SANDVIK ASIA LTD., Pune V. JTCIT SPECIAL RG. 5, Pune

ITA 525/PUN/2003

• Counselvise Citation: 52524514 RSA 2003
• Duration Of Justice: 11 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-01-2015
• Assessment Year: 1997-1998
• Appeal Filed On: 09-05-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Assessee Lawyers: JEHANGIR D MISTRI
• Keywords: Capital asset; Business income; Depreciation; Opportunity of being heard; Wrong claim; Bad and doubtful debts; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 143(3); 80HHC; 234B; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.525/PN/2003 ASSESSMENT YEAR: 1997-98 SANDVIK ASIA LIMITED MUMBAI-PUNE ROAD, DAPODI, PUNE 411012 . APPELLANT VS. THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 5, PUNE . RESPONDENT APPELLANT BY : SHRI JEHANGIR D MISTRI RESPONDENT BY : SMT. M.S. VERMA, CIT DATE OF HEARING : 14-01-2015 DATE OF PRONOUNCEMENT : 10-04-2015 ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-III, PUNE, DATED 28.03.2003 RELATING TO ASSESSMENT YEAR 1997-9 8 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. DEDUCTION UNDER SECTION 37(1) OF THE INCOME -TAX ACT, 1961 ('THE ACT') IN RESPECT OF LUMP SUM KNOW HOW FEES OF RS.8, 82,46,665/- 1.1 THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-I II, PUNE ['THE CIT(A)] ERRED IN LAW AND ON FACTS IN DISALLOWING SANDVIK AS IA LTD.'S ('THE APPELLANT'') CLAIM FOR DEDUCTION OF LUMP SUM KNOW HOW FEES OF RS.8,82,46,665/- PAID UNDER THE COLLABORATION AGREE MENT ENTERED INTO WITH SANDVIK AB AND AB, SANDVIK COROMANT FOR ACCESS TO U SE TECHNICAL KNOWHOW AND PATENT RIGHTS FOR THE PURPOSE OF ITS BU SINESS. THE CIT(A) ERRED IN HOLDING THAT THE LUMP SUM KNOWHOW FEES PAI D BY THE APPELLANT WERE IN THE NATURE OF A CAPITAL ASSET AND HENCE, ENTITLED TO DEDUCTION OF RS.47,80,002 (BEING 1/6 TH OF THE AMOUNT PAID DURING THE YEAR UNDER CONSIDERATION UNDER SECTION 3 5AB OF THE ACT. THE CIT(A) OUGHT TO HAVE HELD THAT A DEDUCTION OF RS.8, 82,46,665/- PAID FOR SUPPLY OF TECHNICAL KNOW-HOW BE ALLOWED UNDER SECTI ON 37(1) OF THE ACT, ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 2 1.2 THE CIT(A) OUGHT TO HAVE HELD THAT PROVISIONS OF S ECTION 40(A)(I) OF THE ACT CANNOT BE INVOKED IN THE APPELLANT'S CASE A S THE APPROPRIATE TAXES WERE DEDUCTED AND PAID UNDER CHAPTER XVIIB OF THE A CT. 1.3 WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) OUGHT T O HAVE, IN ANY CASE, HELD THAT EVEN UNDER SECTION 35 AB OF THE ACT THE APPELLANT IS ENTITLED TO DEDUCTION OF 1/6 TH OF THE ENTIRE AMOUNT PAID AND, THEREFORE, OUGHT NOT TO HAVE RESTRICTED THE DEDUCTION TO 1/6 TH OF THE AMOUNT PAID DURING THE YEAR UNDER CONSIDERATION. 1.4 IN VIEW OF THE ABOVE, THE APPELLANT PRAYS AS FOLLO WS: DEDUCTION OF THE ENTIRE AMOUNT OF RS.8,82,46,665/ - BE ALLOWED UNDER SECTION 37(1) OF THE ACT, WITHOUT INVOKING TH E PROVISIONS OF SECTION 40(A)(I) OF THE ACT; WITHOUT PREJUDICE TO THE ABOVE, DEDUCTION OF RS. 2,98,70,014/- BEING AMOUNT PAID DURING THE FINANCIAL YEAR 1996-97 (COMPRISING OF TECHNICAL KNOWHOW FEES OF RS.2,39,20,012/- PLUS TAX THEREON OF RS.47,60,002/- AND R&D CESS OF RS.11,90,000), BE AL LOWED AS DEDUCTION UNDER SECTION 37(1) EVEN IF PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE INVOKED: AND WITHOUT PREJUDICE TO THE ABOVE, DEDUCTION OF RS. 15,58,0611/- BEING 1/6 TH OF THE TOTAL AMOUNT PAID OF RS.9,34,83,666/- (COMPRISING OF TECHNICAL KNOWHOW FEES AND TAX THERE ON OF RS.8,82,26,665/- PLUS RS 52,57,001/- ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IN SUBSEQUENT YEARS), BE ALLOWED UNDER SECTION 35AB OF THE ACT, WITHOUT INVOKING THE PROVISIONS OF SECT ION 40(A)(I) OF THE ACT, WITHOUT PREJUDICE TO THE ABOVE, DEDUCTION OF RS .49,78,336/- BEING 1/6 TH OF RS.2,98,70,014/- I.E., AMOUNT ACTUALLY PAID DUR ING THE YEAR UNDER CONSIDERATION, BE ALLOWED UNDER SECT ION 35AB OF THE ACT, EVEN IF PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE INVOKED. 2. COMPUTATION OF RELIEF UNDER SECTION 80HHC 2.1. THE CIT(A) ERRED IN REJECTING THE APPELLANT'S CLAIM THAT INTEREST OF RS.81,90,000/- (COMPRISING OF INTEREST ON INTER-COR PORATE DEPOSITS OF RS.71,93,000/- BANK INTEREST OF RS.2,54,000/- NSC I NTEREST OF RS.35,000/- AND INTEREST RECEIVED ON INCOME-TAX REF UNDS OF RS.7,08,000/-) SHOULD BE CONSIDERED AS 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' FOR THE PURPOSES OF SECTION 80HHC. THE APPELLANT PRAYS THAT THE AFORESAID INTEREST BE CONSIDERED AS 'PROFITS OF BUSINESS' WHILE COMPUTING DEDUCTION UND ER SECTION 80HHC OF THE ACT. 2.2. THE CIT(A) ERRED IN REJECTING THE APPELLANT'S CLAIM THAT NO ADJUSTMENT ON ACCOUNT OF TRAINING COURSE FEES OF RS .5,66,000/- SHOULD BE MADE UNDER EXPLANATION (BAA) TO SECTION 8 0HHC OF THE ACT WHILE COMPUTING 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. THE APPELLANT PRAYS THAT NO SUCH ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF THE TRAINING COURSE FEES. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 3 3. ADDITION OF INTEREST INCOME OF RS.7,43,523/- PAI D ON INCOME-TAX THE CIT(A) ERRED IN HOLDING THAT GROSS INTEREST OF RS.10,82,787/- PAID ON INCOME-TAX BY THE APPELLANT SHOULD BE DISAL LOWED INSTEAD OF THE NET AMOUNT OF RS.3,39,264 DISALLOWED BY THE APPELLANT (AFTER CONSIDERING THE INTEREST OF RS.7,43,523/- RECEIVED BY THE APPELLANT ON INCOME-TAX REFUNDS GRANTED BY THE INCOME-TAX DEP ARTMENT). THE CIT(A) OUGHT TO HAVE APPRECIATED THAT IN VIEW OF TH E HONOURABLE ITAT'S ORDER IN THE APPELLANT'S OWN CASE FOR ASSESS MENT YEAR 1996-97, ONLY THE NET INTEREST OF RS 3,39,264 SHOUL D HAVE BEEN DISALLOWED. THE APPELLANT PRAYS THAT THE ABOVE ADDITION OF RS 7 ,43,523 IN RESPECT OF INTEREST BE DELETED. 4. DEPRECIATION ON POLLUTION CONTROL AND ENERGY SAV INGS DEVICE THE CIT(A) ERRED IN RESTRICTING THE DEPRECIATION ON CERTAIN POLLUTION CONTROL AND ENERGY SAVINGS DEVICE TO 50% INSTEAD OF 100%. THE CIT(A) OUGHT TO HAVE HELD THAT DEPRECIATION AT THE RATE OF 100% SHOULD BE ALLOWED ON THESE ASSETS. THE APPELLANT PRAYS THAT 100% OF THE DEPRECIATION B E GRANTED ON THE ABOVE ASSETS. 5. DEDUCTION UNDER SECTION 80M OF THE ACT THE CIT(A) ERRED IN REJECTING THE APPELLANT'S CLAIM THAT DIVIDEND OF RS.12,96,000/- RECEIVED ON MASTER SHARES OF UNIT TR UST OF INDIA (UTI) SHOULD BE CONSIDERED FOR PURPOSES OF COMPUTIN G DEDUCTION UNDER SECTION 80M OF THE ACT, THE APPELLANT PRAYS THAT DEDUCTION OF RS.12,96,000/ - BE ALLOWED UNDER SECTION 80M OF THE ACT IN RESPECT OF DIVIDEND RECEIVED ON MASTER SHARES OF UTI. 6. THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO G RANT ALL SUCH RELIEFS ARISING FROM THE PRECEDING GROUNDS AS ALSO RELIEFS CONSEQUENTIAL THERETO THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, BY DEL ETION, SUBSTITUTION, MODIFICATION OR OTHERWISE ALL OR ANY OF THE FOREGOI NG GROUNDS OF APPEAL EITHER BEFORE OR DURING THE HEARING OF THIS APPEAL. 3. THE ISSUE IN GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS AGAINST THE CLAIM OF DEDUCTION UNDER SECTION 37(1) OF THE ACT I N RESPECT OF LUMP SUM PAYMENT OF KNOW-HOW FEES OF RS.8,82,46,665/-. 4. THE BRIEF FACTS OF THE CASE ARE THAT, THE ASSESS EE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF TUNGSTEN C ARBIDE TOOLS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 4 35AB OF THE ACT IN THE COMPUTATION OF ITS INCOME AT RS.47,80,002/- BEING 1/6 TH OF RS.2,86,80,014/- FOR ACQUIRING TECHNICAL KNOW-HOW. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE LEARNED AUTHORIZED RE PRESENTATIVE FOR THE ASSESSEE CLAIMED THE ENTIRE EXPENDITURE TO BE ALLOW ED UNDER SECTION 37 OF THE ACT, AS PER LETTER DATED 01.02.2000. THE ASSESSING OFFICER OBSERVED THAT THE SAID CLAIM OF THE ASSESSEE COULD NOT BE ENTERTAINED AS ALLOWANCE OR DISALLOWANCE OF SUCH CLAIMS WERE GOVERNED BY PROVISIONS OF SECTI ON 35AB OF THE ACT AS THE ASSESSEE WOULD GET ENDURING BENEFIT FROM THE TECHNI CAL KNOW-HOW SO RECEIVED. THUS, THE CLAIM OF THE ASSESSEE FOR ALLOWANCE OF EN TIRE EXPENDITURE OF RS.8,82,46,665/- WAS REJECTED BY THE ASSESSING OFFI CER. HOWEVER, THE CLAIM MADE BY THE ASSESSEE IN THE RETURN OF INCOME WAS AL LOWED IN THE HANDS OF THE ASSESSEE. 