BEML Limited, Bangalore V. DCIT, Bangalore

ITA 618/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5607 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 04-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CIT IDR
• Assessee Lawyers: R E BALASUBRAMANYAM
• Keywords: Capital asset; Revenue expenditure
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO. 618/BANG/2010 ASSESSMENT YEAR : 2006-07 BEML LIMITED, NO.23/1, BEML SOUDHA, 4 TH MAIN, SAMPANGIRAMNAGAR, BANGALORE 560 027. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. : RESPONDENT APPELLANT BY : SHRI R.E. BALASUBRAMANYAM, C.A. RESPONDENT BY : SHRI G.V. GOPALA RAO, CIT-I(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY THE ORDER OF LD. CIT(A)-I IN ITA NO.99/DC 11(2)/A-I/08-09 DATED 15.2 .2010 FOR THE A.Y. 2006-07. 2. THE ASSESSEE HAS RAISED FOUR GROUNDS IN ITS APPE AL, HOWEVER THE CRUX OF THE ISSUE IS THE DISALLOWANCE OF TECHNICAL ASSISTANCE FEE PAID TO ROTEM FOR AN AMOUNT OF RS.8,69,26,609 CONSTRUING IT NOT TO BE AN ITA NO.618/BANG/10 PAGE 2 OF 5 EXPENDITURE IN THE NATURE OF REVENUE BUT CAPITAL I N NATURE FOLLOWING THE DECISION IN EIMCO-K.C. P. LTD. V. CIT (2000) REPORTED IN 242 ITR 659 (SC) . 3. THE APPELLANT IS A PUBLIC SECTOR COMPANY MANUFA CTURING EARTH MOVING EQUIPMENTS, RAIL PRODUCTS AND DEFENSE PRODUC TS. IT FILED ITS RETURN OF INCOME FOR THE A.Y. 2006-07 DECLARING A TOTAL INCOM E OF RS.267,67,94,870 ON 29.11.2006. SUBSEQUENTLY THE COMPANY FILED A RE VISED RETURN ON 20.3.2007. THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT ON 22.12.2008. 4. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS , LD. AO NOTICED THAT THE ASSESSEE HAD CLAIMED EXPENDITURE BEING TEC HNICAL ASSISTANCE FEE PAID TO A KOREAN COMPANY VIZ., ROTEM TO THE TUNE OF RS.8,69,26,609. LD. AO AFTER EXAMINING THE AGREEMENT MADE BY THE ASSESS EE COMPANY WITH THE KOREAN COMPANY, ROTEM, MADE THE FOLLOWING OBSER VATIONS: (A) THE ASSESSEE COMPANY IS NORMALLY ENGAGED IN TH E MANUFACTURE AND SALE OF EMU AND RAILWAY ROLLING STO CK. (B) THE TECHNICAL FEE PAID TO THE KOREAN COMPANY R OTEM WAS FOR MANUFACTURING OF ROLLING STOCK VIZ., STAINL ESS STEEL FOR THE EMU USE TO BE DELIVERED FOR DELHI METRO RAIL. (C) AS PER THE TECHNICAL AGREEMENT, THE KOREAN COM PANY ROTEM WILL PROVIDE THE APPELLANT WITH THE DESIGN, D EVELOPMENT AND OTHER ENGINEERING ASPECTS ON A CASE TO CASE BAS IS. (D) THE PROPRIETARY RIGHT IN THE KNOW HOW WOULD BE LONG TO ROTEM AND APPELLANT IS ONLY AUTHORIZED TO USE THE S AME. (E) THE APPELLANT HAS THE EXCLUSIVE RIGHT TO USE T HE TECHNOLOGY IN INDIA PROVIDED BY ROTEM. BASED ON THESE FINDINGS, THE LD. AO CAME TO THE CON CLUSION THAT ITA NO.618/BANG/10 PAGE 3 OF 5 (I) THE ASSESSEE HAS STARTED A NEW LINE OF BUSINESS AND THE TECHNOLOGY OBTAINED IS FOR MANUFACTURE OF NEW PRODU CTS. (II) THE ASSESSEE DERIVES BENEFIT OF THE EXPENDITUR E OVER A PERIOD OF TIME. (III) THE TECHNICAL KNOWLEDGE AND ASSISTANCE AGREED TO BE SUPPLIED BY ROTEM IS A CAPITAL ASSET. (IV) THE ASSESSEE HAS BECOME PART OWNER OF THE TECH NICAL KNOW-HOW WITHIN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT. (V) THE TECHNOLOGY OBTAINED WOULD NOT CHANGE RAPIDL Y AND WOULD NOT BECOME OBSOLETE WITHIN A YEAR AND THE BENEFITS ARE ACCRUED ON A LONG TERM BASIS. (VI) THE PAYMENT FOR INITIAL TECHNOLOGY WOULD BE CA PITAL. 