBODY IT CANNO T BE SAID THAT HE HAS ACQUIRED A RIGHT TO RECEIVE THE INCOME OR THAT INCOME HAS ACCRUED TO HIM. 8. THE LEARNED AR FURTHER REFERRED TO THE DECISION O F HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. HINDUSTAN COMPUTERS LTD. 233 ITR 366 (ALL) TO CONTEND THAT THE ENTIRE RECEIP TS COULD NOT BE ASSESSED AS INCOME BECAUSE THEY WERE RECEIVED ON ACCOUNT OF AMC AND WAS TRANSFERRED TO PROFIT & LOSS ACCOUNT AS THE SAME DOES NOT HAVE THE EFFECT OF CHANGING THE SYSTEM OF ACCOUNTING AND NO REAL PROFIT HAD ARISEN ON THE UN-EXPIRED PERIOD OF AMC. THEREFO RE, THE TRIBUNAL WAS HELD RIGHT IN DELETING THE ADDITION OF ` 72.05 L AC EVEN IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING. 9. THE LEARNED AR FURTHER REFERRED TO THE DECISION O F HONBLE SUPREME COURT IN THE CASE OF CALCUTTA COMPANY LTD. V S. CIT 37 ITR 1 (SC). REFERRING TO THE DECISION HE CONTENDED THAT I F THERE IS A CLEAR LIABILITY OF THE ASSESSEE TO INCUR CERTAIN EXPENDITURE FOR CERTAIN PERIOD, THEN, THE ASSESSEE IS WITHIN ITS RIGHT TO CLAIM THAT EXPE NDITURE IN THE YEAR WHEN THE LIABILITY ACCRUED. THUS, IT WAS THE CO NTENTION OF LEARNED AR THAT THE INCOME WHICH RELATES TO SUBSEQUENT YEARS CO ULD NOT BE ASSESSED IN THE YEAR UNDER CONSIDERATION. 10. IT WAS FURTHER SUBMITTED THAT THE ASSESSMENT ORDER PA SSED BY THE ASSESSING OFFICER EARLIER CANNOT BE SAID TO BE PREJU DICIAL TO THE INTEREST OF THE REVENUE AS EVEN CREDITING THE ENTIRE INCOME IN THE YEAR UNDER CONSIDERATION DOES NOT RESULT IN THE LOSS OF REVEN UE AS THE ITA NO.288/DEL/2011 8 ASSESSEE HAS BROUGHT FORWARD LOSS OF ` 13 CRORE WHICH WILL BE SET OFF AGAINST SUCH ADDITION AND THE REVENUE RESULT OF THE SAI D ADDITION WILL BE NEGATIVE. 11. ON THE OTHER HAND, LEARNED DR CARRIED US THROUGH THE VARIOUS TERMS OF THE AGREEMENT. HE FIRST REFERRED TO ARTICLE 7 ACCORDING TO WHICH THE ASSESSEE WAS ENTITLED TO RECEIVE ONE TIME TEC HNOLOGY TRANSFER COST OF US $ 1 MILLION. HE SUBMITTED THAT BY THE NATURE ITSELF, IT WAS THE ONE TIME PAYMENT WHICH WAS TO BE RECEIVED BY THE ASSESSEE ON ACCOUNT OF ONE TIME TECHNOLOGY TRANSFER COST. TH EN, LEARNED DR REFERRED TO ARTICLE 4.2 TO CONTEND THAT ACCORDING T O CLAUSE 4.2, THE LICENSEE (THE OTHER PARTY) WAS HAVING THE RIGHT TO GE T ITS PERSONNEL TRAINED AND TO STUDY DESIGNS, ETC. ACCORDING TO CLAUSE 4.5, THE LICENSEE WAS TO BEAR THE TRAVELING EXPENSES TO AND FRO INDIA BY THE PERSONS OF THE LICENSOR. THEN, LEARNED DR REFERRED TO ARTICLE 5.1 ACCORDING TO WHICH THE ASSESSEE AS WELL AS OTHER PARTY WERE ENTITLED T O EXCHANGE THE IMPROVEMENTS AND FURTHER INVENTIONS RELATING TO L ICENSED PRODUCTS OR IN CONNECTION WITH THE DESIGNS, MANUFACTURE AND RE PAIR AND USE AND SALE OF THE PRODUCTS. LEARNED DR ALSO REFERRED TO CLA USE 6 ACCORDING TO WHICH THE ASSESSEE WAS TO GIVE SOFT LOAN TO THE OTHER PAR TY FOR UPGRADATION OF PLANT AND MACHINERY. HE ALSO REFERRE D TO CLAUSE 8 WHEREBY THE ASSESSEE WAS UNDER AN OBLIGATION TO SUPPLY CO MPONENTS, PARTS AND RAW MATERIALS, ETC. TO THE OTHER PARTY IF T HE SAME IS REQUIRED TO BE GIVEN AS PER WRITTEN REQUEST. IN REGARD TO SUCH REQUESTS, THE OTHER PARTY WAS REQUIRED TO MAKE THE PAYMENT BY LETT ER OF CREDIT. REFERRING TO ALL THESE CLAUSES, IT WAS SUBMITTED BY HIM THAT FOR EACH AND EVERY ACT, THE OTHER PARTY HAS TO BEAR THE COST A ND NOT THE ASSESSEE. HE SUBMITTED THAT FOR ALL THESE FURTHER ACTIVI TIES THE PAYMENT WAS TO BE RECEIVED BY THE ASSESSEE IN THE SHAPE O F ROYALTY AS PER CLAUSE 7.1 (B) WHICH WAS TO BE PAID @ 5% OF THE T OTAL EX-WORK SALE OF THE LICENSED PRODUCTS. HE SUBMITTED THAT THE SAID P AYMENT OF ITA NO.288/DEL/2011 9 ROYALTY IS