5. IN APPEAL, THE CIT(A) NOTED THAT AS PER COLLABOR ATION AGREEMENT DATED 18.01.1997 BETWEEN THE ASSESSEE AND AB SANDVIK CORO MANT, SWEDEN, SUM OF RS.8,82,46,665/- BEING EQUIVALENT OF LUMP SUM KNOW- HOW FEES OF US$ 2 MILLION REMITTED IN THE SUBJECT YEAR AND IN THE SUBSEQUENT YEARS, WAS CLAIMED AS DEDUCTION BY THE ASSESSEE. WITHOUT PREJUDICE TO TH E SAME, FURTHER DEDUCTION OF RS.2,86,80,014/- BEING THE ACTUAL PAYMENT MADE FOR THE USE OF KNOW-HOW UNDER THE SAID AGREEMENT WAS CLAIMED AS ALLOWABLE UNDER S ECTION 37(1) OF THE ACT. FURTHER PLEA OF THE ASSESSEE WITHOUT PREJUDICE TO T HE ABOVE, WAS THAT THE EXPENDITURE TO BE CONSIDERED FOR DEDUCTION UNDER SE CTION 35AB OF THE ACT SHOULD BE TAKEN AT 1/6 TH OF THE TOTAL EXPENDITURE OF RS.8.82 CRORES AND HEN CE, DEDUCTION OF RS.1,47,07,778/- TO THE EXTENT OF 1/6 TH OF SAME SHOULD BE ALLOWED. THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFORE THE CIT( A), WHICH ARE REFERRED TO IN PARA 3.2 AT PAGES 5 TO 8 OF THE APPELLATE ORDER. THE PLEA OF THE ASSESSEE WAS THAT THE AGREEMENT WAS ENTERED INTO FOR ACCESS TO U SE THE TECHNICAL KNOW-HOW AND PATENT RIGHTS OF SANDVIK FOR THE PURPOSE OF MAN UFACTURING, MARKETING AND SELLING CERTAIN CEMENTED CARBIDE PRODUCTS. THE SAI D AGREEMENT GRANTED THE ASSESSEE ONLY RIGHT TO USE TECHNICAL KNOW-HOW AND A S PER THE AGREEMENT, THE ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 5 CONSIDERATION FOR THE TECHNICAL KNOW-HOW AND TECHNI CAL ASSISTANCE WAS PAYABLE IN THREE INSTALLMENTS I.E. FIRST INSTALLMENT OF 1/3 RD ON RECEIPT OF GOVERNMENTS APPROVAL, NEXT INSTALLMENT OF 1/3 RD ON DELIVERY OF KNOW-HOW AND THE BALANCE INSTALLMENT OF 1/3 RD ON COMMENCEMENT OF PRODUCTION UNDER THE SAID KNOW- HOW, BUT NOT LATER THAN FOUR YEARS FROM THE DATE OF RECE IPT OF KNOW-HOW. FURTHER, ROYALTY OF 5% ON DOMESTIC SALES AND 8% OF THE EXPOR T SALES WAS TO BE PAID FOR A PERIOD OF SEVEN YEARS AS DEFINED IN THE AGREEMENT. ON OBTAINING THE RBIS APPROVAL, THE FIRST INSTALLMENT OF US$ 666667 BEING 1/3 RD OF THE TOTAL CONSIDERATION PAYABLE, WAS PAID IN THE FINANCIAL YEAR 1996-97. T HE ASSESSEE CLAIMED THAT SUBSTANTIAL PORTION OF THE KNOW-HOW WAS DELIVERED T O THE ASSESSEE BY AB SANDVIK COROMANT, SWEDEN IN THE SUBJECT YEAR AND TH E PRODUCTION WAS COMMENCED OF ITEMS IN RESPECT OF WHICH IT RECEIVED THE KNOW-HOW UNDER THE AGREEMENT IN THE SUBJECT YEAR. THE ASSESSEE HAD MA DE WRONG CLAIM OF DEDUCTION OF RS.47,80,002/- UNDER SECTION 35AB OF T HE ACT BEING 1/6 TH OF THE TOTAL AMOUNT PAID BY THE ASSESSEE IN THE SUBJECT YEAR. F URTHER CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) WAS THAT ENTIRE EXPENDIT URE IN RESPECT OF THE LUMP SUM CONSIDERATION OF US$ 2 MILLION SHOULD BE HELD T O BE REVENUE IN NATURE AND IT WAS ALSO CLARIFIED THAT THE TECHNICAL KNOW-HOW WAS OBTAINED WITH REGARD TO THE SAME BUSINESS OF CUTTING TOOLS. AS NO NEW BUSINESS COME INTO EXISTENCE NOR THERE WAS ANY NEW ITEM, THE TECHNICAL KNOW-HOW WAS TO BE RECEIVED OVER A PERIOD AND SUBSTANTIAL PART WAS RECEIVED DURING THE FINANCIAL YEAR 1996-97 ITSELF. 6. ANOTHER PLEA RAISED BY THE ASSESSEE WAS THAT IN JANUARY, 1997, THE ASSESSEE HAD COMMENCED PRODUCTION OF SPECIAL TOOL D ESIGN IN CAD / CAM AND INTIMATION ABOUT THE SAID PRODUCTION TO THE RBI WAS MADE, AS REQUIRED UNDER THE COLLABORATION AGREEMENT AND THE EXCHANGE CONTROL RE GULATIONS RULES. IT WAS FURTHER EXPLAINED THAT THE ENTIRE EXPENDITURE WAS N OT DEBITED TO THE PROFIT & LOSS ACCOUNT ENDING 31 ST MARCH, 1997 AS THE ACCOUNTING YEAR OF THE ASSESSEE WAS CALENDAR YEAR AND ONLY FOR TAX PURPOSE, IT HAD DRAW N THE ACCOUNTS FOR THE FINANCIAL YEAR. THE LEARNED AUTHORIZED REPRESENTAT IVE FOR THE ASSESSEE CLAIMED ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 6 THAT LIABILITY FOR PAYMENT OF THE TECHNICAL KNOW-HO W OF THE WHOLE OF LUMP SUM AMOUNT ACCRUED IN THIS ASSESSMENT YEAR SINCE IT HAD MADE THE PAYMENT OF FIRST INSTALLMENT AS PER THE AGREEMENT AND HAD STARTED RE CEIVING THE TECHNICAL KNOW- HOW AND HAD ALSO COMMENCED PRODUCTION OF CERTAIN IT EMS. 7. THE CIT(A) REFERRED TO CLAUSES IN THE AGREEMENT AND OBSERVED THAT THE ASSESSEE HAD THE RIGHT TO USE SANDVIK KNOW-HOW AND ADVISE PROVIDED BY SANDVIK FOR DESIGNING OR MANUFACTURING OF THE PRODU CTS IN INDIA. AS PER THE AGREEMENT, ASSESSEE WAS GRANTED RIGHT AND LICENSE T O USE THE SANDVIK KNOW- HOW FOR THE MANUFACTURING IN INDIA OF THE PRODUCTS AND FOR THE MARKETING AND SALE OF THE PRODUCTS IN INDIA AND ELSEWHERE. UNDER THE LICENSE, THE ASSESSEE DID NOT HAVE RIGHT TO ASSIGN IT OR SUB-LICENSE IT. THOUGH THE AGREEMENT WAS FOR A PERIOD OF 7 YEARS, BUT EVEN AFTER THE EXPIRATION OF THE AG REEMENT, THE ASSESSEE HAD THE RIGHT TO CONTINUE WITHOUT ANY TIME LIMIT TO USE THE KNOW-HOW MADE AVAILABLE UNDER THE AGREEMENT. THE SAID KNOW-HOW AFTER EXPIRY OF 7 YEARS AND THE TERMINATION OF THE AGREEMENT COULD BE USED BY THE ASSESSEE IN ALL THE COUNTRIES, FREE OF CHARGE AND ALSO TO USE IN INDIA, THE SAME FREE OF CHARGE. THE CIT(A) IN VIEW THEREOF, OBSERVED THAT THE BENEFITS ARISING TO THE ASSESSEE WERE OF ENDURING NATURE AND SUCH KNOW-HOW WERE IN THE NATURE OF CAPITAL ASSET, WHICH WERE TO REMAIN IN POSSESSION OF THE ASSESSEE EVEN AFTER EXPIRY OF 7 Y EARS. THE CIT(A) FURTHER OBSERVED THAT WITH THE SAID AGREEMENT THERE HAD COME INTO EXISTEN CE ASSET AND ADVANTAGE OF ENDURING NATURE. IT WAS NOT A CASE OF OBTAINING AND UPDATING MERE USE OF TECHNICAL KNOWHOW AND INFORMATION WHICH WAS AVAILABLE WITH THE APPELLANT. THOUGH THE APPELLANT DEALS WITH CUTTING TOOLS THE KNOWHOW WAS FOR A NEW TYPE OF CEMENTED CARBIDE PRODUCTS. THEREFORE, I AM OF THE CONSIDERED VIEW THAT THE LUMP CONSIDERATION FOR ACQUIRING KNOW HOW FOR THE USE FOR THE PURPOSE OF BUSINESS WAS COVERED BY PROVISIONS OF SECTION 35AB AND THE APPELLANT WAS ENTITLED FOR DEDUCTION OF 1/6 TH OF THE AMOUNT SO PAID. THE CIT(A) FURTHER HELD THAT THE LIABILITY FOR THE TECHNICAL KNOW-HOW FEES ACCRU ED TO THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1997-98 A ND HENCE, DEDUCTION UNDER ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 7 SECTION 35AB OF THE ACT WAS ALLOWABLE ON THE LUMP S UM AMOUNT PAYABLE BY THE ASSESSEE WITH REGARD TO TECHNICAL KNOW-HOW FEES EVE N THOUGH PART OF THE PAYMENTS HAVE BEEN MADE IN THE NEXT PREVIOUS YEAR, BUT SUBJECT TO PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THE CIT(A) FURTHER NO TED THAT AS PER THE DETAILS FURNISHED BY THE ASSESSEE, THE INCOME TAX ON THE SE COND INSTALLMENT AMOUNTING TO RS.53,04,003/- WAS PAID BY THE ASSESSEE ON 06.02 .1998 AND THE INCOME TAX ON THE THIRD INSTALLMENT OF RS.26,51,997/- WAS PAID ON 06.06.1998 AND IN VIEW OF THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT, ALL THE DEDUCTIONS TOWARDS ANY EXPENDITURE INCURRED ON SUM PAYABLE OUTSIDE INDIA I NCLUDING ROYALTY WAS ALLOWABLE AS ONLY IN THE YEAR IN WHICH TAX PAYABLE THEREON, WAS DEDUCTED OR PAID. THE CIT(A) THUS, OBSERVED THAT EVEN PRESUMING THAT THE ASSESSEE HAD MADE A PROPER CLAIM UNDER SECTION 35AB OF THE ACT, BUT THE SAID DEDUCTION WAS SUBJECT TO OVERRIDING PROVISIONS OF SECTION 40(A)(I) OF THE AC T AND ON THIS GROUND, THE CLAIM OF THE ASSESSEE IN RESPECT OF SECOND AND THIRD INSTALL MENTS CANNOT BE ALLOWED IN THIS ASSESSMENT YEAR. THUS, THE CIT(A) HELD THE CL AIM UNDER SECTION 35AB OF THE ACT WAS TO BE ALLOWED ONLY IN RESPECT OF 1/6 TH ON RS.2,86,80,014/-, WHICH WAS ORIGINALLY CLAIMED BY THE ASSESSEE AND ALLOWED BY T HE ASSESSING OFFICER. HENCE, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE WERE D ISMISSED. 8. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF CIT(A). 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE AFTER TAKING US THROUGH THE ORDERS OF ASSESSING OFFICER AND CIT(A) AND FACTUAL ASPECTS OF THE CASE, POINTED OUT THAT THE ACQUISITION OF TECHNICAL KNOW-HOW WAS THE RIGHT TO USE THE TECHNOLOGY AND NO RIGHT WAS ASSIGNED TO THE ASS ESSEE IN THE TECHNICAL KNOW- HOW. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN ALEMBIC CHEMICAL WORKS CO LTD VS CIT [1989] 177 ITR 377 (SC). IT WAS FURTHER POINTED OUT BY THE LEARNED AUTHORIZED REPRE SENTATIVE FOR THE ASSESSEE THAT THE CIT(A) VIDE OBSERVATIONS ON PAGE 11 HAD HE LD THAT THE LIABILITY FOR PAYMENT OF TECHNICAL KNOW-HOW ACCRUED IN ASSESSMENT YEAR 1997-98 ITSELF AND ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 8 35AB OF THE ACT HAD TO BE ALLOWED ON FULL AMOUNT. FURTHER, THE PLEA OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD WAS THAT NO APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE SA ID OBSERVATIONS OF THE CIT(A). OUR ATTENTION WAS THEN DRAWN TO THE PROVIS IONS OF SECTION 40(A)(I) OF THE ACT AND THE PROVISO THEREUNDER. IT WAS CONTENDED B Y THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE PROVISO ON LY APPLIES IF MAIN SECTION APPLIES. IT WAS FURTHER SUBMITTED BY THE LEARNED A UTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT NO AMOUNTS WERE DEBITED TO PROFIT & LOSS ACCOUNT, BUT ONLY LIABILITY WAS SHOWN IN THE BALANCE SHEET AND FURTHE R EXPLANATION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE YEAR ENDING FOR THE COMPANY WAS 31.12.1996 AND ONLY FOR INCOME TAX PURP OSE, THE BALANCE SHEET WAS DRAWN AS ON 31.03.1997. OUR ATTENTION WAS DRAW N TO THE PAGE 3 OF THE PAPER BOOK II, WHERE THE LIST OF EXPENSES WERE PR OVIDED AND PAGE 9 OF THE PAPER BOOK II, UNDER WHICH THE ADVANCES RECOVERAB LE IN CASH WERE SHOWN AT RS.16.14 CRORES. THIS WAS IN RESPECT OF BALANCE SH EET AS ON 31.03.1997. FURTHER, OUR ATTENTION WAS DRAWN TO THE PAGE 36 OF THE PAPER BOOK II, WHEREIN THE AMORTIZED AMOUNT ON TECHNICAL KNOW-HOW OF RS.1. 