5. FURTHER, RELYING ON THE JUDICIAL PRONOUNCEMENT I N EIMCO-K.C. P. LTD. V. CIT (2000) REPORTED IN 242 ITR 659 (SC), THE LD. AO TREATED THE AMOUNT PAID FOR TECHNICAL ASSISTANCE FEE TO ROTEM AS CAPIT AL EXPENDITURE AND DISALLOWED IT AS REVENUE EXPENDITURE IN COMPUTING I TS INCOME. THE APPELLANT MADE ELABORATE SUBMISSIONS BEFORE THE LD. CIT(APPEALS) CITING VARIOUS CASE LAWS. HOWEVER, THE LD. CIT(A) HELD TH AT THERE IS NO CHANGE IN THE LINE OF BUSINESS FROM MANUFACTURE OF EMU TO MET RO RAIL COACHES BY SETTING UP A NEW BUSINESS BUT NEW RAIL COACHES WITH ADVANCED TECHNOLOGY HAS BEEN PURCHASED AND BY PAYING AN UPFRONT FEE THE APPELLANT HAS GOT SUBSTANTIAL RIGHT TO USE THE ROTEM RAIL TECHNOLOGY EXTENDING OVER A LARGE TERRITORY OF EARTH FOR A VERY LONG PERIOD WHICH MAY EVEN BE CALLED PART OWNERSHIP OVER THE INCOME YIELDING TECHNOLOGY DERIV ING ENDURING BENEFIT AND THEREFORE THE UPFRONT FEE PAID IS CAPITAL IN NA TURE, HENCE DISALLOWED AND ADDITION SUSTAINED. ITA NO.618/BANG/10 PAGE 4 OF 5 6. AFTER HEARING BOTH THE PARTIES, IT WAS REQUIRED BY THE BENCH TO SUBMIT THE ANNUAL REPORT OF THE APPELLANT FOR THE PREVIOUS YEAR 2005-06. ON PERUSING THE ANNUAL REPORT, THE BENCH OBSERVED A QU ALIFYING NOTE IN PAGE 38 OF THE ANNUAL REPORT ITEM NO.25 NOTES ANNEXED TO AND FORMING PART OF ANNUAL STATEMENT OF ACCOUNTS FOR THE YEAR ENDED 31. 3.2006 SUB-HEAD (II) NOTES 2(B). THE SAME IS REPRODUCED FOR REFERENCE; ADVANCE FOR TECHNICAL ASSISTANCE RS.869.27 LAKHS REPRESENTS FIR ST INSTALLMENT PAYMENT TO A FOREIGN COLLABORATOR M/S. ROTEM, KOREA TOWARDS TRANSFER OF TECHNOLOGY AND TECHNICAL ASSISTANCE IN TERMS OF MEMORANDUM OF AGREEMENT WITH THE APPROVAL OF GOVERNMENT OF INDIA, PENDING EXECUTION OF DETAILED COLLABORATION AGREEMENT. 7. IT IS EVIDENT FROM THE ABOVE THAT THE AMOUNT OF RS.869.27 LAKHS PAID TO ROTEM IS ONLY AN ADVANCE FOR TECHNICAL ASSISTANC E. AN ADVANCE PAYMENT FOR EXPENDITURE CANNOT BE REVENUE EXPENDITU RE FOR THE CURRENT YEAR. THEREFORE A THOROUGH EXAMINATION AS TO THE N ATURE OF PAYMENT IS VITAL BEFORE DECIDING THE LEGAL ISSUE. MORE OVER FROM TH E PAPER-BOOK PRODUCED BEFORE US, IT IS EVIDENT THAT THE CASE LAWS RELIED UPON BY THE APPELLANT WAS NOT BEFORE THE LD. AO FOR EXAMINATION. THEREFORE, IN THE INTEREST OF JUSTICE, THE ENTIRE ISSUES IS REMITTED BACK TO THE FILE OF L D. AO FOR A THROUGH EXAMINATION OF THE FACTS AND LAW INVOLVED IN THE CA SE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW. 8. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ITA NO.618/BANG/10 PAGE 5 OF 5 PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF MAY, 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 13 TH MAY, 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.