THE MAJOR PART OF THE CONSIDERATION STATED IN THE AGREEMENT AS ACCORDING TO THAT CLAUSE THE MINIMUM PAYMENTS WAS FI XED AT US $ 25,000/- PER MONTH. THUS, HE SUBMITTED THAT ONE TIME TECHNOLOGY TRANSFER COST RECEIVED BY THE ASSESSEE WAS NOTHING, BUT A LUMPSUM PAYMENT RECEIVED BY THE ASSESSEE AND THE ASSESSEE WAS NOT TO PAY ANYTHING IN THE FURTHER FIVE YEARS FOR THAT PURPOSE. HE FURTHER REFERRED TO ARTICLE 11.4 ACCORDING TO WHICH EVEN IN THE CASE OF TERMINATION OF THE AGREEMENT, THE PARTIES WERE OBLIGED TO PERFORM T HE OUTSTANDING OBLIGATIONS UNDER THE AGREEMENT NOT AFFECTED BY THE TERMINATION. THUS, IT WAS PLEADED THAT THE BALANCE AMOUNT HAVING N OT BEEN TAXED BY THE ASSESSING OFFICER MADE THE ASSESSMENT ORDER ERRONEOU S AS WELL AS PREJUDICIAL TO THE INTEREST OF REVENUE. HE SUBMITT ED THAT IT CANNOT BE SAID THAT THE ORDER WAS NOT PREJUDICIAL TO THE INT EREST OF THE REVENUE AS THE TAX EFFECT HAS TO BE TAKEN INTO CONSIDERATION E VEN IF IT AFFECTS THE LOSS OR IT REDUCE THE LOSS CLAIMED BY THE ASSESSEE. HE PLEADED THAT IT HAS CLEARLY BEEN BROUGHT OUT IN THE ORDER PASSED U/ S 263 THAT THE ASSESSING OFFICER DID NOT DISCUSS THIS ISSUE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HE SUBMITTED THAT NON-DISCUSSION OR NON- DELIBERATION BY THE ASSESSING OFFICER ON THIS ISSUE DURING THE COURSE OF ASSESSMENT PROCEEDINGS WILL MAKE THE ASSESSMENT ORDER ERRON EOUS AS HE FAILED TO INITIATE ANY INQUIRY WITH REGARD AN ISSU E WHICH HAS EFFECT UPON THE CHARGEABLE INCOME OF THE ASSESSEE. 12. IN THE REJOINDER, IT WAS VEHEMENTLY CONTENDED BY LEARNED AR THAT THE OBLIGATION OF THE ASSESSEE FOR RECEIVING ONE T IME TECHNOLOGY TRANSFER COST WAS NOT LIMITED TO THE YEAR UNDER CONSIDE RATION, BUT IT WAS FOR THE EXTENDED PERIOD OF FIVE YEARS APPLICABLE TO THE ENTIRE AGREEMENT. HE SUBMITTED THAT BEARING THE COST BY THE OTHER PARTY AS STIPULATED IN THE TERMS CANNOT IN ANY WAY BE INTERPRE TED AGAINST THE ASSESSEE AS, ACCORDING TO GENERAL TERMS AND CONDITIONS, TH E INCURRING OF EXPENDITURE ON SUCH ITEMS IS ALWAYS THE LIABILITY OF THE PERSON WHO IS ITA NO.288/DEL/2011 10 TO OBTAIN THE BENEFIT. THUS, HE SUBMITTED THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WAS NEITHER ERRONEOUS NOR P REJUDICIAL TO THE INTEREST OF REVENUE, HENCE, IT IS TO BE HELD T HAT POWER U/S 263 WAS NOT RIGHTLY EXERCISED BY THE CIT. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS I N THE LIGHT OF THE MATERIAL PLACED BEFORE US. IT IS NOTICED THAT THE CIT HAS CLEARLY RECORDED IN HIS ORDER THAT DURING THE COURSE OF ASSESSMEN T PROCEEDINGS THE ASSESSEE COMPANY WAS NEITHER ASKED FOR ANY EXPLANATIO N REGARDING THE ENTIRE ONE TIME TECHNOLOGY TRANSFER FE E OF ` 4,64,25,000/- NOR ANY EXPLANATION IN THIS REGARD WAS EVER FURNISHED BY THE ASSESSEE COMPANY. SUCH FACT IS ALSO NOT DENIED BY LE ARNED AR. HENCE, IT IS CLEAR THAT DURING THE COURSE OF ASSESSMENT P ROCEEDINGS THE ISSUE REGARDING TAXABILITY OF THE ENTIRE AMOUNT IN TH E YEAR UNDER CONSIDERATION WAS NOT TOUCHED UPON BY THE ASSESSING OFFIC ER OR BY THE ASSESSEE. THEREFORE, IT IS A CASE WHERE NO EXAMINATION W AS DONE BY THE ASSESSING OFFICER AND THE ASSESSEE ALSO DID NOT GIVE ANY EXPLANATION ON THIS ISSUE. IF IT IS SO, THEN, THE LAW I S WELL ESTABLISHED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GEE VEE ENTERPRISES VS. ADDL. CIT 99 ITR 375 (DEL) WHICH IS LA TER ON APPROVED IN THE CASE OF MALABAR INDUSTRIAL COMPANY LTD. VS. CIT 24 3 ITR 83 (SC) WHEREIN IT WAS HELD THAT VIDE SECTION 263 THE INTENT ION OF THE LEGISLATURE WAS TO GIVE A WIDE POWER TO THE COMMISSIONE R. HE MAY CONSIDER THE ORDER OF THE ITO AS ERRONEOUS