55 CRORES WAS DEBITED TO THE PROFIT & LOSS ACCOUNT. FURTHER, IN FINANCIAL Y EAR 1998-99, SIMILAR AMOUNT OF TECHNICAL KNOW-HOW WAS AMORTIZED AND CLAIMED AS DED UCTION IN THE PROFIT & LOSS ACCOUNT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE LIABILITY TO PAY RS.8.82 CRORES ACCRUED IN THE FIRST YEAR AND EVEN IF ASSUMING THE PROVISIONS OF SECTION 35AB OF THE ACT WERE TO BE APPLIED, THEN 1/6 TH ON THE WHOLE AMOUNT WAS TO BE ALLOWED AS DEDUCTION. THE NEXT PLEA RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE WAS THAT THE PROVISIONS OF SECTION 35AB OF THE ACT WERE NOT APPLICABLE AS T HE PAYMENTS MADE FOR ACQUISITION OF TECHNICAL KNOW-HOW WERE ON REVENUE A CCOUNT, AGAINST WHICH THE CIT(A) HAD OBSERVED THAT SINCE THE PAYMENT WAS FOR 7 YEARS, THERE WAS ENDURING BENEFIT. RELIANCE WAS PLACED ON SERIES OF DECISION S FOR THE ABOVE SAID PROPOSITION FOR CLAIM OF DEDUCTION UNDER SECTION 37 OF THE ACT, WHICH WE WILL REFER ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 9 TO IN THE PARAS HEREINAFTER. THE LEARNED AUTHORIZE D REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE RIGHT TO USE AND THE NON-TRANSFERABLE RIGHT TO USE THE BENEFIT WAS REVENUE IN NATURE AS HELD BY TH E HONBLE SUPREME COURT IN CIT VS. WAVIN INDIA LTD. (1999) 236 ITR 314 (SC). AS FAR AS THE APPLICATION OF SECTION 35AB OF THE ACT WAS HELD TO BE APPLICABLE O NLY TO CAPITAL PAYMENTS AND WHERE THE EXPENDITURE HAS BEEN INCURRED FOR UPDATE OF KNOW-HOW, THEN IT WAS REVENUE IN NATURE. THE LEARNED AUTHORIZED REPRESEN TATIVE FOR THE ASSESSEE THEREAFTER, REFERRED TO THE VARIOUS CLAUSES OF THE AGREEMENT AND POINTED OUT THAT THE SAID EXPENDITURE WAS ALLOWABLE IN WHOLE IN THE HANDS OF THE ASSESSEE. 10. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE REFERRING TO THE ORDER OF CIT(A) POINTED OUT THAT THE ASSESSEE HAD C OMMENCED THE PRODUCTION OF SPECIAL TOOLS DESIGNED IN CAD WHICH IS COMPUTER AID ED DESIGN AND CAM WHICH IS COMPUTED AIDED MANUFACTURING. IT WAS FURTHER POINT ED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE THAT PR OCESS WAS DIFFERENT AS THERE WAS SHIFTING OF TOOLS AIDED BY COMPUTERS AND THE NE W TECHNOLOGY ACQUIRED BY THE ASSESSEE WAS DIFFERENT. FURTHER OBJECTION OF THE L EARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS THAT THERE WAS P ASSAGE OF RIGHTS AND ALSO PASSAGE OF KNOW-HOW AS ONCE THE AGREEMENT HAD COME INTO OPERATION, THE TECHNOLOGY HAD BEEN PASSED ON NOT FOR A PERIOD OF 7 YEARS, BUT FOR EVER AND WHERE THERE WAS DEFINITE PASSAGE OF TECHNOLOGY, THE N SUCH BENEFIT ARISING TO THE ASSESSEE WAS OF ENDURING IN NATURE SINCE THERE WAS NO TIME LIMIT FIXED FOR THE USE OF TECHNOLOGY. HENCE, THE EXPENDITURE CLAIMED BY T HE ASSESSEE WAS CAPITAL EXPENDITURE AND THE PROVISIONS OF SECTION 35AB OF T HE ACT WERE TO BE APPLIED. OUR ATTENTION WAS DRAWN TO THE PREAMBLE OF THE AGRE EMENT ENTERED INTO BETWEEN THE PARTIES AND IT WAS POINTED OUT THAT THE ASSESSE E WAS SUPPLYING BACK TO THE PARENT COMPANY, THE TOOLS MANUFACTURED BY IT AND AS SESSEE ALSO SHOWED ITS WILLINGNESS TO SELL THE PRODUCTS BOTH IN THE DOMEST IC MARKET AND ALSO OUTSIDE INDIA. AS PER CLAUSE 2.4 OF AGREEMENT, IN ADDITION TO KNOW-HOW, EVERYTHING ELSE WAS PASSED TO THE ASSESSEE AS INDEPENDENT MANUFACTU RER. FURTHER, REFERENCE ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 10 WAS MADE TO THE TERMINATION CLAUSE AND ITS EFFECT I N CLAUSE 8 OF THE AGREEMENT. THE CLAIM OF LEARNED DEPARTMENTAL REPRESENTATIVE FO R THE REVENUE WAS THAT THERE WAS ACTUAL ACQUISITION OF KNOW-HOW AND NOT ON LY THE RIGHTS TO USE THE KNOW- HOW. RELIANCE WAS PLACED ON THE FOLLOWING RATIOS L AID DOWN BY VARIOUS COURTS: 1. APS-STAR INDUSTRIES LTD. VS. DCIT (2003) 86 ITD 182 (AHD) 2. DRILCOS (INDIA) (P.) LTD. VS. CIT (2012) 25 TAXM ANN.COM 228 (SC) 3. CIT VS. BRIGHT AUTOMOTIVES & PLASTICS LTD. (2004 ) 141 TAXMAN 582 (MP) 4. DCIT VS. SARABHAI PIRAMAL PHARMACEUTICALS LTD. ( 2006) 8 SOT 815 (MUM) 11. WITH REFERENCE TO THE RATIO LAID DOWN IN ALEMBI C CHEMICAL WORKS CO LTD VS CIT (SUPRA), THE SUBMISSIONS OF LEARNED DEPARTME NTAL REPRESENTATIVE FOR THE REVENUE WAS THAT THESE RELATED TO ERA OF PRE-SECTIO N 35AB OF THE ACT AND WAS NOT APPLICABLE. 12. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE IN REJOINDER EXPLAINED THAT THE CAD/CAM WAS A PROGRAMME TO DESIG N TOOLS AND THERE WAS NO ACQUISITION OF ANY ASSET AND ONCE THERE WAS NO ACQU ISITION OF ANY ASSET, THEN NO QUESTION OF ACQUISITION OF CAPITAL ASSET. THE LEAR NED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TEST OF ENDUR ING BENEFIT WAS SETTLED BY THE HONBLE SUPREME COURT IN EMPIRE JUTE CO LTD VS CIT [1980] 124 ITR 1 (SC). ANOTHER ISSUE RAISED BY THE LEARNED AUTHORIZED REPR ESENTATIVE FOR THE ASSESSEE WAS THAT ALL EXPORTS WERE NOT TO ITS PRINCIPAL AND OUT OF TOTAL SALES OF RS.150.45 CRORES, THE TOTAL FOB VALUE OF EXPORTS WAS ONLY RS. 4.60 CRORES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER EXPLAINED THAT THE PROVISIONS OF SECTION 35AB OF THE ACT WERE INTENDED FOR EXPEND ITURE WHICH WERE OTHERWISE CAPITAL IN NATURE AND IN CASE OF EVERY TRANSFER OF KNOW-HOW, THE SAME COULD NOT BE SAID TO HAVE BEEN PASSED ON. IN THE CASE OF ASS ESSEE, THE TRANSFER WAS FOR A PERIOD OF 7 YEARS AND THEREAFTER, SANDVIK WAS TO GI VE ANCILLARY HELP ONLY. IT WAS FURTHER CLARIFIED BY THE LEARNED AUTHORIZED REPRESE NTATIVE FOR THE ASSESSEE THAT WHETHER THE EXPENDITURE WAS CAPITAL OR REVENUE IN N ATURE, THE DECISIONS OF ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 11 TRIBUNAL IN SAROJ KUMAR PODDAR VS. JCIT (2001) 77 I TD 327, WELLMAN INCANDESCENT INDIA LTD. VS. DCIT (1995) 55 ITD 338, SAYAJI INDUSTRIES LTD. VS. DCIT (2000) 68 TTJ (AHD) 851 APPLY. FURTHER, THE D ISTINCTION WAS DRAWN ON THE RATIO REFERRED TO BY LEARNED DEPARTMENTAL REPRESENT ATIVE FOR THE REVENUE AND IT WAS POINTED OUT THAT FACTUALLY, THEY WERE AT VARIAN CE. ANOTHER PLEA RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT ASSUMING THAT THE TOTAL EXPENDITURE IS ALLOWABLE IN THE HANDS OF THE ASSESSEE, THEN NO DISALLOWANCE COULD BE MADE FOR SHORT DEDUCTION OF TAX. WHERE TH E WHOLE AMOUNT IS TO BE TREATED AS DEDUCTIBLE IN THE FIRST YEAR OF CLAIM IT SELF, THEN SHORT DEDUCTION OF TAX AT SOURCE WOULD NOT ATTRACT THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT, IN VIEW OF THE RATIO LAID DOWN BY PUNE BENCH OF THE TRIBUNAL I N ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 1994-95. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD EN TERED INTO AN AGREEMENT WITH AB SANDVIK COROMANT, SWEDEN (HEREINAFTER REFER RED TO AS SANDVIK) AND M/S. SANDVIK ASIA LTD. THE AGREEMENT DATED 18.01.1 997 IS PLACED AT PAGES 1 TO 27 OF THE PAPER BOOK I. AS PER PREAMBLE TO THE A GREEMENT, IT WAS ACKNOWLEDGED THAT SANDVIK WAS THE LEADING COMPANY I N THE WORLD IN CEMENTED CARBIDE AND HIGH SPEED STEEL CUTTING TOOLS AND ALSO CUTTING TOOLS SYSTEM FOR METAL WORKING. M/S. SANDVIK WAS IN POSSESSION OF EXTENSI VE KNOW-HOW REGARDING THE MANUFACTURE, MARKETING AND SALE OF SUCH PRODUCTS AS WELL AS OF PATENT AND TRADE MARKS RELATING THERETO. ON THE OTHER HAND, THE ASS ESSEE WAS SUPPLYING DIFFERENT TYPES OF PRODUCTS TO SANDVIK FOR SALE THROUGH ITS I NTERNATIONAL SALES ORGANIZATION. IT IS FURTHER PROVIDED IN THE SAID PREAMBLE WHEREAS, SAL, HAS EXPRESSED AN INTEREST IN OBTAINING LONG TERM ACCESS TO SANDVIK K NOW-HOW AS WELL AS PATENT RIGHTS FOR THE PURPOSE OF MANUFACTURING, MARKETING AND SELLING CERTAIN CEMENTED CARBIDE PRODUCTS, PRIMARILY IN INDIA BUT ALSO OUTSI DE INDIA. IN THE DEFINITION CLAUSE, PRODUCTS ARE DEFINED AS UNDER:- ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 12 1.6 'PRODUCTS' SHALL MEAN SUCH CEMENTED CARBIDE C UTTING TOOLS (INCLUDING SPARES) AND CUTTING TOOL SYSTEMS FOR ME TAL WORKING BEING EITHER MANUFACTURED BY THE APPLICATION OF SANDVIK KNOW-HOW (PROCESSES) OR BEING DEVELOPED BY OR ON BEHALF OF SANDVIK, WHICH A RE LICENSED BY SANDVIK TO SAL HEREUNDER. THE PRESENT GROUP OF SU CH TOOLS AND SYSTEMS ARE IDENTIFIED IN APPENDIX A:1 HERETO, AND ANY FURT HER GROUPS OF SUCH TOOLS AND SYSTEMS ARE TO BE IDENTIFIED IN APPENDIX A:2, A :3 ETC., SUCH FURTHER APPENDIX OR APPENDICES TO FORM AN INTEGRAL PART OF THIS AGREEMENT. 14. FURTHER, SANDVIK KNOW-HOW IS DEFINED AS UNDER:- 1.7 'SANDVIK KNOW-HOW' SHALL MEAN ALL SPECIFICATIO NS, DRAWINGS, PROCEDURES, PROCESSES, PERFORMANCE AND PROCUREMENT STANDARDS, AND ALL OTHER RELATED INFORMATION NECESSARY FOR OR USEFUL F OR THE MANUFACTURE ACCORDING TO ARTICLE 2 AND BEING SPECIFIED IN APPEN DIX B ATTACHED HERETO. 