NOT ONLY BE CAUSE IT CONTAINS SOME APPARENT ERROR OF REASONING OR OF LAW OR OF FACT ON THE FACE OF IT, BUT ALSO BECAUSE IT IS A STEREO TYPE ORDER WHICH SIMPLY ACCEPTS WHAT THE ASSESSEE HAS STATED IN HIS RETURN AND FAILS TO MAKE INQ UIRIES WHICH ARE CALLED FOR IN THE CIRCUMSTANCES OF THE CASE. THE COMMISSIONER CAN REGARD THE ORDER AS ERRONEOUS ON THE GROUND THAT IN T HE CIRCUMSTANCES OF THE CASE, THE ITO SHOULD HAVE MADE FURTHER INQUIRI ES BEFORE ACCEPTING THE STATEMENTS MADE BY THE ASSESSEE IN HIS RETUR N. THE ITA NO.288/DEL/2011 11 REASON IS OBVIOUS. THE POSITION AND FUNCTION OF THE IT O IS VERY DIFFERENT FROM THAT OF A CIVIL COURT. THE STATEMENT MADE IN TH E PLEADING PROVED BY THE MINIMUM AMOUNT OF EVIDENCE MAY BE ACCEPTED B Y A CIVIL COURT IN THE ABSENCE OF ANY REBUTTAL. THE CIVIL COURT IS N EUTRAL WHEN IT SIMPLY GIVES DECISION ON THE BASIS OF THE PLEADINGS AND EVIDENC E WHICH COMES BEFORE IT. THE ITO IS NOT ONLY AN ADJUDICATOR, BUT ALSO AN INVESTIGATOR. HE CANNOT REMAIN PASSIVE IN THE FACE OF A RETURN WHIC H IS APPARENTLY IN ORDER, BUT CALLS FOR FURTHER INQUIRY. IT IS HIS DUTY TO ASCERTAIN THE TRUTH OF THE FACTS STATED IN THE RETURN WHEN THE CIRCUMSTANC ES OF THE CASE ARE SUCH AS TO PROVOKE AN INQUIRY. THE MEANING TO BE GIVEN TO THE WORD ERRONEOUS IN SECTION 263 EMERGES OUT OF THIS CO NTEXT. IT IS BECAUSE IT IS INCUMBENT ON THE ITO TO FURTHER INVESTIG ATE THE FACTS STATED IN THE RETURN WHEN THE CIRCUMSTANCES WOULD MAKE SUCH AN INQUIRY PRUDENT THAT THE WORD ERRONEOUS IN SECTION 263 INCLUDES THE FAILURE TO MAKE SUCH AN INQUIRY. THE ORDER BECOMES E RRONEOUS BECAUSE SUCH AN INQUIRY HAS NOT BEEN MADE AND NOT BECA USE THERE IS ANYTHING WRONG WITH THE ORDER IF ALL THE FACTS STATED THEREIN ARE ASSUMED TO BE CORRECT. THUS, IT IS CLEAR THAT THE ORDE R CAN BE TERMED TO BE ERRONEOUS IF NO INQUIRY IS CONDUCTED BY THE ASSESSI NG OFFICER WHICH WAS REQUIRED TO BE CALLED FOR. THUS, IT IS NOT A CASE OF INADEQUATE INQUIRY BUT, IT IS A CASE OF LACK OF IN QUIRY AND THIS POSITION HAS BEEN ACCEPTED EVEN IN THE CASE OF CIT VS. SUNBEAM AUTO LTD. 227 CTR 133 (DEL). IF THE ORDER IS ERRONEOUS, THEN, IT SH OULD ALSO BE PREJUDICIAL TO THE INTEREST OF REVENUE TO BRING THE ASSESSMENT ORDER WITHIN THE AMBIT OF SECTION 263. HERE, WE FIND FOR CE IN THE CONTENTION OF LEARNED DR THAT IF THE AMOUNT IS ASSESSABLE ON LUMPSUM BASIS IN THE YEAR UNDER CONSIDERATION, THEN, THERE WILL CERTAINLY BE A PREJUDICE CAUSED TO THE REVENUE AND SUCH PREJUDICE CANNOT BE WA SHED AWAY SIMPLY FOR THE REASON THAT THERE WAS AMPLE BROUGHT FOR WARD LOSSES AGAINST WHICH SUCH INCOME COULD BE WIPED OUT. NOW, A S PER WELL ESTABLISHED LAW, REDUCTION OF LOSS ALSO IS AT PAR WITH EN HANCEMENT IN ITA NO.288/DEL/2011 12 TAXABLE INCOME, HENCE, IT CANNOT BE SAID THAT NO PRE JUDICE CAN BE CAUSED TO THE REVENUE IF THERE ARE SUFFICIENT BROUGHT FORWARD LOSSES TO SET OF CURRENT ADDITION. 14. HOWEVER, TO EXAMINE WHETHER REAL PREJUDICE HAS B EEN CAUSED TO THE REVENUE, THE CONTENTION OF LEARNED AR REGARDING VALIDITY OF ADDITION IS ALSO TO BE CONSIDERED ON THE BASIS OF MATERIAL AVAILA BLE ON RECORD AND ON THE BASIS OF ARGUMENTS SUBMITTED BY BOTH THE PAR TIES AS THE COMMISSIONER HAS HELD THAT THE ENTIRE AMOUNT WAS TAXABL E IN THE YEAR UNDER CONSIDERATION AND HE HAS ALSO DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE SIMILAR AMOUNT OF ` 92,85,000/- IN ALL T HE SUBSEQUENT YEARS FROM ASSESSMENT YEAR 2007-08 TO 2010-11 AS THE ENTIRE AM OUNT IS BEING ADDED IN THE CURRENT YEAR. 15. THE ADDITION OF THE ENTIRE AMOUNT IN THE YEAR U NDER CONSIDERATION IS CONTESTED BY LEARNED AR MAINLY ON THE GROUND THAT ACCORDING TO THE OBLIGATIONS OF THE ASSESSEE IN THE AGRE EMENT, THE ASSESSEE HAS TO EXTEND VARIOUS FACILITY TO THE LICENSEE FO R THE ENTIRE PERIOD OF FIVE YEARS, HENCE, THE ENTIRE PAYMENT COUL D NOT BE RELATED TO THE YEAR UNDER CONSIDERATION ONLY AS IT HAS TO BE BIFU RCATED INTO FIVE YEARS. FOR THIS PURPOSE, WE HAVE TO CAREFULLY CONSIDER THE CONTENTS OF THE AGREEMENT TO ASCERTAIN THAT WHAT WAS THE OBLIGATI ON OF THE ASSESSEE RELATING TO ONE TIME TECHNOLOGY TRANSFER COST. IT WILL BE PROPER IF ARTICLE 7 IS REPRODUCED IN ITS ENTIRETY TO KNOW THAT WHAT TYPE OF PAYMENTS WERE TO BE RECEIVED BY THE ASSESSEE UNDER TH E AGREEMENT:- ARTICLE 7. PAYMENT ARTICLE 7. PAYMENT ARTICLE 7. PAYMENT ARTICLE 7. PAYMENT 7.1 IN CONSIDERATION OF THE TECHNICAL INFORMATION AND THE INDUSTRIAL PROPERTY RIGHTS FURNISHED BY LICENSOR TO LICENSEE HEREUNDER, LICENSEE SHALL PAY TO LICENSOR TH E FOLLOWING AMOUNTS IN THE MANNER SPECIFIED BELOW. ITA NO.288/DEL/2011 13 A) ONE TIME TECHNOLOGY TRANSFER COSTS OF US $ 1 MILLI ON. THE PAYMENT OF US $ 1 MILLION IS PAYMENT FOR THE LICEN CE TO BE UTILIZED BY THE LICENSEE IN TERMS OF THIS AGREEMEN T. LICENSEE SHALL THEREFORE PAY LICENSOR US $ 500 000 W ITHIN 6 MONTHS FROM THE DATE OF THIS AGREEMENT AND ANOTHER US $ 500 000 SIX MONTHS LATER TO COVER THE LICENCE FEE SUBJECT TO APPROVAL BY THE RESERVE BANK OF ZIMBABWE. THE PAYMENT SHALL BE MADE THROUGH A CONFIRMED IRREVOCABLE LETTER OF CREDIT FROM A FIRST CLASS BANK IN INDIA. THE LETTER OF CREDIT SHOULD BE RAISED WITHIN 30 (THIRTY) DAYS OF RECEIPT OF RESERVE BANK OF ZIMBABWE APPROVAL . B) ROYALTY IT IS AGREED THAT THE LICENSEE SHALL PAY A ROYALTY FEE O F 5% OF THE TOTAL EX-WORKS SALES OF THE LICENSED PRODUCTS. THE ROYALTY PAYABLE SHALL BE CALCULATED AND PAID ON TH E TOTAL OUTPUT ON AN ANNUAL BASIS WITH AN ADVANCE PAYMENT OF US $ 25 000 PAID PER MONTH TO COVER COSTS INCURRED BY THE LICENSOR IN THE EXECUTION OF THE PROJECT. 7.2 RAW MATERIAL REQUIREMENTS TO KICK START THE REPAIR AND MANUFACTURE OF TRANSFORMERS , IT IS ESTIMATED THAT RAW MATERIALS REQUIREMENTS SHALL BE APPROXIMATELY US $ 2 MILLION. LICENSEE HAS AGREED TO PROVIDE SUFFICIENT FUNDS FROM TIME TO TIME TO ENSURE UNINTERRUPTED PRODUCTION ACTIVITIES AS PER REQUIREMENTS FOR THE IMPLEMENTATION OF THE ENVISAGED PRODUCTION CAPACITIES. PMEL WILL ORGANIZE MATERIALS FROM INDIA AT COMPETITIVE PRIES AND WILL ENSURE THAT THE DESIRED QUALI TY LEVELS ARE ACHIEVED. LICENSEE SHALL ESTABLISH THE LE TTER OF CREDIT THROUGH A FIRST CLASS BANK FOR THE INITIAL VALUE OF US $ 1.8 MILLION. 7.3 THE LICENSEE SHALL GENERATE THE FULL FOREIGN CUR RENCY REQUIREMENTS FOR THE PAYMENT OF THE LICENSING FEES, ROYALTY FEES AND FOR THE IMPORTED RAW MATERIALS. 7.4 IT IS UNDERSTOOD THAT ALL EXPENSES SUCH AS CUSTOM DU TIES, VAT, HANDLING, LOCAL TRANSPORT AND ANY TAXES PAYABLE I N ZIMBABWE SHALL BE BORNE BY THE LICENSEE. 16. THE PERUSAL OF THE AFOREMENTIONED ARTICLE 7 WILL REVEAL THAT AGAINST ONE TIME TECHNOLOGY TRANSFER COST, THE ASSESSEE WA S TO RECEIVE ITA NO.288/DEL/2011 14 US $ 1 MILLION WHICH IS EQUIVALENT TO A SUM OF ` 4,64 ,25,000/-. FURTHER TO THAT THE ASSESSEE WAS TO RECEIVE A ROYALTY FEE OF 5% OF THE TOTAL EX WORKS SALE OF THE LICENSED PRODUCTS. TO SEE THE VOLUME OF SUCH RECEIPTS, IT CAN BE SEEN THAT MINIMUM PAYMENT OF US $ 25,000/- PER MONTH WAS TO BE PAID BY THE LICENSEE TO THE ASSESSEE TO C OVER THE COST INCURRED BY THE LICENSOR IN THE EXECUTION OF THE PRO JECT. 17. APART FROM THE ABOVE, THE LICENSEE WAS TO PAY THE COST RELATING TO RAW MATERIAL FOR WHICH THE AMOUNT WAS APPROXIMATE LY FIXED AT US $ 2 MILLION AND THE LICENSEE WAS REQUIRED TO ESTABLISH TH E LETTER OF CREDIT THROUGH A FIRST CLASS BANK FOR INITIAL VALUE OF US $ 1 .8 MILLION. 