15. AS PER CLAUSE 2.1 TO THE AGREEMENT, SANDVIK SHA LL MAKE AVAILABLE TO THE ASSESSEE THE SANDVIK KNOW-HOW AND THE ADVICE AND AS SISTANCE OF ITS EXPERTS ALSO. FURTHER, AS PER CLAUSE 2.2 OF THE AGREEMENT, THE ASSESSEE SHALL HAVE THE RIGHT TO USE THE SANDVIK KNOW-HOW AND ADVICE PROVID ED FOR THE PURPOSE OF DESIGNING AND OR MANUFACTURING THE PRODUCTS IN INDI A. FURTHER, AS PER CLAUSE 2.3 OF THE AGREEMENT, IT WAS AGREED UPON THAT SANDVIK K NOW-HOW AND THE ADVICE AND ASSISTANCE TO BE PROVIDED BY THE SANDVIK SHALL BE G IVEN TO THE EXTENT REQUIRED BY THE ASSESSEE TO BE ABLE TO MANUFACTURE THE PRODUCTS WITH QUALITY CORRESPONDING TO THE QUALITY REACHED IN SANDVIK OWN PRODUCTION OF THE PRODUCTS. UNDER CLAUSE 2.4 OF THE AGREEMENT, IT IS ENLISTED THE NATURE OF ADVICE AND ASSISTANCE TO BE PROVIDED BY SANDVIK TO ASSESSEE IN THE FIELD OF MAN UFACTURING, RAW MATERIAL AND PACKAGING. FURTHER, UNDER CLAUSE 2.6 OF THE AGREEM ENT, IT WAS AGREED THAT SANDVIK SHALL MAKE PROVISION FOR TRAINING OF INDIVI DUAL MEMBERS OF TECHNICAL STAFF OF ASSESSEE. UNDER CLAUSE 2.7 OF THE AGREEMENT, SA NDVIK WAS TO MAKE AVAILABLE THE ASSESSEE MARKETING AND SALES EXPERTS FOR THE PU RPOSE OF ADVISING AND ASSISTING THE ASSESSEE IN RELATION TO MARKETING AND SALES OF THE PRODUCTS AT PRICES AND OTHER TERMS AND CONDITIONS TO BE AGREED UPON. FURTHER, UNDER CLAUSE 2.8 OF THE AGREEMENT, THE SAID ASSISTANCE AND SERVICES PRO VIDED BY THE SANDVIK DOES NOT SHOULDER ANY RESPONSIBILITY UPON SANDVIK FOR TH E WAY AND THE MANNER IN ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 13 WHICH SANDVIK KNOW-HOW AND ADVICE ARE APPLIED BY TH E ASSESSEE. CLAUSE 3 OF THE AGREEMENT TALKS ABOUT LICENSE. CLAUSE 3.1 OF T HE AGREEMENT READS AS UNDER:- 3.1 SAL IS HEREBY GRANTED THE RIGHT AND LICENSE TO USE THE SANDVIK PATENT RIGHTS AND THE SANDVIK KNOW-HOW FOR THE MANU FACTURE IN INDIA OF THE PRODUCTIONS, AND FOR THE MARKETING AND SALE OF THE PRODUCTS IN INDIA AND ELSEWHERE THROUGH THE SANDVIK SALES ORGANIZATIO N PROVIDED, HOWEVER, THAT SANDVIK SHALL HAVE THE FINAL RULING AS TO THE SALE OF PRODUCTS MANUFACTURED BY SAL IN EUROPE AND NORTH AMERICA. T HIS LICENSE DOES NOT INCLUDE THE RIGHT TO ASSIGN IT OR GRANT SUBLICE NSES UNDER IT. 16. AS PER CLAUSE 3.1 OF THE AGREEMENT, THE ASSESSE E WAS GRANTED THE RIGHT AND LICENSE TO USE THE SANDVIK PATENT RIGHTS AND TH E SANDVIK KNOW-HOW FOR THE MANUFACTURE IN INDIA. HOWEVER, THE LICENSE DID NOT INCLUDE THE RIGHT TO ASSIGN IT AND GRANTS SUBLICENSES UNDER IT. HOWEVER, SANDVIK HAD FINAL SAY AS TO THE SALE OF PRODUCTS MANUFACTURED BY THE ASSESSEE IN EUROPE AND NORTH AMERICA, BUT NO SUCH CONTROL WAS IN RESPECT OF SALE OF PRODUCTS IN INDIA AND ELSEWHERE THROUGH SANDVIK SALES ORGANIZATION. UNDER CLAUSE 3.2 OF TH E AGREEMENT, THE ASSESSEE HAD THE RIGHT, SUBJECT TO SANDVIK APPROVAL TO APPLY FOR OR MAINTAIN SUCH PATENT/S IN THE NAME OF SANDVIK OR THE RELEVANT SUBSIDIARIES . A SECRECY CLAUSE VIS--VIS USE OF SANDVIK KNOW-HOW WAS AGREED UPON BETWEEN THE PARTIES UNDER CLAUSE 5 OF THE AGREEMENT, WHICH READS AS UNDER:- SAL SHALL KEEP ALL SANDVIK KNOW-HOW AS WELL AS ALL ADVICE AND ASSISTANCE PROVIDED BY SANDVIK AND ITS SUBSIDIARIES STRICTLY C ONFIDENTIAL AND SECRET BOTH DURING THE SUBSISTENCE OF THIS AGREEMENT AND T HEREAFTER AND SHALL NOT DISCLOSE THE SAME TO ANY PERSON WHATSOEVER EXCEPT T O THOSE EMPLOYEES ENGAGED IN THE MANUFACTURE, MARKETING AND SALE OF T HE PRODUCTS IN INDIA TO WHOM IT SHALL BE ESSENTIAL TO DISCLOSE THE SAME AND SAL SHALL TAKE ALL REASONABLE MEASURES TO PREVENT SUCH EMPLOYEES FROM DISCLOSING THE SAME, TO OTHERS. THE FOREGOING SHALL NOT RELATE TO ANY INFORMATION WHICH SAL CAN SHOW BY WRITTEN RECORD TO HAVE BEEN IN ITS POSSESSION AT THE TIME OF ITS DISCLOSURE BY SANDVIK OR WHICH IS OR BECOMES PUBLIC KNOWLEDGE THROUGH NO FAULT OF SAL'S PART. THE SANDVIK KNOW-HOW MAY BE USED BY SAL FOR THE PUR POSE OF THE DESIGN, MANUFACTURING, MARKETING AND SALE OF THE PR ODUCTS ONLY. 17. UNDER CLAUSE 6.1 OF THE AGREEMENT, IT WAS AGREE D THAT THE ASSESSEE SHALL PAY SANDVIK THE LUMP SUM AS STATED IN ARTICLE 6.5 A ND ALSO ROYALTY. AS PER CLAUSE 6.2, ROYALTY WAS FIXED AT 5% OF NPS FOR SALE S BY THE ASSESSEE OF PRODUCTS ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 14 WITHIN INDIA AND 8% OF NPS FOR SALES BY THE ASSESSE E OUTSIDE INDIA. AS PER CLAUSE 6.5, IT IS PROVIDED THAT THE ASSESSEE HAS TO PAY TO SANDVIK IN SWEDEN A LUMP SUM CORRESPONDING TO US$ 2 MILLION. THE SAID LUMP SUM WAS TO BE PAID IN THREE INSTALLMENTS I.E. 1/3 RD AT THE DATE OF APPROVAL BY THE AUTHORITIES, 1/3 RD AT THE DELIVERY OF SANDVIK KNOW-HOW AND 1/3 RD AT THE COMMENCEMENT OF PRODUCTION, BUT NOT LATER THAN FOUR YEARS FROM THE RECEIPT OF SANDV IK KNOW-HOW. THE VALIDITY OF THE SAID AGREEMENT WAS FOR A PERIOD OF 7 YEARS AS P ER CLAUSE 7.2 OF THE AGREEMENT. THE EFFECTS OF TERMINATION ARE ENLISTED IN CLAUSE 8 OF THE AGREEMENT, WHICH READS AS UNDER:- 8. EFFECTS OF TERMINATION 8.1 NOTWITHSTANDING THE EXPIRATION OF THIS AGREEMEN T, SAL SHALL HAVE THE RIGHT, SUBJECT TO THE COMPLIANCE WITH THE OBLIGATIO NS IN RESPECT THEREOF IMPOSED BY THIS AGREEMENT, TO CONTINUE WITHOUT ANY LIMIT OF TIME AND WITHOUT ANY CHARGE USING ANY UNPATENTED SANDVIK KNO W-HOW MADE AVAILABLE TO SAL PURSUANT TO THIS AGREEMENT. 8.2 AT THE TERMINATION OF THE AGREEMENT PURSUANT TO ARTICLE 7.2 SAL SHALL FURTHER HAVE THE RIGHT TO CONTINUE TO USE THE SAND VIK KNOW-HOW AND THE INVENTIONS BEING THE OBJECT OF THE SANDVIK PATE NT RIGHTS PROVIDED, HOWEVER, THAT ROYALTY, NOTWITHSTANDING THE TERMINAT ION OF THE AGREEMENT SHALL ALWAYS, SAVE AS STATED IN THE LAST PARAGRAPH, BE PAYABLE AS STATED HEREIN WITH REGARD TO ALL PRODUCT S MANUFACTURED DURING A PERIOD OF SEVEN YEARS FROM THE COMMENCEMEN T OF COMMERCIAL PRODUCTION OF THE PRODUCTS. AFTER THE EXPIRATION OF SAID PERIOD SAL SHALL HAVE THE RIGHT TO USE THE SANDVIK KNOW-HOW IN ALL C OUNTRIES FREE OF CHARGE AND TO USE IN INDIA ALSO FREE OF CHARGE ANY INVENTION UNDER THE SANDVIK PATENT RIGHTS (INDIAN), AS TO THE SALE BY SAL OUTSIDE INDIA OR FOR USE OUTS IDE INDIA OF ANY PRODUCT INCORPORATING AN INVENTION UNDER SANDVIK PA TENT RIGHTS SUCH SALE IS SUBJECT TO CONTINUOUS - AS LONG AS THE RELE VANT SANDVIK PATENT RIGHTS ARE VALID - PAYMENT OF ROYALTY AS STATED HER EIN WITH REGARD TO PRODUCTS BEING EITHER USED OR SOLD IN A COUNTRY WHE RE ANY PATENT WITHIN THE SANDVIK PATENT RIGHTS IS MAINTAINED. 8.3 SHOULD THIS AGREEMENT TERMINATE PREMATURELY ACC ORDING TO ARTICLE 7.3 THEN ANY SUMS PAYABLE UNDER ARTICLE 6 SHALL BE DUE WITH RESPECT OF SUCH PART OF THE AGREEMENT YEAR IN QUESTION AS THE AGREEMENT HAS BEEN VALID AND BE MADE WITHIN TWO MONTHS FROM THE D ATE OF EXPIRY OF THIS AGREEMENT. SAL'S RIGHTS ACCORDING TO ARTICLE 2 AND ARTICLE 3 SHALL THEN TERMINATE WITH IMMEDIATE EFFECT. 8.4 THE TERMINATION OF THIS AGREEMENT SHALL NOT EFF ECT SAL'S SECRECY OBLIGATIONS ACCORDING TO ARTICLE 5 ABOVE OR ITS OBL IGATION UNDER THIS ARTICLE U, WHICH OBLIGATIONS SHALL CONTINUE TO APPL Y AS SET OUT IN THOSE ARTICLES. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 15 18. EVEN AFTER THE TERMINATION OF THE AGREEMENT, IT IS PROVIDED THAT THE ASSESSEE SHALL HAVE THE RIGHT SUBJECT TO THE COMPLI ANCE WITH THE OBLIGATIONS, TO CONTINUE WITHOUT ANY TIME LIMIT AND WITHOUT ANY CHA RGE THE USE OF UN-PATENTED SANDVIK KNOW-HOW MADE AVAILABLE TO IT UNDER THE AGR EEMENT, VIDE CLAUSE 8.1 OF THE AGREEMENT. UNDER CLAUSE 8.2, THE TERMINATION O F THE AGREEMENT PURSUANT TO ARTICLE 7.2 I.E. THE TERM OF AGREEMENT FOR A PERIOD OF 7 YEARS, THE ASSESSEE SHALL FURTHER HAVE THE RIGHT TO CONTINUE TO USE THE SANDV IK KNOW-HOW AND THE INNOVATIONS BEING THE OBJECT OF SANDVIK PATENT RIGH TS. NOTWITHSTANDING THE TERMINATION OF THE AGREEMENT, THE ROYALTY SHALL BE PAYABLE WITH REGARD TO ALL PRODUCTS MANUFACTURED DURING THE PERIOD OF 7 YEARS FROM THE COMMENCEMENT OF COMMERCIAL PRODUCTION OF THE PRODUCTS. AFTER THE E XPIRY OF SAID PERIOD, THE ASSESSEE SHALL HAVE THE RIGHT TO USE SANDVIK KNOW-H OW IN ALL THE COUNTRIES FREE OF CHARGE AND TO USE IN INDIA ALSO FREE OF CHARGE. FU RTHER, THE TERMINATION OF AGREEMENT ALSO COULD NOT AFFECT THE ASSESSEES SECR ECY OBLIGATION TO SANDVIK. THE CLAIM OF THE ASSESSEE BEFORE US IS THAT THE EXP ENDITURE INCURRED ON THE ACQUISITION OF TECHNICAL KNOW-HOW WAS FOR THE RIGHT TO USE THE TECHNOLOGY AND UNDER THE SAID AGREEMENT, NO RIGHT WAS ASSIGNED TO THE ASSESSEE IN THE TECHNICAL KNOW-HOW. SINCE THE ASSESSEE HAD ONLY ACQUIRED THE RIGHT TO USE THE TECHNOLOGY, THE SAID EXPENDITURE INCURRED BY THE AS SESSEE WAS CLAIMED TO BE REVENUE EXPENDITURE. HOWEVER, AS POINTED OUT BY US IN THE PARAS HEREINABOVE, THE ASSESSEE WHILE FILING THE RETURN OF INCOME HAD CLAIMED SAID EXPENDITURE TO BE ALLOWABLE UNDER THE PROVISIONS OF SECTION 35AB OF T HE ACT. 19. THE PROVISIONS OF SAID SECTION 35AB READ AS UND ER:- 35AB. (1) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), WHERE THE ASSESSEE HAS PAID IN ANY PREVIOUS YEAR 44 [RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR BEFORE THE 1ST DAY OF APRIL, 1998] ANY LUMP SUM CONSIDERATION FOR ACQUIRING 45 ANY KNOW-HOW FOR USE FOR THE PURPOSES OF HIS BUSINESS, ONE-SIXTH OF THE AMOUNT SO PAID SHALL BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT PREV IOUS YEAR, AND THE BALANCE AMOUNT SHALL BE DEDUCTED IN EQUAL INSTALMEN TS FOR EACH OF THE FIVE IMMEDIATELY SUCCEEDING PREVIOUS YEARS. (2) WHERE THE KNOW-HOW REFERRED TO IN SUB-SECTION ( 1) IS DEVELOPED IN A LABORATORY, UNIVERSITY OR INSTITUTION REFERRED TO I N SUB-SECTION (2B) OF SECTION ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 16 32A, ONE-THIRD OF THE SAID LUMP SUM CONSIDERATION P AID IN THE PREVIOUS YEAR BY THE ASSESSEE SHALL BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT YEAR, AND THE BALANCE AMOU NT SHALL BE DEDUCTED IN EQUAL INSTALMENTS FOR EACH OF THE TWO IMMEDIATELY S UCCEEDING PREVIOUS YEARS. 