18. IF THE COST RELATING TO RAW MATERIAL IS EXCLUDED, THEN, THE ASSESSEE, APART FROM RECEIVING THE ONE TIME TECHNOLOGY TRANSFER COST OF US $ 1 MILLION, WAS TO RECEIVE 5% ROYALTY OF THE TOT AL EX WORKS SALE OF LICENSED PRODUCTS WHICH WAS ESTIMATED TO BE NOT LESS THAN US $ 25,000/- PER MONTH MEANING THEREBY US $ 0.3 MILLION PER YEAR. THUS, WHAT THE ASSESSEE WAS TO RECEIVE AS A MAJOR REVENUE WAS TH E ROYALTY IN RESPECT OF TOTAL EX WORKS SALES OF THE LICENSED PRODU CTS. 19. WE CAN TAKE THE BRIEF OVERVIEW OF THE ENTIRE AG REEMENT. THE AGREEMENT IS BETWEEN THE ASSESSEE BEING LICENSOR AND ZESA ENTERPRISES PVT. LTD. BEING THE LICENSEE. THE ASSESSEE HA VING THE EXPERTISE IN THE MANUFACTURE OF POWER AND DISTRIBUTIO N TRANSFORMERS TO THE ELECTRICITY POWER SECTOR AND RELATED ACTIVITY HA S ENTERED INTO AN AGREEMENT WITH THE LICENSEE WHO DESIRES TO BE AUTHORIZ ED AND OBTAINED A LICENCE TO MANUFACTURE, REPAIR, USE AND SA LE THE LICENSED PRODUCTS UTILIZING THE TECHNICAL INFORMATION FURNISH ED BY THE LICENSOR WHO HAS GIVEN THE AUTHORITY AND HAS GRANTED THE LICEN CE. THUS, ACCORDING TO THE RECITAL, THE LICENSEE WANTED TO BE AUTHORIZED TO ITA NO.288/DEL/2011 15 MANUFACTURE, REPAIR, USE AND SELL LICENSED PRODUCTS UTI LIZING TECHNICAL INFORMATION FURNISHED BY THE LICENSOR. IT CAN BE DIV IDED INTO TWO PARTS; FIRST TO GIVE THE LICENCE TO MANUFACTURE AND DEAL IN THE LICENSED PRODUCTS AND THEN TO MANUFACTURE, REPAIR AND USE AND SELL THE LICENSED PRODUCTS. THE LICENSED PRODUCTS ACCORDING TO DEFINITIO N SECTION MEANS POWER AND DISTRIBUTION TRANSFORMERS. THE DEFINITION S ARE CONTAINED IN ARTICLE 1 WHICH DEFINES LICENSED PRODUCTS, TECHNICA L INFORMATION, INDUSTRIAL PROPERTY RIGHTS, EFFECTIVE DATE, AND CONTRACT TERRITORY. THE TECHNICAL INFORMATION HAS BEEN DEFINED AS OF TECH NICAL KNOWLEDGE, KNOW HOW, STANDARD CALCULATIONS, DATA AND INFORMATION DEVELOPMENT OR OTHERWISE GENERALLY USED BY THE LICENSOR PERTAINING TO MANUFACTURE, REPAIR, USE AND SALE OF THE LICENSED PRODUCTS. INDUSTR IAL PROPERTY RIGHTS MEAN ANY OR ALL RIGHTS UNDER PATENTS, UTILITY, MODELS AND APPLICATION THEREOF, WHETHER PRESENTLY OWNED OR HERE AFTER ACQUIRED BY THE LICENSOR AND/OR WHICH LICENSOR HAS OR MAY HAVE THE RIGHT TO CONTROL OR GRANT LICENSE THEREOF DURING THE TERM OF THE AGRE EMENT AND WHICH ARE APPLICABLE TO OR MAY BE USED IN THE MANUFACTURE AND REPAIR OF THE PRODUCTS. THE EFFECTIVE DATE MEANS 1 ST JANUARY, 2006. 20. VIDE ARTICLE 2, THE LICENSOR HAS GRANTED LICENSE T O THE LICENSEE OF EXCLUSIVE RIGHT TO MANUFACTURE, REPAIR, USE AND SELL T HE LICENSED PRODUCTS USING THE INDUSTRIAL PROPERTY RIGHTS AND TECHN ICAL INFORMATION FURNISHED BY THE LICENSOR IN THE CONTRACT TERRITORY. AS PER ARTICLE 3, UNDER THE HEAD SALES AND INFORMATION UPON WRITTEN R EQUEST OF LICENSEE, THE LICENSOR IS REQUIRED TO FURNISH TO THE LI CENSEE WITH THE NECESSARY DRAWINGS, TECHNICAL DATA AND PRICE INFORMATI ON ON A BREAK DOWN BASIS IN ORDER TO ENABLE THE LICENSEE TO PREPARE QUOTATIONS, IN SO FAR AS SUCH INFORMATION IS CURRENTLY AVAILABLE FROM LI CENSOR. ARTICLE 4 STIPULATES TECHNICAL ASSISTANCE AND SERVICES ACCORDING T O WHICH THE LICENSOR WAS REQUIRED TO SUPPLY THE FOLLOWING DATA IN ORDER TO ENABLE ITA NO.288/DEL/2011 16 LICENSEE MANUFACTURE AND REPAIR TO THE BEST ADVANTAGE THE LICENSED PRODUCTS WITHOUT DELAY:- A) DRAWINGS FOR DESIGNS, REPAIR AND ASSEMBLING B) SPECIFICATIONS C) MATERIALS LIST D) GENERAL CALCULATION SHEET IN RESPECT OF BASIC ENGIN EERING PARAMETERS E) DATA FOR INSPECTIONS AND TRIAL OPERATIONS. F) FABRICATION AND ASSEMBLY PROCEDURES, G) OPERATING AND INSTRUCTION MANUALS H) ANY OTHER NECESSARY TECHNICAL DATA AND KNOW HOW GEN ERALLY USED BY LICENSOR. 21. ARTICLE 4.2 STIPULATES THE CONDITION REGARDING PE RSONNEL OF THE LICENSEE TO BE TRAINED BY THE LICENSOR FOR WHICH ALL THE EXPENSES WERE TO BE BORNE BY THE LICENSEE SUBJECT TO THE CONDITIONS MENTIONED THEREIN. THE LICENSOR WAS ALSO REQUIRED TO CARRY OUT THE STUDIES OF THE LICENSEES REPAIR AND MANUFACTURING FACILITY AND TO ASSI ST IT IN PREPARATION OF SPECIFICATIONS TO PROCURE PLANT AND MA CHINERY AND TO BE PART OF NEGOTIATION, INSPECTION AND SUPERVISION OF THE INSTALLATION WORK. THE ARTICLE 5 DEALS WITH IMPROVEMENTS WHICH STIPULAT ES THAT IF AT ANY TIME DURING THE CURRENCY OF THE AGREEMENT, IT IS DISC OVERED OR COMES TO THE POSSESSION OF ANY IMPROVEMENTS OR FURTHER INVENTIONS RELATING TO LICENSED PRODUCTS OR IN CONNECTION WITH THE DESIGN, MA NUFACTURE, REPAIR AND USE AND SALE OF THE SAME; THE PARTY SHALL FURNISH TH E OTHER PARTY WITH THE INFORMATION ON SUCH IMPROVEMENT OR FURTHER INVENTION WITHOUT ANY DELAY AND FREE OF CHARGE AND, THUS, IT IS NOT ONL Y THE OBLIGATION OF THE LICENSOR, BUT, IT IS A MUTUAL OBLIGATION TO BE DI SCHARGED BY BOTH THE PARTIES. ITA NO.288/DEL/2011 17 22. ARTICLE 6 PROVIDE THAT FINANCIAL ARRANGEMENT WHICH IS REGARDING SOFT LOAN TO BE GIVEN BY THE LICENSOR TO THE LICENSEE OF US $ 2 MILLION AND IT ALSO STIPULATES THAT THE LICENSOR SHALL HAVE NO F INANCIAL OBLIGATION WITH REGARD TO OPERATING EXPENSES OF THEIR LICENSEE. THE ARTICLE 7 HAS ALREADY BEEN REPRODUCED IN THE ABOVE PART OF THIS OR DER. ARTICLE 8 IS REGARDING SUPPLY OF COMPONENTS, PARTS AND RAW MATERIA L WHICH ARE SUPPLIED BY THE LICENSOR AT THE WRITTEN REQUEST OF THE LICENSEE FOR WHICH THE LICENSEE IS REQUIRED TO OPEN IRREVOCABLE LETTER O F CREDIT FROM PRIME BANK TO BUY COMPONENTS, PARTS AND RAW MATERIALS FROM SU PPLIERS RECOMMENDED BY THE LICENSOR. ARTICLE 9 DESCRIBE ABOU T THE RECORDS, AUDITING AND REPORTS. ARTICLE 10 SPECIFY THE GUARANT EE ACCORDING TO WHICH LICENSOR IS RESPONSIBLE FOR DAMAGES AND ANY OTHER RELATED CLAIM BY THE THIRD PARTY ARISING FROM DEFECTIVE TECHNICAL INFORMATION AND PARTS FURNISHED BY THE LICENSOR TO THE LICENSEE. HOWEV ER, THE LICENSOR IS NOT RESPONSIBLE FOR CONSEQUENTIAL DAMAGES RESULTING FR OM FAULTY APPLICATION OF TECHNICAL INFORMATION BY THE LICENSEE . 23. ARTICLE 11 DEFINES DURATION AND TERMINATION WHIC H IS FOR THE PERIOD OF FIVE YEARS FROM THE EFFECTIVE DATE SUBJECT TO REVIEW, EXTENSION OR TERMINATION BY THE PARTIES. ARTICLE 11. 4 DESCRIBE THAT NOTWITHSTANDING TERMINATION OF THE AGREEMENT, THE PA RTIES HAVE TO PERFORM ALL OUTSTANDING OBLIGATIONS NOT AFFECTED BY T HE TERMINATION. 24. ARTICLE 12 DESCRIBE USE OF TRADE MARK AND BRAND NAME WHEREBY THE LICENSEE HAS BEEN GRANTED WITH THE LICENCE BY THE LICENSOR ON THE TERMS AND CONDITIONS CONTAINED IN THE AGREEMENT WITH CERTAIN CONDITIONS STIPULATED THEREIN. ARTICLE 12.4 STATES AS U NDER:- 12.4 THIS LICENSE TO USE THE LICENSED TRADEMARK IS P ROVIDED ON A ROYALTY FEE BASIS. ITA NO.288/DEL/2011 18 25. THE ARTICLE 12.5 STIPULATES THAT IF THE AGREEMENT IS TERMINATED, LICENSEE SHALL IMMEDIATELY CEASE USING THE LICENSED TRAD E MARK. ARTICLE 13 DEALS WITH PATENT INFRINGEMENT AND ARTICL E 14 DEALS WITH SECRECY WHICH STIPULATES THAT LICENSEE HAS AGREED THAT I T SHALL NOT, WITHOUT PRIOR WRITTEN CONSENT OF THE LICENSOR, SHALL, ASSIGN OR DIVULGE THE TECHNICAL INFORMATION DISCLOSED AND FURNISHED BY T HE LICENSOR IN ANY MANNER TO ANYONE EXCEPT THOSE OF ITS EMPLOYEES AND IT S SUB- CONTRACTORS WHO WILL BE USING SUCH INFORMATION IN THE REPAIR, MANUFACTURE AND ERECTION OF THE LICENSED PRODUCTS. ARTICLE 15 TO 23 CONTAINS GENERAL CONDITIONS WHICH ARE NOT RELEVANT FO R THE PURPOSE OF DETERMINING THE ISSUE RAISED IN THE PRESENT APPEAL. 