46 [(3) WHERE THERE IS A TRANSFER OF AN UNDERTAKING UN DER A SCHEME OF AMALGAMATION OR DEMERGER AND THE AMALGAMATING OR TH E DEMERGED COMPANY IS ENTITLED TO A DEDUCTION UNDER THIS SECTI ON, THEN, THE AMALGAMATED COMPANY OR THE RESULTING COMPANY, AS TH E CASE MAY BE, SHALL BE ENTITLED TO CLAIM DEDUCTION UNDER THIS SEC TION IN RESPECT OF SUCH UNDERTAKING TO THE SAME EXTENT AND IN RESPECT OF TH E RESIDUAL PERIOD AS IT WOULD HAVE BEEN ALLOWABLE TO THE AMALGAMATING COMPA NY OR THE DEMERGED COMPANY, AS THE CASE MAY BE, HAD SUCH AMAL GAMATION OR DEMERGER NOT TAKEN PLACE.] EXPLANATION.FOR THE PURPOSES OF THIS SECTION, 'KNO W-HOW' MEANS ANY INDUSTRIAL INFORMATION OR TECHNIQUE LIKELY TO ASSIS T IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE, OI L WELL OR OTHER SOURCES OF MINERAL DEPOSITS (INCLUDING THE SEARCHING FOR, D ISCOVERY OR TESTING OF DEPOSITS OR THE WINNING OF ACCESS THERETO).] [EXPENDITURE FOR OBTAINING LICENCE TO OPERATE TELEC OMMUNICATION SERVICES.] 20. THE SECTION PROVIDES THAT WITHIN THE STIPULATED PERIOD, WHERE ANY LUMP SUM CONSIDERATION IS PAID FOR ACQUIRING ANY KNOW-HO W FOR USE OR FOR THE PURPOSE OF BUSINESS, THEN 1/6 TH OF THE AMOUNT SO PAID SHALL BE DEDUCTED IN COMPUTI NG PROFITS AND GAINS OF THE BUSINESS FOR THAT YEAR. T HE YEAR UNDER APPEAL, IN WHICH THE ASSESSEE HAS CLAIMED THE SAID DEDUCTION FALLS W ITHIN THE STIPULATED PERIOD AS PROVIDED UNDER SECTION 35AB OF THE ACT. 21. THE FIRST ISSUE WHICH HAS TO BE ADDRESSED IS WH ETHER THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEDUCTION IN ENTIRETY, FOR WHICH RELIANCE WAS PLACED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN ALEMBIC CHEMICAL WORKS CO LTD VS CIT (SUPRA). THE PLEA OF THE ASSESSEE IN THIS REGARD, WAS THAT THE E XPENDITURE INCURRED BY THE ASSESSEE OVER A PERIOD OF SEVEN YEARS EVEN IF WAS A N EXPENDITURE OF ENDURING BENEFIT AND APPLYING THE RATIO LAID DOWN BY THE HON BLE SUPREME COURT IN EMPIRE JUTE CO LTD VS CIT (SUPRA) AND ALSO ALEMBIC CHEMICA L WORKS CO LTD VS CIT (SUPRA), SUCH EXPENDITURE IS TO BE ALLOWED AS DEDUC TION UNDER SECTION 37(1) OF THE ACT AND THE PROVISIONS OF SECTION 35AB OF THE A CT WERE NOT APPLICABLE. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 17 FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN JONAS WOODHEAD AND SONS (INDIA) LTD. VS. CIT (1997) 224 ITR 342 (SC) FOR TH E SIMILAR PROPOSITION OF WHAT IS THE MEANING OF ENDURING BENEFIT. IN THE FACTS OF T HE CASE BEFORE THE HONBLE SUPREME COURT, THE ASSESSEE HAD ACQUIRED NEW TECHNO LOGY FOR THE MANUFACTURE OF A PRODUCT AND PAYMENT WAS MADE FOR TECHNICAL KNO W-HOW, WHICH WAS FOR THE BETTERMENT OF THE PRODUCT IN QUESTION, WHICH WAS AL READY PRODUCED AND WHERE EVEN ON THE EXPIRY OF AGREEMENT, THE ASSESSEE DEEME D TO DERIVE BENEFITS AND MANUFACTURE THE PRODUCT IN THE FACTORY. THE ISSUE WAS WHETHER THE ENTIRE PAYMENT MADE COULD BE HELD AS REVENUE EXPENDITURE, THE HONBLE HIGH COURT HAD DISALLOWED 25% OF THE SUM PAID AS ROYALTY AS CAPITA L EXPENDITURE NOT ALLOWABLE AS REVENUE EXPENDITURE, WHICH WAS UPHELD BY THE HON BLE SUPREME COURT. 22. FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE RATIO LAID DOWN BY HONBLE MADRAS HIGH COURT IN CIT VS. SIMPSON AND CO. LTD. (1999) 239 ITR 83 (MAD) FOR THE PROPOSITION TH AT THE ACQUISITION OF TECHNICAL KNOW-HOW RELATING TO MANUFACTURE OF AUTOMOBILE ENGI NES, WAS NOT OF ENDURING BENEFIT AND AMOUNT PAID FOR ACQUIRING SUCH TECHNICA L KNOW-HOW WAS REVENUE EXPENDITURE. SIMILAR PROPOSITION HAD BEEN LAID DOW N BY THE HONBLE SUPREME COURT IN CIT VS. I.A.E.C. (PUMPS) LTD. (1998) 232 I TR 316 (SC) ON WHICH FURTHER RELIANCE WAS PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE. IN ALL THESE CASE LAWS, THE DISTINCTION DRAWN WAS BETWEEN CAPITAL AND REVENUE EXPENDITURE AND IF REVENUE IN NATURE, THEN ITS ALLOWABILITY UNDER SECTION 37(1) OF THE ACT. 23. ANOTHER RELIANCE WAS PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS ON THE DECISION OF CHANDIGARH BENCH OF THE TRIBUNAL IN DCIT VS. METALMAN AUTO (P.) LTD. (2001) 78 ITD 327 (CHD.) FOR THE PROPOSITION THAT WHERE THE EXPENDITURE RESULTED IN IMPROVING EXISTING PRODUCTS ALREADY MANUFACTURED BY THE ASSESSEE AND DID NOT RE LATE TO SETTING UP OF ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 18 ALTOGETHER NEW PRODUCT OR FOR SETTING UP OF NEW UNI T, SUCH EXPENDITURE WOULD BE REVENUE IN NATURE, SINCE THE BENEFIT ACQUIRED BY IT WAS NOT OF ENDURING NATURE TO PUT IN THE CATEGORY OF CAPITAL EXPENDITURE. THE TR IBUNAL IN THAT CASE HELD THAT THE PROVISIONS OF SECTION 35AB WOULD BE APPLICABLE TO T HE CONSIDERATION PAID FOR ACQUIRING TECHNICAL KNOW-HOW, WHICH WOULD OTHERWISE BE DISALLOWABLE AS BEING ON CAPITAL ACCOUNT. FURTHER RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE KOLKATA BENCH OF THE TRIBUNAL IN WELLMAN INCANDESCE NT INDIA LTD. VS. DCIT (1995) 55 ITD 338. HOWEVER, THE FACTS OF PRESENT C ASE ARE DIFFERENT, WHERE THE ASSESSEE HAD ACQUIRED THE TECHNICAL KNOW-HOW FOR PR ODUCTION OF NEW ITEMS AND HENCE THE RATIO OF ABOVE DECISION WAS NOT APPLICABL E. 24. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN REPLY HAD POINTED OUT THAT THE ISSUE HAS NOW BEEN SETTLED BY THE HONBLE SUPREME COURT IN DRILCOS (INDIA) (P.) LTD. VS. CIT (2012) 25 TAXMANN .COM 228 (SC), WHEREIN IT HAS BEEN HELD THAT WHERE THE ASSESSEE HAD ENTERED INTO AN AGREEMENT FOR ACQUIRING KNOW-HOW, WHICH IN TURN WAS TO BE USED IN THE BUSIN ESS OF THE ASSESSEE, SECTION 35AB OF THE ACT WOULD COME INTO PLAY AND SECTION 37 (1) OF THE ACT WOULD HAVE NO APPLICATION. THE LEARNED DEPARTMENTAL REPRESENTATI VE FOR THE REVENUE FURTHER PLACED RELIANCE ON THE DECISION OF HONBLE MADHYA P RADESH HIGH COURT INDORE BENCH OF THE TRIBUNAL IN CIT VS. BRIGHT AUTOMOTIVES & PLASTICS LTD. (2004) 141 TAXMAN 582 (MP), WHEREIN IT WAS HELD THAT IN ORDER TO ATTRACT THE PROVISIONS OF SECTION 35AB, IT MAY NOT BE NECESSARY FOR THE ASSES SEE TO ACTUALLY BECOME ABSOLUTE OWNER OF KNOW-HOW. WHERE THE ASSESSEE IS ABLE TO RUN HIS BUSINESS EFFECTIVELY WITH THE AID OF KNOW-HOW OBTAINED BY HI M PURSUANT TO AN AGREEMENT ON PAYMENT OF CONSIDERATION, THEN THE PROVISIONS OF SECTION 35AB OF THE ACT GETS ATTRACTED AND IT WAS FURTHER HELD THAT THE SAID PRO VISIONS ARE ALSO ATTRACTED EVEN IN THOSE CASES WHERE RIGHT IS NOT ACQUIRED ABSOLUTE LY, BUT FOR LIMITED PERIOD. FURTHER RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN APS-STAR INDUSTRIES LTD. VS. DCIT ( 2003) 86 ITD 182 (AHD), WHEREIN THE PROVISIONS OF SECTION 35AB OF THE ACT W ERE APPLIED TO LUMP SUM ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 19 PAYMENT FOR ACQUIRING TECHNICAL KNOW-HOW BY OBSERVI NG THAT EVEN IF BOTH THE PROVISIONS I.E. SECTION 35AB AND 37(1) OF THE ACT A RE APPLICABLE IN RESPECT OF ANY EXPENDITURE, SECTION 35AB WOULD APPLY AND SUCH EXPE NDITURE WOULD BE OUTSIDE THE PURVIEW OF SECTION 37(1) OF THE ACT. IT WAS TH US, HELD THAT WHERE THE ASSESSEE HAD ACQUIRED A BENEFIT OF ENDURING NATURE AND THE E XPENDITURE IN CONNECTION THEREOF BEING CAPITAL IN NATURE, WAS NOT DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE FURTHER POINTED OUT THAT THE RATIO LAID DOWN BY THE HONBLE SUPREME COU RT IN ALEMBIC CHEMICAL WORKS CO LTD VS CIT (SUPRA) RELATED TO PRE-INTRODUC TION OF SECTION 35AB OF THE ACT. 25. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE REFERRING TO THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN DRI LCOS (INDIA) (P.) LTD. VS. CIT (SUPRA) POINTED OUT THAT THE ASSESSEE DID NOT RECEI VE ANY KNOW-HOW AND REGARDLESS OF THE SAME, SECTION 35AB OF THE ACT WAS APPLIED AND THE ALTERNATE PLEA WAS ALLOWED BY THE HONBLE SUPREME COURT. IN RESPECT OF RATIO LAID DOWN BY THE HONBLE MADHYA PRADESH HIGH COURT, IT WAS POINT ED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE FACTS OF THE CASE OF THE ASSESSEE WERE DISTINGUISHABLE AND IN RESPECT OF THE DECISION OF AHMEDABAD BENCH OF THE TRIBUNAL IN APS-STAR INDUSTRIES LTD. V S. DCIT (SUPRA), THE ISSUE WAS WHETHER IT FELL WITHIN THE REALM OF CAPITAL OR REVE NUE EXPENDITURE. 26. THE HONBLE SUPREME COURT IN ALEMBIC CHEMICAL W ORKS CO LTD VS CIT (SUPRA) WHILE DECIDING THE ISSUE OF ALLOWABILITY OF EXPENDITURE ON ACQUISITION OF KNOW-HOW, FOR WHICH LUMP SUM PAYMENT WAS MADE HELD THAT IDEA OF ONCE FOR ALL PAYMENT AND ENDURING BENEFIT ARE TO BE TREATED AS S OMETHING AKIN STATUTORY CONDITIONS; NOR ARE THE NOTIONS OF CAPITAL OR REVEN UE, A JUDICIAL FETISH. IT WAS FURTHER HELD THAT THERE WAS NO SINGLE DEFINITIVE CR ITERION WHICH BY ITSELF IS DETERMINATIVE WHETHER A PARTICULAR OUTLAY IS CAPITA L OR REVENUE. ANOTHER RELIANCE WAS PLACED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 20 RATIO LAID DOWN BY HONBLE APEX COURT IN EMPIRE JUT E CO LTD VS CIT (SUPRA) FOR THE PROPOSITION OF TEST OF ENDURING BENEFIT. THE H ONBLE APEX COURT WHILE APPLYING THE TEST FOR DETERMINING WHETHER THE EXPEN DITURE WAS CAPITAL OR REVENUE IN NATURE, OBSERVED THAT THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCURR ED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, N ONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. THE HONBLE APEX COURT FURTHER PROPOUNDED THAT WHAT WAS MATERIAL TO BE CONSIDERED WAS THE NATURE OF ADVANTAGE IN COMMERCIAL STRENGTHS AND ONLY WHEN THE ADVANTAGE WAS IN THE CAPITAL FIELD, THEN THAT EXPENDITURE WOULD BE DISAL LOWED ON THAT ACCOUNT. THE PLEA OF THE ASSESSEE WHILE PLACING RELIANCE ON THE RATIOS LAID DOWN BY HONBLE SUPREME COURT WAS THAT THE PAYMENT FOR TECHNICAL KN OW-HOW EVEN FOR ENDURING BENEFIT WAS ON REVENUE ACCOUNT AND HENCE, WAS TO BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. IT MAY BE PUT ON R ECORD THAT BOTH THESE DECISIONS WERE DELIVERED PRIOR TO INTRODUCTION OF SECTION 35A B OF THE ACT, WHICH WAS INSERTED BY THE FINANCE ACT, 1985, W.E.F. 01.04.198 6. 