26. IF THE ENTIRE AGREEMENT IS TO BE SEEN IN THE TERM S OF OBLIGATIONS OF THE LICENSOR VIS-A-VIS LICENSEE, IT CAN BE OBSERVED THAT TWO TYPES OF REVENUE COMES TO THE LICENSOR; ONE IS REGARDING ONE TI ME TECHNOLOGY TRANSFER COST AND THE OTHER IS ROYALTY EARNED DURING T HE SUBSISTENCE OF THE AGREEMENT. IT HAS ALREADY BEEN OBSERVED THAT ROY ALTY CONSTITUTE MAJOR PART OF REVENUE TO BE EARNED BY THE ASSESSEE FROM LICENSEE. AFTER GIVING THE LICENSEE A RIGHT TO USE THE LICENSED PRODUCTS AND MANUFACTURING, SALES AND REPAIRS THEREOF, THE OBLIGATI ON OF THE LICENSOR IS TO ASSIST THE LICENSEE IN ALL MANNER TO ENABLE THE LI CENSEE TO CARRY ON ITS ACTIVITY EFFICIENTLY, SMOOTHLY AND IN A MANNER TH AT IT CAN GENERATE SUBSTANTIAL REVENUE. TO EARN SUBSTANTIAL REVENUE BY TH E LICENSEE IS THE BUSINESS INTEREST OF THE LICENSOR AS IT IS TO EARN 5% OF T HE TOTAL EX WORK SALE OF THE LICENSED PRODUCTS. THE SUBSTANTIAL ASSISTANCE REQUIRED TO BE PROVIDED BY THE LICENSOR TO THE LICENSEE DURING TH E SUBSISTENCE OF THE AGREEMENT IS FOR THE PURPOSE OF EARNING THE ROYAL TY. IT IS IMPORTANT TO NOTE THAT FOR THAT PURPOSE NO COST HAS TO BE INCURR ED BY THE LICENSOR AS THE COST INCURRED BY IT HAS TO BE REIMBURSED OR TO B E PAID BY THE LICENSEE ONLY. HERE, THE ARGUMENT OF LEARNED AR IS T HAT THE LICENSOR HAS TO SUPPLY ALL THE DEVELOPMENTS AND IMPROVEMENTS IN THE LICENSED ITA NO.288/DEL/2011 19 PRODUCTS TO THE LICENSEE, THEREFORE, THE LICENSOR IS UN DER AN OBLIGATION TO PROVIDE THE ASSISTANCE TO THE LICENSEE WITH REGARD T O TECHNOLOGY TRANSFER, HENCE, THE OBLIGATION OF THE ASSESSEE IS EXTEND ED TO FIVE YEARS ON THAT ACCOUNT ALSO, THEREFORE, THE ASSESSEE IS RIG HT IN TAKING 1/5 OF THE TOTAL REVENUE AS INCOME FOR THE YEAR UNDE R CONSIDERATION. WE FIND NO FORCE IN SUCH CONTENTION OF LEARNED AR AS THE IMPROVEMENT AND NEW INVENTION, IF ANY, IS THE MUTUAL LIABILITY O F LICENSEE AS WELL AS LICENSOR. IT HAS ALREADY BEEN OBSERVED THAT IMPROVEMEN T AND NEW INVENTION IS GOVERNED BY ARTICLE 5 AND IT IS NOT ONLY THE OBLIGATION OF THE LICENSOR, BUT, IT IS MUTUAL OBLIGATION. MOREOVER , IF NEW INVENTION IS THERE AND IMPROVEMENT IS THERE, THAT WILL HELP IN I NCREASING THE SALES WHICH WILL ULTIMATELY BE COMING TO THE ASSESSEE IN THE FORM OF 5% ROYALTY. AFTER CAREFUL EXAMINATION OF THE VARIOUS TERMS OF THE AGREEMENT, WE ARE OF THE OPINION THAT THE RECEIPT O F THE ASSESSEE OF US $ 1 MILLION HAS NOTHING TO DO WITH THE ENTIRE PERIOD OF THE AGREEMENT. IT IS ONLY A ONE TIME TECHNOLOGY TRANSFER COST WHICH I S TO BE RECEIVED BY THE ASSESSEE AND IS TO BE ASSESSED ONLY IN THE YEAR UNDER CONSIDERATION. THEREFORE, ON MERITS ALSO THE ASSESSEE HAS NO CASE FOR COMING TO THE CONCLUSION THAT THE ENTIRE RECEIPTS OF US $ 1 MILLION HAS TO BE DIVIDED INTO FIVE PARTS. THE CASE LAW RELIED U PON BY LEARNED AR ALSO DO NOT SUPPORT THE CASE OF THE ASSESSEE. COMING TO T HE DECISION IN THE CASE OF CIT VS. DINESH KUMAR GOYAL (SUPRA), THE ASSESSEE WAS RUNNING AN INSTITUTION FOR COACHING STUDENTS AND THE T UITION FEE WAS RECEIVED IN ADVANCE AND IT WAS HELD THAT IF THE ENTI RE RECEIPTS ARE TREATED AS INCOME, IT WOULD LEAD TO AN ANOMALOUS SITUA TION INASMUCH AS THE EXPENSES WHICH WILL BE INCURRED IN THE NEXT YE AR, ARE TO BE DEDUCTED TO ARRIVE AT THE NET INCOME. HERE, THE ASSE SSEE HAS NOT BEEN ABLE TO SHOW THAT IT HAS TO INCUR OR IT HAS INCURRED A NY OF THE EXPENDITURES RELATING