27. IN THE FACTS OF CASE BEFORE THE HONBLE SUPREME COURT IN DRILCOS (INDIA) (P.) LTD. VS. CIT (SUPRA), THE ASSESSEE HAD ACQUIRE D TECHNICAL KNOW-HOW UNDER AN AGREEMENT FOR CONSIDERATION, WHICH WAS TO BE PAI D IN INSTALLMENTS. THE QUESTION FOR DETERMINATION WAS WHETHER THE EXPENDIT URE COULD BE CLAIMED AS DEDUCTION UNDER SECTION 37 OF THE ACT. THE HONBLE APEX COURT HELD AS UNDER:- 5. THE CONTENTION OF THE ASSESSEE IS THAT SECTION 35AB OF THE ACT IS NOT APPLICABLE TO THIS CASE. WE FIND NO MERIT IN TH E SAID CONTENTION. SUB- SECTION (1) OF SECTION 35AB OF THE ACT CLEARLY STAT ES THAT WHERE THE ASSESSEE HAS PAID IN ANY PREVIOUS YEAR ANY LUMP SUM CONSIDERATION FOR ACQUIRING ANY KNOW-HOW FOR USE FOR THE PURPOSES OF HIS BUSINESS, THEN ONE-SIXTH OF THE AMOUNT SO PAID SHALL BE DEDUCTED I N COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT PREVIOUS YEAR AN D THE BALANCE AMOUNT SHALL BE DEDUCTED IN EQUAL INSTALMENTS FOR EACH OF THE FIVE IMMEDIATELY SUCCEEDING PREVIOUS YEARS. EXPLANATION TO THE SAID SECTION SAYS THAT THE WORD 'KNOW-HOW' MEANS ANY INDUSTRIAL INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE. IF ONE CAREFULLY ANALYZES SECTION 35AB OF THE ACT, IT IS CLEAR THAT PRIOR TO 1 ST APRIL, I986 THERE WAS SOME DOUBT AS TO WHETHER SUC H EXPENDITURE COULD FALL UNDER SECTION 37 OF THE ACT. TO REMOVE THAT DOUBT SECTION 35AB OF THE ACT STOOD INSERTED. IN SUBSECTI ON (1) OF SECTION 35AB OF THE ACT, THERE IS A CONCEPT OF AMORTIZATION OF E XPENDITURE. IN THE PRESENT CASE, IT IS TRUE THAT ON ACCOUNT OF CERTAIN DISPUTE S WHICH AROSE BETWEEN ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 21 THE PARTIES, THE BALANCE AMOUNT WAS NOT PAID BY THE ASSESSEE TO THE AMERICAN COMPANY. HOWEVER, THE WORD 'FOR IN SECTIO N 35 AB OF THE ACT, WHICH IS A PREPOSITION IN ENGLISH GRAMMAR, HAS TO B E EMPHASISED WHILE INTERPRETING SECTION 35AB OF THE ACT. SECTION 35AB OF THE ACT SAYS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED FOR THE PURPO SES OF THE BUSINESS OF THE ASSESSEE. IN THE PRESENT CASE, THE TECHNICAL A SSISTANCE AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND THE AMERI CAN COMPANY FOR ACQUIRING KNOW-HOW WHICH WAS, IN TURN, TO BE USED I N THE BUSINESS OF THE ASSESSEE. ONCE SECTION 35AB OF THE ACT COMES INTO PLAY, THEN SECTION 37 OF THE ACT HAS NO APPLICATION. 28. A BARE READING OF SECTION 35AB OF THE ACT BRING S OUT THE INTENT OF THE LEGISLATURE IN INSERTING THE SAID SECTION. SECTION 35AB OF THE ACT INSERTED BY FINANCE ACT, 1985 LAYS DOWN THAT WHERE THE ASSESSEE HAS PAID IN ANY PREVIOUS YEAR ANY LUMP SUM CONSIDERATION FOR ACQUIRING ANY KNOW-HOW FOR USE FOR THE PURPOSE OF ITS BUSINESS 1/6 TH OF THE AMOUNT SO PAID SHALL BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT PREVIOUS YEAR AND THE BALANCE AMOUNT SHALL BE DEDUCTED IN EQUAL INSTALLME NTS FOR EACH OF THE FIVE IMMEDIATELY SUCCEEDING PREVIOUS YEARS. EXPLANATION, APPENDED BELOW THE SECTION, DEFINES KNOW-HOW AND READS AS UNDER:- FOR THE PURPOSE OF THIS SECTION, KNOW-HOW MEANS ANY INDUSTRIAL INFORMATION OF TECHNIQUE LIKELY TO ASSIST IN THE MA NUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE, OIL WELL OR O THER SOURCES OF MINERAL DEPOSITS (INCLUDING THE SEARCHING FOR, DISCOVERY OR TESTING OF DEPOSITS OR THE WINNING OF ACCESS THERETO). 29. SECTION 35AB OF THE ACT DOES NOT SPEAK OF THE N ATURE OF EXPENDITURE I.E. WHETHER CAPITAL OR REVENUE, BUT TALKS OF CONSIDERAT ION PAID FOR ACQUISITION OF TECHNICAL KNOW-HOW. THUS, WHERE THE ASSESSEE HAS P AID CONSIDERATION FOR ACQUIRING TECHNICAL KNOW-HOW, AS IN FACTS OF PRESEN T CASE, WHICH IS TO BE USED FOR CARRYING ON ITS BUSINESS, THEN SUCH EXPENDITURE FAL LS IN THE REALM OF SECTION 35AB OF THE ACT, IRRESPECTIVE OF THE FACT WHETHER THE EX PENDITURE IS IN CAPITAL OR REVENUE FIELD. IN VIEW THEREOF, WE FIND NO MERIT IN RELIAN CES PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON SERIE S OF DECISIONS TO DRAW DIFFERENCE BETWEEN REVENUE AND CAPITAL EXPENDITURE. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 22 30. ANOTHER ASPECT OF THE ISSUE IS WHETHER SUCH EXP ENDITURE IS ALLOWABLE UNDER SECTION 37 OF THE ACT. THE AHMEDABAD BENCH O F THE TRIBUNAL IN APS-STAR INDUSTRIES LTD. VS. DCIT (SUPRA) ON THE SAID ISSUE HELD AS UNDER:- 19. REGARDING THE APPLICABILITY OF SECTION 37(1) W E HAVE HELD ABOVE THAT THE LUMP SUM CONSIDERATION PAID BY THE ASSESSE S WOULD FALL WITHIN THE PURVIEW OF SECTION 35AB AND THEREFORE WOULD BE EXCL UDED FROM THE AMBIT OF SECTION 37(1). WITHOUT PREJUDICE TO THE AFORESA ID CONCLUSION REACHED BY US IN THE PRECEDING PARAGRAPHS, WE MAY POINT OUT TH AT THE EXPENDITURE IN QUESTION IS CLEARLY OF THE NATURE OF CAPITAL EXPEND ITURE AND ON THIS GROUND ALSO IT WOULD NOT BE DEDUCTIBLE BUSINESS EXPENDITUR E UNDER SECTION 37(1). THE LUMP SUM CONSIDERATION OF RS.14,50,249/- HAS BE EN PAID BY THE ASSESSES FOR ACQUIRING TECHNICAL KNOWHOW FOR AN IND EFINITE PERIOD. THERE IS NO STIPULATION, AS WE HAVE ALREADY NOTED ABOVE, IN THE COLLABORATION AGREEMENT FOR THE RETURN OF DOCUMENTATION, DRAWINGS AND DESIGNS ON EXPIRATION OF THE AGREEMENT ALTER 10 YEARS TO THE G ERMAN COMPANY AND THERE IS NO BAR ON THE ASSESSES IN CONTINUING WITH THE MANUFACTURE OF THE CONTRACT PRODUCTS BY UTILISATION OF THE TECHNICAL K NOWHOW EVEN AFTER THE PERIOD OF 10 YEARS. THE ASSESSES HAS THUS ACQUIRED A BENEFIT OF ENDURING NATURE AND THE EXPENDITURE IN CONNECTION THEREOF IS CAPITAL IN NATURE. IN SUPPORT OF THE VIEW TAKEN BY US RELIANCE IS PLACED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT V INDI AN OXYGEN LID. I1996) 218 ITR 337 WHEREIN THE SUPREME COURT HELD THAT SIN CE THE INDIAN COMPANY WAS NOT ENTITLED TO USE THE TECHNICAL KNOWH OW AFTER THE TERMINATION OF THE AGREEMENT, IT COULD NOT BE SAID THAT INDIAN COMPANY HAD INCURRED THE EXPENDITURE FOR THE PURPOSES OF BR INGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING NATURE. A SIMILA R TEST BASED ON THE FACT WHETHER THE TECHNICAL KNOWHOW COULD BE USED AFTER T HE TERMINATION OF THE AGREEMENT HAS BEEN APPROVED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. IAEC (PUMPS) LTD [1998] 232 ITR 316 FOR D ETERMINING WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. A PPLYING THE RATIO OF THE AFOREMENTIONED DECISIONS OF THE APEX COURT IN THE I NSTANT CASE, SINCE THE ASSESSEE IS ENTITLED TO USE THE TECHNICAL INFORMATI ON FOR THE MANUFACTURE OF THE PRODUCTS EVEN AFTER THE TERMINATION OF THE AGRE EMENT AND THE DOCUMENTATION, DRAWINGS ARE NOT TO BE RETURNED BACK ON EXPIRY OF THE AGREEMENT AFTER 10 YEARS, THE EXPENDITURE IS DEARLY CAPITAL IN NATURE AND OUTSIDE THE PURVIEW OF SECTION 37(1). 20. THERE IS NO DISPUTING THE FACTS THAT ACQUISITIO N OF THE TECHNICAL KNOWHOW BY THE ASSESSEE COMPANY FOR MANUFACTURE OF NEW TEXTILE MACHINERY COMPONENTS AS SPECIFIED IN THE AGREEMENT WITHOUT ANY LIMITATION WITH REGARD TO UTILISATION PERIOD THEREO F HAS RESULTED IN AN ENDURING BENEFIT TO THE ASSESSEE WHICH LIES IN THE CAPITAL FIELD. THE EXPENSES HAVE ESSENTIALLY RESULTED IN AUGMENTATION AND EXPANSION OF THE PROFIT-EARNING APPARATUS OF THE ASSESSEE COMPANY. S UCH EXPENSES WHICH ARE INEXTRICABLY CONNECTED WITH THE CAPITAL STRUCTU RE OF THE COMPANY WOULD CLEARLY BE OF CAPITAL NATURE AND THEREFORE OUTSIDE THE PURVIEW OF SECTION 37(1). IT HAS BEEN HELD BY THE HON'BLE SUPREME COU RT IN EMPIRE JUTE CO. LTD V. CIT [1980] 124 ITR 1 AND ALEMBIC CHEMICAL W ORKS CO. LTD V. CIT [1989] 177 ITR 377 THAT IF THE EXPENSES INCURRED BY THE ASSESSEE ARE IN THE CAPITAL FIELD AND ARE INEXTRICABLY CONNECTED WI TH THE CAPITAL STRUCTURE OF THE COMPANY. SUCH EXPENSES WOULD BE HELD LO BE CAPI TAL IN NATURE. APPLYING THE PRINCIPLES ENUNCIATED BY THE HON'BLE S UPREME COURT IN THE AFORESAID JUDICIAL PRONOUNCEMENTS, THE CONCLUSION I S IRRESISTIBLE THAT THE EXPENSES UNDER QUESTION ARE DEARLY OF CAPITAL NATUR E AND ARE THEREFORE, OUTSIDE THE PURVIEW OF SECTION 37(1). THE VARIOUS DOCUMENTS SUCH AS ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 23 DRAWINGS, DESIGNS, CHARTS, PLANS INCLUDED IN THE TE CHNICAL DOCUMENTATION PROVIDED BY THE FOREIGN COLLABORATOR OBVIOUSLY FORM THE TOOLS BY USING WHICH THE BUSINESS OF MANUFACTURING THE TEXTILE MAC HINERY SPARE PARTS WAS TO BE DONE BY THE ASSESSEE AND FOR ACQUIRING SUCH T ECHNICAL KNOWHOW THROUGH THESE DOCUMENTS, A LUMP SUM PAYMENT WAS MAD E. THIS EXPENDITURE WAS INCURRED BY THE ASSESSEE AS AND BY WAY OF PURCHASE PRICE OF SUCH DOCUMENTATION AND WAS OF A CAPITAL NA TURE INASMUCH AS THE DOCUMENTATION PROVIDED ID THE ASSESSEE WAS A TOOL O F HIS TRADE WITH WHICH HE CARRIED ON HIS BUSINESS. THE CAPITAL ASSET ACQU IRED BY THE ASSESSEE VIS-A-VIS THE TECHNICAL KNOWHOW IN THE SHAPE OF DRA WINGS, DESIGNS, CHARTS, PLANS AND OTHER LITERATURE FELL WITHIN THE DEFINITI ON OF 'PLANT' AND THE EXPENDITURE INCURRED FOR ACQUIRING THE SAME WAS CAP ITAL EXPENDITURE. THE DECISION OF SUPREME COURT IN THE CASE OF SCIENTIFIC ENGG. HOUSE (P.) LTD. V. CIT [1986) 157 ITR 86 FULLY SUPPORTS THE VIEW AD OPTED BY US. 31. IN VIEW OF INTRODUCTION OF PROVISIONS OF SECTIO N 35AB OF THE ACT WHICH WERE INSERTED BY THE FINANCE ACT, 1985 W.E.F. 01.04.1986 , WE ARE OF THE VIEW THAT IN CASES OF PAYMENT OF LUMP SUM CONSIDERATION FOR ACQU IRING TECHNICAL KNOW-HOW, THE PROVISIONS OF SECTION 35AB OF THE ACT ARE ATTRA CTED AND THE EXPENDITURE IS NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT, WHICH IS GENERAL PROVISION AND SPECIFICALLY EXCLUDES EXPENDITURE COVERED UNDER SEC TIONS 30 TO 36 OF THE ACT. CONSEQUENTLY, THE SAID EXPENDITURE IS TO BE AMORTIZ ED UNDER SECTION 35AB OF THE ACT AND CANNOT BE ALLOWED AS A DEDUCTION IN THE YEA R IN WHICH THE LIABILITY TO PAY THE SAID AMOUNT ACCRUES. THE HONBLE SUPREME COURT IN DRILCOS (INDIA) (P.) LTD. VS. CIT (SUPRA) HAD HELD THAT AFTER INSERTION OF SE CTION 35AB OF THE ACT, WHERE THE EXPENDITURE IS TO BE USED IN BUSINESS OF ASSESSEE, SECTION 35AB OF THE ACT WOULD COME INTO PLAY AND THE PROVISIONS OF SECTION 37(1) OF THE ACT ARE NOT APPLICABLE FOR UNITS ESTABLISHED PRIOR TO 01.04.1998. FOLLOWI NG THE SAME PARITY OF REASONING, WE HOLD THAT PROVISIONS OF SECTION 35AB OF THE ACT ARE TO BE APPLIED TO THE LUMP SUM CONSIDERATION PAID FOR ACQUISITION OF TECHNICAL KNOW-HOW BY THE ASSESSEE. 32. ANOTHER PLEA RAISED BY THE ASSESSEE WAS THAT TH E ASSESSEE HAD ONLY ACQUIRED THE RIGHT TO USE THE TECHNICAL KNOW-HOW. THE READING OF CLAUSES OF AGREEMENT WITH SPECIAL REFERENCE TO CLAUSE 8 I.E. E FFECT OF TERMINATION OF AGREEMENT REFLECTS THAT THE ASSESSEE HAD ACQUIRED T HE SAID TECHNICAL KNOW-HOW IN PERPETUITY. EVEN AFTER THE TERMINATION OF PERIO D OF AGREEMENT I.E. 7 YEARS, THE ASSESSEE HAD THE RIGHT TO USE THE SAID TECHNICAL KN OW-HOW AND CONTINUE TO ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 24 MANUFACTURE THE ITEMS USING BOTH THE PATENTED AND U N-PATENTED SANDVIK KNOW- HOW PROVIDED BY SANDVIK TO IT. AS PER THE AGREEMEN T, THE TECHNICAL KNOW-HOW IN SUCH CIRCUMSTANCES, WAS ACQUIRED BY THE ASSESSEE BY PAYING THE CONSIDERATION AGAINST THE PURCHASE OF THE SAID TECHNICAL KNOW-HOW AND WE FIND NO MERIT IN THE PLEA OF THE ASSESSEE THAT THE CONSIDERATION TO BE P AID IN INSTALLMENTS WAS PAID FOR THE USE OF TECHNICAL KNOW-HOW AND NOT FOR THE ACQUI SITION OF TECHNICAL KNOW-HOW AND HENCE NOT COVERED UNDER SECTION 35AB OF THE ACT . THE SECTION ITSELF PROVIDES THAT ANY LUMP SUM CONSIDERATION PAID FOR A CQUIRING ANY KNOW-HOW, FOR USE, FOR THE PURPOSE OF HIS BUSINESS IS TO BE DEDUC TED IN SIX INSTALLMENTS. UNDER THE AGREEMENT, THE TECHNICAL KNOW-HOW RECEIVED BY T HE ASSESSEE WAS IN RELATION TO PRODUCTION OF NEW TYPE OF CEMENTED CARBIDE PRODU CTS, AND ACQUISITION GAVE RISE TO COMING INTO EXISTENCE OF ASSET AND ADVANTAG E OF ENDURING BENEFIT AND THE SAME IS ENVISAGED IN SECTION 35AB OF THE ACT. THER E IS PASSAGE OF RIGHTS, KNOW- HOW AND TECHNOLOGY UNDER THE AGREEMENT, AND THE SAI D ASSET AND ADVANTAGE HAD BEEN ACQUIRED FOR USE IN BUSINESS OF THE ASSESSEE A ND THE SAME COULD BE USED BY ASSESSEE EVEN AFTER THE TERM OF AGREEMENT. WE H OLD THAT THE ASSESSEE HAVING ACQUIRED THE TECHNICAL KNOW-HOW IS TO BE SUB JECTED TO THE PROVISIONS OF SECTION 35AB OF THE ACT VIS--VIS ITS CLAIM OF DEDU CTION OF THE SAID AMOUNT. THE CIT(A) VIDE OBSERVATIONS ON PAGE 11 OF APPELLATE OR DER HAD HELD THAT THE LIABILITY FOR PAYMENT OF TECHNICAL KNOW-HOW ACCRUED IN ASSESS MENT YEAR 1997-98 ITSELF AND THE DEDUCTION UNDER SECTION 35AB OF THE ACT HAD TO BE ALLOWED ON FULL AMOUNT. THE REVENUE IS NOT IN APPEAL AGAINST THE S AID OBSERVATIONS OF THE CIT(A). ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) IN THIS REGARD AND WE HOLD THAT THE ASSESSEE IS ENTITLED TO THE DEDUCTION UNDE R SECTION 35AB OF THE ACT ON THE FULL AMOUNT I.E. RS.8.82 CRORES. THE AHMEDABAD BENCH OF THE TRIBUNAL IN APS-STAR INDUSTRIES LTD. VS. DCIT (SUPRA) HAD ALSO HELD THAT WHAT IS MATERIAL FOR SECTION 35AB OF THE ACT IS NOT THE ACTUAL AMOUNT PA ID DURING THE YEAR BUT THE AMOUNT IN RESPECT OF WHICH LIABILITY HAD BEEN INCUR RED FOR ACQUIRING TECHNICAL KNOW-HOW. WE HOLD SO. THE CIT(A) AFTER HOLDING TH E ASSESSEE TO BE ELIGIBLE FOR ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 25 DEDUCTION UNDER SECTION 35AB OF THE ACT ON THE FULL AMOUNT, HAD NOT ALLOWED THE CLAIM OF THE ASSESSEE IN VIEW OF NON-DEDUCTION OF T AX AT SOURCE ON THE BALANCE TWO INSTALLMENTS, WHICH WERE PAID IN THE SUCCEEDING ASSESSMENT YEARS, IN VIEW OF THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. ADM ITTEDLY, THE ASSESSEE HAD DEDUCTED TAX AT SOURCE ON THE INSTALLMENT PAID DURI NG THE FINANCIAL YEAR AND HAS PAID TAX AT SOURCE ON THE BALANCE INSTALLMENTS IN T HE SUCCEEDING YEARS. IN THIS REGARD, WE FIND MERIT IN THE PLEA OF LEARNED AUTHOR IZED REPRESENTATIVE FOR THE ASSESSEE THAT THIS WAS AT BEST OF THE CASE OF SHORT DEDUCTION OF TAX AND NOT NON- DEDUCTION OF TAX AT SOURCE AND THERE WAS NO MERIT I N INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. 33. THE PUNE BENCH OF THE TRIBUNAL IN ITA NO.758/PN /1999 & CO NO.58/PN/2005 AND ANOTHER, IN ASSESSEES OWN CASE H AD HELD AS UNDER:- 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. LOOKING AT THE CONSPECTUOUS OF FACTS AS EMERGING FROM THE ORDERS O F THE AUTHORITIES BELOW, IT APPEARS THAT THOUGH THE CLAIM OF THE ASSE SSEE IS UNDER HEAD 'PROVISION FOR DOUBTFUL DEBTS', IN ACTUALITY THE CL AIM IS BASED ON CERTAIN DEDUCTIONS CLAIMED TO BE MADE BY THE GOVERNMENT BUY ERS AS LIQUIDATED DAMAGES FOR LATE SUPPLY OF GOODS, ETC. THE COMMISSI ONER OF INCOME-TAX (APPEALS) IN HIS ORDER DATED 28.11.1997 HAS REFERRE D TO TWO JOURNAL ENTRIES IN THIS REGARD AND ON THAT BASIS DIRECTED THE ASSES SING OFFICER TO ALLOW THE CLAIM, SUBJECT TO THE VERIFICATION THAT THE LIABILI TY CRYSTALISED IN THIS YEAR OR NOT. OSTENSIBLY, IF THE AFORESAID FACTUAL MATRIX NO TED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND WHICH WAS REQUIRED TO B E VERIFIED IS JUSTIFIED, THE CLAIM WOULD BE ALLOWABLE AS SUCH. WE ALSO FIND THAT THE ASSESSING OFFICER IN HIS ORDER DATED 10.3.1998 HAS NOT CARRIE D OUT THE DIRECTIONS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN ITS PRO PER PERSPECTIVE, BUT HAS MERELY GONE BY THE FACT THAT THE CLAIM HAS BEEN MADE UNDER 'PROVISION FOR DOUBTFUL DEBTS'. IN OUR CONSIDERED O PINION, IT WOULD MEET THE ENDS OF JUSTICE IF THE MATTER IS RESTORED TO THE FI LE OF THE ASSESSING OFFICER WITH DIRECTIONS TO CONSIDER THE TRUE NATURE OF THE CLAIM IN THE LIGHT OF THE OBSERVATIONS OF THE COMMISSIONER OF INCOME-TAX (APP EALS) IN PARA 6.3 OF HIS ORDER DATED 28.11.1997 AND NOT BE GUIDED BY MER ELY THE NOMENCLATURE OF THE HEAD UNDER WHICH THE CLAIM HAS BEEN MADE. NE EDLESS TO SAY, IN CARRYING OUT THE AFORESAID EXERCISE, THE ASSESSING OFFICER SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THUS, ON THIS ISSUE ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 19. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 20. THE APPEAL BY THE REVENUE VIDE ITA NO 113/PN/98 IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) DATED 28.11.1997 PERTAINING TO THE ASSESSMENT YEAR 1994-95 AND THE C ROSS OBJECTION IN CO NO 58/PN/2005 BY THE ASSESSEE ALSO EMANATES FROM TH E SAME ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 26 21. IN THE APPEAL OF THE REVENUE, FOLLOWING TWO GRO UNDS HAVE BEEN RAISED: ' (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS 1,99,43 ,610/- MADE BY THE AO ON ACCOUNT OF EXCISE DUTY PAYMENT ON FINISHE D GOODS WHICH IS NOT INCLUDED IN THE VALUE OF CLOSING STOCK. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD CIT(A) ERRED IN TAXING THE NET OF INTEREST AND THUS GIVING RELIEF FOR INTEREST PAID BY THE ASSESSEE TO THE I.T DEPARTMENT.' 22. THE FIRST GROUND RELATES TO AN ADDITION OF RS 1 ,99,43,610/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF VALUATION OF CL OSING STOCK OF FINISHED GOODS DUE TO EXCISE DUTY PAYABLE. THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS DELETED THE ADDITION BY OBSERVING THA T SIMILAR ISSUE WAS CONSIDERED IN ASSESSEE'S OWN CASE FOR THE ASSESSMEN T YEARS 1992-93 AND 1993-94 IN FAVOUR OF THE ASSESSEE. 23. BEFORE US, IT WAS A COMMON GROUND BETWEEN THE P ARTIES THAT FOR THE ASSESSMENT YEAR 1992-93, SIMILAR ISSUE HAS BEEN ADJ UDICATED BY THE TRIBUNAL VIDE ITS ORDER IN ITA NO 119/PN/96 DATED 1 3.9.2011 IN FAVOUR OF THE ASSESSEE. IN VIEW OF THE PRECEDENT, COPY OF WHI CH HAS BEEN PLACED ON RECORD, THE DECISION OF THE COMMISSIONER OF INCOME- TAX (APPEALS) DELETING THE ADDITION OF RS 1,99,43,610/- ON ACCOUNT OF EXCI SE DUTY PAYABLE ON FINISHED GOODS NOT INCLUDED IN THE VALUATION OF CLO SING STOCK IS HEREBY AFFIRMED. THUS, REVENUE FAILS ON THIS GROUND. 