TO THE RECEIPT OF US $ 1 MILLI ON WHICH HAS BEEN RECEIVED BY THE ASSESSEE IN THE SHAPE OF ONE TIME TECHNO LOGY TRANSFER COST. ITA NO.288/DEL/2011 20 27. IN THE CASE OF SHRIRAM REFRIGERATION INDUSTRIES LT D. (SUPRA), THE ASSESSEE WAS TO RECEIVE US $ 50,000/- IN THREE INSTALLMEN TS STARTING FROM THE SIGNING OF THE AGREEMENT TILL 24 TH MONTHS OF SIGNING OF THE AGREEMENT AND IT WAS HELD THAT THE ENTIRE RECEIPTS WE RE TAXABLE IN THE YEAR OF AGREEMENT. IN THE CASE OF E.D. SASSOON & CO. LTD. VS. CIT (SUPRA), IT WAS HELD THAT THE BASIC CONCEPT IS THAT THE ASSESSEE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. ACCOR DING TO THAT PRINCIPLE, IN THE PRESENT CASE, AS THE ASSESSEE HAS ACQUIRE D THE RIGHT TO RECEIVE THE INCOME, IT IS TO BE ASSESSED IN THE YEAR IN WHICH IT HAS ACQUIRED THE RIGHT TO RECEIVE THE INCOME. THERE IS NO PROVISION IN THE AGREEMENT ACCORDING TO WHICH IT CAN BE SAID THAT THE RIGHT OF THE ASSESSEE TO RECEIVE THE INCOME WAS RESTRICTED IN ANY MANN ER AND WAS RELATED TO THE YEAR OTHER THAN THE YEAR IN WHICH IT WAS TO BE RECEIVED BY THE ASSESSEE. 28. IN THE CASE OF CIT VS. HINDUSTAN COMPUTERS LTD. (SUP RA), THE FACTS WERE THAT THE ASSESSEE WAS RECEIVING AMOUNTS FOR ANNUAL M AINTENANCE CHARGES AND IT WAS HELD THAT MERELY BECAUSE THE ENTIRE AMC CHARGES WERE TRANSFERRED TO P&L ACCOUNT WILL NOT CHANGE THE SYSTEM OF ACCOUNTING AND, ON THE BASIS OF MERCANTILE SYSTEM OF AC COUNTING THE AMOUNT COULD NOT BE TAXED. 29. IN THE CASE OF CALCUTTA COMPANY LTD. VS. CIT (SUPR A), IT WAS HELD THAT THE EXPRESSION PROFIT OR GAINS HAS TO BE UNDERSTO OD IN ITS COMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SU CH PROFITS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING RECEIPT IS DEDUCTED THEREFROM AND IT WAS HELD THAT WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE. HERE, THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT WHAT ITA NO.288/DEL/2011 21 EXPENDITURE IS ACTUALLY INCURRED OR WHAT IS THE LIABI LITY IN RESPECT THEREOF AS ACCRUED WHICH HAS TO BE DISCHARGED BY THE A SSESSEE AT A FUTURE DATE. THE TERMS OF THE AGREEMENT HAVE ALREAD Y BEEN DESCRIBED IN DETAIL IN THE EARLIER PART OF THIS ORDER AND IT I S NOT COMING OUT THEREFROM THAT THE ASSESSEE WAS TO INCUR ANY EXPENDITURE WITH REGARD TO THE IMPUGNED RECEIPT OR THERE WAS ANY LIABILITY W HICH WAS TO BE DISCHARGED AT SOME FUTURE DATE. 30. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPI NION THAT LEARNED CIT HAS RIGHTLY INVOKED THE POWER U/S 263 WHE REBY IT HAS BEEN HELD THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICE R WAS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. HE IS ALSO RIGHT IN HOLDING THAT THE ENTIRE AMOUNT OF ` 4, 64,25,000/- WAS REQUIRED TO BE BROUGHT TO TAX INSTEAD OF ` 92,85,000 /- IN ASSESSMENT YEAR 2006-07 AND HE HAS RIGHTLY DIRECTED THE ASSESSING O FFICER TO MODIFY THE ORDER AND GIVE CONSEQUENTIAL RELIEF TO TH E ASSESSEE WITH RESPECT TO ASSESSMENT YEARS FROM 2007-08 TO 2010-11. THE REFORE, WE DECLINE TO INTERFERE IN SUCH ORDER PASSED BY LEARNED C IT AND HIS ORDER IS UPHELD. 31. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DI SMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 21.04.20 11. SD/- SD/- [K.G. BANSAL] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 21.4.2011. DK ITA NO.288/DEL/2011 22 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR, ITAT, DELHI BENCHES ITA NO.288/DEL/2011 23 DATE OF DICTATION 13.04.2011 DATE OF PRESENTATION OF THE DRAFT ORDER TO THE MEMBER 18.04.2011 DATE OF RETURN FROM THE BENCH AFTER PRONOUNCEMENT &SIGNING DATE OF DISPATCH OF THE ORDER TO THE BENCH