24. THE FACTS IN RELATING TO SECOND GROUND ARE THAT DURING THE YEAR, THE ASSESSEE RECEIVED INTEREST OF RS 25,63,992/- FROM T HE INCOME-TAX DEPARTMENT AND ALSO PAID INTEREST OF RS 10 LAKHS TO THE DEPARTMENT. THE CLAIM OF THE ASSESSEE WAS THAT ONLY THE NET INTERES T SHOULD BE CHARGED TO TAX. THIS PLEA WAS REJECTED BY THE ASSESSING OFFICE R WHEREAS THE COMMISSIONER OF INCOME-TAX (APPEALS) ALLOWED THE PL EA OF THE ASSESSEE IN VIEW OF THE DECISION OF THE DELHI BENCH OF THE T RIBUNAL IN THE CASE OF R N AGARWAL V. ITO. AGAINST SUCH A DECISION, REVENUE IS PRESENTLY IN APPEAL BEFORE US. 25. BEFORE US, IT WAS A COMMON POINT BETWEEN THE PA RTIES THAT SIMILAR ISSUE AROSE IN ASSESSEE'S OWN CASE FOR THE ASSESSME NT YEAR 1992-93 IN ITA NO 119/PN/96 (SUPRA) WHEREIN THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE, BY WAY OF A MAJORITY DECISION VIDE ORDER DATED 13.9.2011 (SUPRA). IT HAS BEEN HELD THA T THE ASSESSEE IS ASSESSABLE IN RESPECT OF THE GROSS INTEREST RECEIVE D FROM THE INCOME-TAX DEPARTMENT AND NOT MERELY ON THE NET INTEREST REMAI NING AFTER SET OFF OF INTEREST PAID TO THE DEPARTMENT. THE INTEREST PAYME NT HAS ALSO NOT BEEN HELD TO BE DEDUCTIBLE FROM INTEREST RECEIVED IN ORD ER TO ARRIVE AT THE ASSESSABLE INCOME. IN THIS VIEW OF THE MATTER, THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ISSUE IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED. THUS, ON THIS GROUND REVENUE SUCCEEDS. 26. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. 34. IN VIEW THEREOF, WE ALLOW THE ALTERNATE PLEA RA ISED BY THE ASSESSEE THAT THE PROVISIONS OF SECTION 35AB OF THE ACT ARE TO BE APPLIED ON THE TOTAL LIABILITY OF ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 27 RS.8.82 CRORES AND 1/6 TH ON SAID AMOUNT IS TO BE ALLOWED AS DEDUCTION IN TH E HANDS OF THE ASSESSEE. THE GROUND OF APPEAL NO.1 R AISED BY THE ASSESSEE IS THUS, PARTLY ALLOWED. 35. THE ISSUE IN GROUND OF APPEAL NO.2.1 RAISED BY THE ASSESSEE IS AGAINST THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE ITEMS CONSIDERED BY THE AUTHORITIES BELOW FOR EXCLUSION F ROM THE PROFITS OF BUSINESS FOR THE PURPOSE OF COMPUTING PROFITS ELIGIBLE FOR DEDUC TION UNDER SECTION 80HHC OF THE ACT WERE AS UNDER:- A) INTEREST ON INTER-CORPORATE DEPOSITS OF RS.71,93,00 0/-; B) BANK INTEREST OF RS.2,54,000/-; C) NSC INTEREST OF RS.35,000/-; AND D) INTEREST RECEIVED ON INCOME-TAX REFUNDS OF RS.7, 08,000/- 36. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE POINTED OUT THAT THE ABOVE SAID ISSUE OF EXCLUSION OF ITEMS OF INCOM E ENLISTED IN GROUND OF APPEAL NO.2.1 WAS DECIDED AGAINST THE ASSESSEE BY THE TRIB UNAL IN ASSESSEES OWN CASE IN ITA NO.580/PN/2000, RELATING TO ASSESSMENT YEAR 1996-97, ORDER DATED 02.02.2001. THE TRIBUNAL VIDE PARA 29 ON PAGE 20 H AD CONSIDERED THE SAID RECEIPTS AND VIDE PARA 31 HAD HELD THAT THE INTERES T EARNED ON DEPOSITS WITH MIDC, MSEB AS WELL AS INTEREST ON OUTSTANDING AMOUN T FROM THE CUSTOMERS ARE ASSESSABLE UNDER THE HEAD PROFIT & GAIN OF THE BU SINESS. HOWEVER, THE CONTENTION OF ASSESSEE IN RESPECT OF OTHER ITEMS I. E. INTEREST RECEIVED FROM EMPLOYEES, BANK INTEREST, INTEREST RECEIVED ON INCO ME TAX, INTER CORPORATE DEPOSITS, HAD NO NEXUS BETWEEN INCOME EARNED AND TH E BUSINESS ACTIVITY OF THE ASSESSEE AND THE SAME ARE TO BE ASSESSED AS INCOME FROM OTHER SOURCES. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THA T THE ITEMS OF INCOME I.E. INTEREST ON INTER-CORPORATE DEPOSITS, BANK INTEREST , NSC INTEREST AND INTEREST RECEIVED ON INCOME-TAX REFUNDS ARE THE ITEMS TO BE EXCLUDED WHILE COMPUTING PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE GROUND OF APPEAL NO.2.1 IS THUS, DISMISSED. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 28 37. THE ISSUE VIDE GROUND OF APPEAL NO.2.2 IS AGAIN ST COMPUTATION OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE A CT BY EXCLUDING TRAINING COURSE FEES OF RS.5,66,000/-. 38. THE ASSESSING OFFICER AND THE CIT(A) HAD HELD T HAT THE SAID TRAINING COURSE FEES OF RS.5,66,000/- COULD NOT FORM PART OF PROFITS OF BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT AS IT IS COVERED BY EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. 39. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE POINTED OUT THAT THE TEST TO BE APPLIED WAS WHETHER NATURE OF SERVIC ES WERE OF SIMILAR NATURE. WE FIND NO MERIT IN THE PLEA OF ASSESSEE AS THE TRAINI NG COURSE FEES IN NO WAY CAN BE ATTRIBUTED TO EXPORT BUSINESS AND HENCE CANNOT FORM PART OF PROFITS OF BUSINESS, WHICH ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 80HH C OF THE ACT. CONFIRMING THE ORDER OF CIT(A), WE DISMISS THE GROUND OF APPEAL NO .2.2 RAISED BY THE ASSESSEE. 40. THE ISSUE VIDE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS IN RELATION TO INCLUSION OF INTEREST INCOME RECEIVED FROM THE I NCOME-TAX DEPARTMENT IN THE HANDS OF THE ASSESSEE. 41. THE CASE OF THE ASSESSEE WAS THAT IT HAD RECEIV ED INTEREST INCOME OF RS.7,43,523/- AND HAD PAID INTEREST OF RS.10,82,787 /- FROM THE INCOME-TAX DEPARTMENT. HOWEVER, IN THE COMPUTATION OF INCOME, THE ASSESSEE HAD ADDED BACK SUM OF RS.3,39,264/- ON ACCOUNT OF INTEREST PA ID TO THE DEPARTMENT. THE ASSESSING OFFICER AND THE CIT(A) HOWEVER, HELD THAT THE INTEREST PAID UNDER SECTION 234A, 234B AND 234C OF THE ACT WERE NOT DED UCTIBLE AS PER PROVISIONS OF SECTION 40(A)(II) OF THE ACT. 42. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE BEFORE US FAIRLY POINTED OUT THAT THE ISSUE IS TO BE DECIDED AGAINST THE ASSESSEE. IN VIEW THEREOF, WE UPHOLD THE ORDER OF CIT(A) IN HOLDING THAT THE T OTAL INTEREST PAID BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION I.E. RS.10 ,82,787/- IS TO BE ADDED TO ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 29 THE INCOME OF THE ASSESSEE. THE GROUND OF APPEAL N O.3 RAISED BY THE ASSESSEE IS THUS, DISMISSED. 43. THE ISSUE IN GROUND OF APPEAL NO.4 RAISED BY TH E ASSESSEE IS WITH REGARD TO THE DEPRECIATION ON POLLUTION CONTROL AND ENERGY SAVINGS DEVICES. 44. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS.4.56 CRORES, WHICH INCLUDED DEPRECIATION OF RS.6 ,46,635/- AND RS.77,859/- ON POLLUTION CONTROL AND ENERGY SAVINGS DEVICES @ 100% . THE ADDITION IN THE ASSETS WAS MADE IN THE BLOCK FOR THE LATER 6 MONTHS, BUT T HE DEPRECIATION WAS CLAIMED BY THE ASSESSEE @ 100% AND NOT @ 50%. THE AUTHORIT IES BELOW WERE OF THE VIEW THAT THE DEPRECIATION ALLOWABLE FOR ASSETS USE D FOR LESS THAN 180 DAYS IN ANY PREVIOUS YEAR HAD TO BE RESTRICTED TO 50% OF THE AM OUNT CALCULATED AT PRESCRIBED PERCENTAGE. 45. THE ASSESSEE IS AGGRIEVED BY THE SAID DISALLOWA NCE. HOWEVER, IN VIEW OF THE SECOND PROVISO TO SECTION 32(1) OF THE ACT, WHE REIN ASSET IS ACQUIRED AND PUT TO USE FOR THE PURPOSE OF BUSINESS FOR LESS THAN 18 0 DAYS IN THAT PREVIOUS YEAR, THEN THE DEDUCTION UNDER SECTION 32(1) OF THE ACT I N RESPECT OF SUCH ASSET IS TO BE RESTRICTED TO 50% OF THE AMOUNT PRESCRIBED. THE AS SESSEE WAS ENTITLED TO CLAIM DEPRECIATION @ 100%. HOWEVER, SINCE THE ASSET WAS ACQUIRED IN USE FOR LESS THAN 180 DAYS, THE DEPRECIATION HAD TO BE ALLOWED A T 50%, IN VIEW OF THE PROVISIONS OF THE ACT. THUS, THE GROUND OF APPEAL NO.4 RAISED BY THE ASSESSEE IS DISMISSED. 46. THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSE E IS IN RELATION TO COMPUTATION OF DEDUCTION UNDER SECTION 80M OF THE A CT. 47. THE PLEA OF THE LEARNED AUTHORIZED REPRESENTATI VE FOR THE ASSESSEE WAS THAT SIMILAR ISSUE HAD ARISEN BEFORE THE TRIBUNAL I N ASSESSEES OWN CASE IN ITA NO.579/PN/2000 RELATING TO ASSESSMENT YEAR 1995-96 AND VIDE ORDER DATED 04.11.2007, THE ISSUE WAS DECIDED AGAINST THE ASSES SEE. ITA NO.525/PN/2003 SANDVIK ASIA LIMITED 30 48. THE ASSESSING OFFICER HAD HELD THAT NO DEDUCTIO N WAS ADMISSIBLE UNDER SECTION 80M OF THE ACT ON DIVIDEND INCOME FROM UTI BECAUSE OF THE AMENDMENT BY THE FINANCE ACT, 1993 W.E.F. ASSESSMENT YEAR 199 6-97. THE PLEA OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES WAS THAT THE SAID PROHIBITION WAS ONLY IN RESPECT OF DIVIDEND INCOME FROM UNITS OF UTI AND DI D NOT APPLY TO DIVIDEND INCOME FROM MASTER SHARES OF UTI. HOWEVER, THE SAI D DISTINCTION POINTED OUT BY THE ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFI CER AND ALSO BY THE CIT(A). 49. WE FIND THAT IN ASSESSEES OWN CASE (SUPRA), TH E TRIBUNAL HAD ALSO COME TO THE FINDING THAT BOTH THE DIVIDEND FROM UTI OR D IVIDEND FROM MASTER SHARES OF UTI WERE UNDER THE UMBRELLA OF UTI AND W.E.F. 01.04 .1996, NO DEDUCTION UNDER SECTION 80M OF THE ACT WOULD BE AVAILABLE TO THE AS SESSEE. FOLLOWING THE SAME PARITY OF REASONING, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE. 50. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON THIS 10 TH DAY OF APRIL, 2015. SD/- SD/- (R.K. PANDA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 10 TH APRIL, 2015 GCVSR COPY OF THE ORDER IS FORWARDED TO: - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-III, PUNE; 4) THE CIT-III, PUNE; 5) THE DR A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE