DCIT, CHENNAI V. M/s. Panasonic Home Appliances Ltd., CHENNAI

ITA 718/CHNY/2010

• Counselvise Citation: 71821714 RSA 2010
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 01-12-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 14-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P MADHANASEKARAN JT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Bad and doubtful debts; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NO. 82/MDS/2009 (ASSESSMENT YEAR : 2004-05 ) M/S PANASONIC HOME APPLIANCES INDIA COMPANY LIMITED NO.5, SHOLAVARAM VILLAGE PONNERI TALUK CHENNAI 600 067 VS THE DY. CIT COMPANY CIRCLE V(1) CHENNAI 600 034 [PAN AAACI1304E] (APPELLANT) (RESPONDENT) I.T.A NOS. 1467/MDS/2009 (ASSESSMENT YEARS : 2004-05) THE DY. CIT COMPANY CIRCLE V(1) CHENNAI 600 034 VS M/S PANASONIC HOME APPLIANCES INDIA COMPANY LTD NO.5, SHOLAVARAM VILLAGE PONNERI TALUK CHENNAI 600 067 (APPELLANT) (RESPONDENT) I.T.A NO. 718/MDS/2010 (ASSESSMENT YEAR : 2005-06 ) THE DY. CIT COMPANY CIRCLE V(1) CHENNAI 600 034 VS M/S PANASONIC HOME APPLIANCES INDIA COMPANY LIMITED SPIC HOUSE, ANNEXE 6 TH FLOOR GUINDY CHENNAI 600 067 [PAN AAACI1304F] (APPELLANT) (RESPONDENT) ITA 82 & 1467/09 718/10 :- 2 -: ASSESSEE BY : SHRI R.VIJAYARAGHAVAN, ADVOCATE DEPARTMENT BY : SHRI P.MADHANASEKARAN, JT. CIT DATE OF HEARING : 01-12-2011 DATE OF PRONOUNCEMENT : 06-01-2012 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: I.T.A.NO. 1467/MDS/2009 & 82/MDS/2009 A.Y 2004-0 5 THESE APPEALS FOR ASSESSMENT YEAR 2004-05, ARE DIRE CTED AGAINST THE ORDER OF THE LD. CIT(A), CHENNAI, DATED 9.7.2008. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ENTIRE PAYMENT MADE BY THE ASSESSEE TO MATSUSHITA ELECTRIC INDUSTRIAL COMPANY LTD. (MEI), JAPAN UNDER A COLLABORATION AGREEMENT FOR MIXER GRINDERS CONSTITU TES REVENUE EXPENDITURE AND NO PORTION OF THE SAME CAN BE DISALLOWED. 2.2. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE ASSESSEE HAD ACQUIRED A VALUABLE RIGHT FOR MANUFACT URE OF MIXER GRINDERS WHICH WAS USED BY THE ASSESSEE FOR T HE PURPOSE OF ITS BUSINESS TO EARN INCOME OVER A CONSI DERABLE PERIOD AND THE AGREEMENT WITH MEI WAS NOT IN THE NA TURE OF A SHORT-TERM VENTURE. 2.3. THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT F OR TREATING AN EXPENDITURE AS A CAPITAL ONE, IT IS NOT NECESSARY THAT THE ASSESSEE SHOULD BE THE ABSOLUTE OWNER OF T HE PROPERTY OR USE THE ASSET EXCLUSIVELY. 3.1. THE LEARNED CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE OF ROYALTY PAYMENT MADE BY THE ASSESSE E COMPANY TO MEI IN RESPECT OF ELECTRIC RICE COOKERS TO 25% OF THE PAYMENT. ITA 82 & 1467/09 718/10 :- 3 -: 3.2. THE LEARNED CIT(A) FAILED TO NO E THAT THE IMP UGNED PAYMENT WILL RESULT IN ENDURING BENEFIT TO THE ASSE SSEE, IN THE LIGHT OF THE FACT THAT THE COLLABORATION AGREEM ENT BETWEEN THE ASSESSEE AND MEI DOES NOT BAR THE ASSES SEE FROM PARTING WITH THE TECHNICAL KNOWHOW IN THE FORM OF A SUB LICENCE IN FAVOUR OF ANY THIRD PARTY. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) M Y BE SET ASIDE AND THAT OF THE ASSESSING O FFICER RESTORED. 2. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS CONTRARY TO LAW, FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N CONFIRMING THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING 25% OF THE ROYALTY PAYMENT WITH REFEREN CE TO ELECTRIC RICE COOKER AS TOWARDS ACQUISITION OF A CA PITAL ASSET. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT AS PER CLAUSE 4.01 OF THE AGREEMENT MEI HAD AGREED TO GRANT TO PANASONIC HOME APPLIANCES INDIA CO LTD(PHAI) (FORMERLY KNOWN AS INDO MATSUSHITA APPLIANCES CO.LTD(IMACO) ONLY A NON EXCLUSIVE LICENSE TO MANUFACTURE THE PRODUCTS. 4. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N HOLDING THAT APPELLANT HAS PARTED WITH THE TECHNICA L ASSISTANCE AND OTHER TECHNICAL KNOW HOW IN THE FORM OF SUB LICENSE IN FAVOUR OF ANY THIRD PARTY. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N NOT PROPERLY APPRECIATING THE TERMS OF CLAUSE 6.01 OF THE AGREEMENT IN THE RIGHT PERSPECTIVE. ITA 82 & 1467/09 718/10 :- 4 -: 6. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT AS PER CLAUSE 6.01 OF THE AGREEMENT, SHOULD THE SUBLICENSING BECOME NECESSARY , THE TERMS OF SUBLICENSE SHALL BE AS MUTUALLY AGREED UPON IN ADVANCE BETWEEN MEI AND PHAI (IMACO) IN WRITING AND SHALL FURTHER BE SUBJECT TO NECESSARY APPROVAL OF THE GOVERNMENT. 7. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT THE APPELLANT HAS NOT PARTED WITH THE TECHNICAL ASSISTANCE AND TECHNICAL KNOW HOW IN THE FORM OF A SUB-LICENCE IN FAVOUR OF ANY THIRD PARTY . 8. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRE D IN RESTRICTING THE CLAIM OF DEDUCTION U/S 80HHC. 9. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N HOLDING THAT INCOME FROM PROCESS SALE SCRAP, CREDIT BALANCE WRITTEN BACK AND INSURANCE CLAIM RECEIVED SHOULD BE EXCLUDED FROM THE PROFITS WHILE COMPUTING RELIEF U/S .80HHC. 10. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE PROCESS SALE SCRAP REPRESENTS INCOME REALIZED FROM SALE OF SCRAP GENERATED DURING THE MANUFACTURING ACTIVITIES AND I S INEXTRICABLY CONNECTED WITH THE EXPORT ACTIVITY. 11. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT PROVISIONS WRITTEN BACK REPRESENTS PROVISIONS ALLOWED AS DEDUCTION IN EARLI ER YEARS AND WHICH WAS NO LONGER REQUIRED WERE REVERSE D IN THIS YEAR AND WRITTEN BACK. THIS WRITE BACK WAS ASSESSED AS BUSINESS INCOME U/S 41 (1) AND HENCE SHOULD NOT BE REDUCED FROM THE PROFITS WHILE COMPUT ING DEDUCTION U/S 80HHC. 12. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE INSURANCE CLAIM RECEIV ED IS TOWARDS COMPENSATION FOR GOODS DAMAGED DURING TRANS IT AND ARE IN THE NATURE OF SALE CONSIDERATION. 13. APPELLANT CRAVES LEAVE TO ADDUCE ADDITIONAL GROUNDS AT THE TIME OF HEARING. ITA 82 & 1467/09 718/10 :- 5 -: 3. BRIEFLY STATED, THE FACTS OF THE CASES ARE THAT THE ASSESSEE- COMPANY, NAMELY M/S PANASONIC HOME APPLIANCES INDIA COMPANY LTD. [FORMERLY KNOWN AS INDO MATSUSHITA APPLIANCES COMPA NY LTD (IMACO)] FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2004-05 ON 1.11.2004 DECLARING TOTAL INCOME OF ` 43,64,549/-. THE ASSESSEE- COMPANY ENTERED INTO TWO COLLABORATION AGREEMENTS W ITH M/S MATSUSHITA ELECTRIC INDUSTRIAL CO. LTD., JAPAN (MEI ) FOR THE MANUFACTURE OF ELECTRIC RICE COOKERS AND MIXER GRIN DERS. THE COLLABORATION AGREEMENTS WERE DRAFTED IN ACCORDANCE WITH THE GUIDELINES PRESCRIBED BY THE GOVERNMENT OF INDIA. THE MODE OF PAYMENT WAS BY WAY OF PAYMENT OF ONE AMOUNT IN LUMP SUM AND THE OTHER WAS TO BE PAID IN THE FORM OF ROYALTY OF THE COMPANY ON RECURRING BASIS. THE PAYMENT MADE TO MEI AS INIT IAL LUMP SUM PAYMENTS WERE PROPERLY CAPITALIZED IN THE BOOKS OF ACCOUNT BY THE ASSESSEE-COMPANY AS FIXED ASSETS AND ALSO CLAIMED D EPRECIATION THEREON. THE MEI RENDERED TECHNICAL ASSISTANCE A ND EXPERTISE TO THE ASSESSEE-COMPANY IN SETTING UP A FACTORY IN INDIA T O MANUFACTURE THE PRODUCTS. THE AFORESAID TECHNICAL ASSISTANCE COMP RISED OF ACTUAL TRAINING TO EFFECTUATE THE FOLLOWING ITEMS (HEREINA FTER REFERRED TO AS TECHNICAL ASSISTANCE): ITA 82 & 1467/09 718/10 :- 6 -: 1. ADVICE AND INSTRUCTION ON THE SETTING UP OF THE FACTORY INCLUDING FACTORY BUILDING AND INCIDENTAL CONSTRUCTION THERETO AND FACTORY LAYOUT; 2. ADVICE AND INSTRUCTION FOR THE MANUFACTURE, TES T AND INSPECTION OF THE PRODUCTS; 3. ADVICE AND INSTRUCTION ON INSTALLATION, OPERATI ON AND MAINTENANCE OF THE PRODUCTION EQUIPMENT USED FOR THE MANUFACTURE OF THE PRODUCTS; 4. OTHER NECESSARY ADVICE AND INSTRUCTION. 4. PURSUANT TO THE TERMS AND CONDITIONS OF THE AGREEME NT, MEI AGREED TO DELIVER TO IMACO A SET OF THE TECHNICAL K NOW-HOW TO THE EXTENT AVAILABLE AS ON THE DATE OF THIS AGREEMENT W HICH CAN BE EXPLAINED AS UNDER: SECTION PRODUCT GROUP PRODUCT SPECIFICATIONS TITLE OF INDIVIDUAL DOCUMENTS PRODUCT SPECIFICATIONS, SPECIFICATIONS OF PRODUCT, INSPECTION, PRODUCT TESTING METHOD. COMPONENTS COMPONENTS LIST COMPONENTS SPECIFICATIONS, SPECIFICATIONS OF COMPONENTS INSPECTION. MANUFACTURE PRODUCTION EQUIPMENT PROCESS CONTROL CHART MACHINERY AND EQUIPMENT LIST. PROCESS CONTROL CHART SPECIFICATIONS OF MACHINERY AND EQUIPMENT, WORKING INSTRUCTIONS AND OPERATING INSTRUCTIONS, MAINTENANCE STANDARDS, QUALITY TROUBLES, CAUSES AND REMEDIES, MEASURING INSTRUMENTS LIST, CONSUMABLE ITEMS LIST. INSPECTION JIGS AND TOOLS LIST PROCESS CONTROL SPECIFICATIONS OF JIGS AND TOOLS PROCESS INSPECTION ITA 82 & 1467/09 718/10 :- 7 -: STANDARD SPECIFICATIONS QUALITY CONTROL RULES. STORAGE STORAGE STANDARDS LIST PRODUCT STORAGE STANDARD, MACHINE PARTS AND INDIRECT MATERIALS STORAGE STANDARD. PACKING PACKING LIST PACKING SPECIFICATIONS 5. SIMILAR TERMS AND CONDITIONS WERE THERE IN AGREEMEN T DATED 17.8.2000 ENTERED INTO BETWEEN THE ASSESSEE AND THE MEI FOR THE MANUFACTURE OF MIXER GRINDER/BLENDER. 6. IN REVENUES APPEAL, THE FIRST ISSUE PERTAINS TO TH E FINDING OF THE LD. CIT(A) REGARDING PAYMENT MADE BY THE ASSESS EE TO M/S MATUSHITA ELECTRIC INDUSTRIAL CO. LTD, JAPAN (MEI) UNDER A COLLABORATION AGREEMENT IN RELATION TO MANUFACTURE OF MIXER GRIND ERS, WHICH HAS BEEN TREATED BY THE LD. CIT(A) AS REVENUE EXPENDITU RE AS AGAINST TREATED BY THE ASSESSING OFFICER TO THE EXTENT OF 2 5% OF THE ROYALTY PAYMENT AS CAPITAL EXPENDITURE. THE CASE OF THE RE VENUE IS THAT THE ASSESSEE HAD ACQUIRED A VALUABLE RIGHT FOR THE MANU FACTURE OF MIXER GRINDERS WHICH WAS USED BY IT FOR THE PURPOSE OF IT S BUSINESS TO EARN INCOME OVER A CONSIDERABLE PERIOD AS THE AGREEMENT WAS NOT IN THE NATURE OF A SHORT TERM VENTURE. IT WAS ARGUED BY THE LD.DR THAT FOR TREATING THE EXPENDITURE AS A CAPITAL ONE, IT IS NO T NECESSARY THAT THE ASSESSEE SHOULD BE THE ABSOLUTE OWNER OF THE PROPER TY/ASSET OR IT SHOULD HAVE BEEN USED EXCLUSIVELY FOR THAT PURPOSE. ON THE OTHER ITA 82 & 1467/09 718/10 :- 8 -: HAND, THE LD.AR HAS SUPPORTED THE FINDING OF THE LD . CIT(A) IN THIS REGARD. 7. AFTER HEARING BOTH SIDES, WE HAVE FOUND THAT THE TE CHNICAL KNOW-HOW FOR SETTING UP OF THE FACTORY AND COMMENCI NG PRODUCTION BY THE ASSESSEE-COMPANY WAS PROVIDED BY MEI IN CONSIDE RATION OF A LUMP SUM PAYMENT WHICH WAS CAPITALIZED IN ASSESSEES BOO KS OF ACCOUNT IN THE RESPECTIVE YEARS OF PAYMENT. THE ROYALTY WAS PAID BY THE COMPANY BASED ON THE SALES EFFECTED BY IT @ 3% IN T HE CASE OF ELECTRIC RICE COOKERS AND @ 4% IN THE CASE OF MIXER GRINDERS . THE ASSESSEE- COMPANY PAID ROYALTY ON SALES EFFECTED BY IT AND CL AIMED THE SAME AS REVENUE EXPENDITURE DEDUCTIBLE UNDER THE PROVISIONS OF THE ACT. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE HON 'BLE MADRAS HIGH COURT RENDERED IN THE CASE OF CIT VS SOUTHERN SWITC HGEAR LIMITED VS CIT, 232 ITR 359. THE ASSESSING OFFICER HAS CONSID ERED A PORTION OF THIS ROYALTY PAYMENT AS TOWARDS ACQUISITION OF A CA PITAL ASSET BY THE ASSESSEE-COMPANY AND THE BALANCE TOWARDS REVENUE EX PENDITURE ALLOWABLE UNDER THE ACT. ACCORDINGLY, THE ASSESSIN G OFFICER HAS TREATED 25% OF THE ROYALTY PAYMENT AFTER ESTIMATION TOWARDS COST OF ACQUISITION OF THE CAPITAL ASSET AND DISALLOWED THE SAME. 8. IT WAS ARGUED BY THE LD.AR THAT RELIANCE ON THE DEC ISION OF SOUTHERN SWITCHGEAR LIMITED (SUPRA) IS NOT CORRECT BECAUSE THAT ITA 82 & 1467/09 718/10 :- 9 -: DECISION WAS RENDERED WITH RESPECT TO DISTINGUISHAB LE AND ENTIRELY DIFFERENT FACTS. IT WAS FURTHER ARGUED THAT THE D ECISION IN THE ABOVE CASE WAS RENDERED IN THE CONTEXT OF SPECIFIC FACTS OF THAT CASE IN WHICH THE FOREIGN COMPANY HAD AGREED NOT TO MANUFACTURE I N INDIA, ANY OF THE PRODUCTS IN QUESTION OR GRANT OR MAKE AVAILABLE TO ANY OTHER PERSON ANY INFORMATION RELATING TO MANUFACTURE, LIC ENCE OR RIGHTS, FOR ANY OF THE PRODUCTS IN QUESTION IN INDIA THEREBY CO NFERRING ON THE ASSESSEE EXCLUSIVE RIGHT OF MANUFACTURE AND SALE OF THE PRODUCTS. IN THAT CIRCUMSTANCE, IT WAS HELD BY THE HON'BLE HIGH COURT THAT THE ASSESSEE HAD PAID ROYALTY TOWARDS ACQUISITION OF AN EXCLUSIVE PRIVILEGE OF MANUFACTURING AND SELLING THE PRODUCTS AND THE A CQUISITION OF SUCH A RIGHT WAS TO BE TREATED AS PARTLY TOWARDS CAPITAL A ND PARTLY TOWARDS REVENUE. THE HON'BLE HIGH COURT HAS AFFIRMED THE T REATMENT OF 25% OF THE ROYALTY AS CAPITAL IN NATURE WHICH WAS ESTIM ATED BY THE TRIBUNAL. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIG HT OF THE OBTAINING FACTS OF THIS CASE. WE HAVE FOUND THAT V ARIOUS CLAUSES FORMULATED UNDER THE HEADS LICENCE TO USE, TECHNIC AL ASSISTANCE AND TECHNICAL KNOW-HOW FOR THE COLLABORATION AGREEMENT FOR MIXER GRINDERS ARE AS UNDER: 'CLAUSE 4.01 :- DURING THE TERM OF THIS AGREEMENT, MEI AGREES TO (GRANT TO IMACO A NON-EXCLUSIVE AND NON TRANSFERABL E LICENSE, WITH NO RIGHT TO SUB LICENSE, TO MANUFACTURE THE PR ODUCTS AT IMACO'S FACTORY IN INDIA UNDER THE TECHNICAL ASSIST ANCE AND TECHNICAL KNOW HOW RENDERED BY MEI HEREUNDER. ITA 82 & 1467/09 718/10 :- 10 - : CLAUSE 4.02 :- THE TECHNICAL ASSISTANCE AND TECHNICAL KNOW HOW MADE AVAILABLE TO IMACO HEREUNDER SHALL BE USED ONL Y FOR IMACO'S OWN MANUFACTURE OF THE PRODUCTS IN ITS OWN FACTORIES IN INDIA, AND IMACO UNDERTAKES THAT SUCH TECHNICAL ASS ISTANCE AND TECHNICAL KNOW HOW SHALL BE NEITHER DIRECTLY OR IND IRECTLY TRANSFERRED OR BE MADE AVAILABLE TO ANY THIRD PARTY . THE TERM 'THIRD PARTY' USED HEREIN SHALL MEAN ANY PARTY WHO SHALL N OT SIGN THIS AGREEMENT. CLAUSE 4.03 :- NOTHING HEREIN CONTAINED SHALL BE CONSTRUED TO PRECLUDE MEI FROM FURNISHING, SUPPLYING, TRANSFERRI NG OR LICENSING FOR ANY PURPOSE THE TECHNICAL ASSISTANCE OR THE TEC HNICAL KNOW HOW (TO BE SUPPLIED HEREUNDER) TO ANY THIRD PARTY O THER THAN IMACO. CLAUSE 4.04 :- THE TECHNICAL ASSISTANCE AND THE TECHNICAL KNOW- HOW MADE AVAILABLE HEREUNDER SHALL NEITHER EXTEND T O THE MANUFACTURE OF ANY OF THE COMPONENTS FOR THE MANUFA CTURE OF ANY OF THE PRODUCTION EQUIPMENT. CLAUSE 5.01 :- IMACO SHALL KEEP THE TECHNICAL ASSISTANCE AND TH E TECHNICAL KNOW HOW MADE AVAILABLE HEREUNDER STRICTL Y SECRET AND SHALL CAUSE SUITABLE SECRECY AGREEMENT OR NON-DISCL OSURE AGREEMENT TO BE SIGNED BY THE STAFF AND OTHER EMPLO YEES OF IMACO WHO MAY HAVE ACCESS THERETO, TO THE EXTENT DE EMED PROPER BY MEI' 10. THUS, IT BECOMES AMPLY CLEAR FROM THE ABOVE CLAUSES THAT THE ASSESSEE HAS NOT OBTAINED AN EXCLUSIVE LICENCE TO M ANUFACTURE THE PRODUCTS AS WAS THE CASE IN SOUTHERN SWITCHGEAR LIM ITED, WHERE THE ASSESSEE HAD OBTAINED A NON-EXCLUSIVE LICENCE. IT IS ALSO FOUND THAT THE ASSESSEE-COMPANY IS DEBARRED FROM MAKING AVAILA BLE THE TECHNICAL ASSISTANCE TO ANY THIRTY PARTY WITHOUT THE PRIOR CO NSENT OF THE COLLABORATOR. THE COLLABORATOR CAN PROVIDE SIMILAR LICENCE TO ANY OTHER PERSON IN INDIA TO MANUFACTURE SIMILAR PRODUCTS. TH E TECHNICAL KNOW- HOW PROVIDED BY THE COLLABORATOR FOR SETTING UP OF THE FACTORY OF THE ITA 82 & 1467/09 718/10 :- 11 - : ASSESSEE-COMPANY AND FOR COMMENCING PRODUCTION WAS NOT CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE-COMPANY, BUT WA S CAPITALIZED IN ITS BOOKS OF ACCOUNT IN THE RESPECTIVE YEARS OF PAY MENTS. THE ROYALTY PAYMENT UNDER CONSIDERATION IS RELATED TO THE QUANT UM OF SALES WHICH IS PAYABLE EVERY YEAR FOR THE RIGHT TO USE THE TECH NOLOGY. IT IS SEEN THAT THE OWNERSHIP OF THE RIGHT TO TECHNOLOGY HA SN OT BEEN TRANSFERRED OR VESTED IN THE ASSESSEE-COMPANY BUT IT REMAINED T HE PROPERTY OF M/S MEI, THE COLLABORATOR. WE ARE OF THE CONSIDERED OP INION THAT THE FACTS OF SOUTHERN SWITCHGEAR LTDS CASE ARE DISTINGUISHAB LE AND ARE NOT SIMILAR TO THE CASE IN HAND. THE DECISION RENDERED IN THE CASE OF CIT VS I.A.E.C.(PUMPS) LTD, 233 ITR 316, IS AKIN TO THE FACTS OF THE PRESENT CASE AND HENCE, IS APPLICABLE TO THE CASE UNDER CON SIDERATION. THE HON'BLE APEX COURT IN THE CASE OF CIT VS I.A.E.C.(P UMPS) LTD (SUPRA) HAS HELD THUS AS UNDER: THE ONLY GENERAL PRINCIPLE THAT CAN BE DERIVED FROM THE DECISIONS, IS WHETHER UNDER THE TERMS OF THE AGREEM ENT, THE ASSESSEE ACQUIRED A BENEFIT OF AN ENDURING NAT URE WHICH WILL CONSTITUTE ACQUISITION OF AN ASSET AND SO THE AMOUNT PAID FOR THE SAME IS A CAPITAL EXPENDITURE OR WHETHER THE ASSESSEE HAD ONLY ACQUIRED TECHNICAL KNOWLEDTE FOR THE MANUFACTURE OF ANY PARTICULAR ITE M FOR A SPECIFIC DURATION, AND HE ACQUIRED ONLY A LICENCE TO USE THE OTHER PARTYS PATENT AND KNOWLEDGE AND THE AMOUNT PAID WOULD ONLY BE A REVENUE EXPENDITURE . 11. IN VIEW OF THE ABOVE DECISION, THE IMPUGNED PAYME NT MADE UNDER THE COLLABORATION AGREEMENT FOR MIXER GRINDER S AMOUNTS ONLY TO LICENCE FEE AND NOT THE PRICE FOR ACQUISITION OF A CAPITAL ASSET. ITA 82 & 1467/09 718/10 :- 12 - : OBVIOUSLY, THIS PAYMENT HAS TO BE TREATED AS REVENU E EXPENDITURE AND NO PORTION OF THE SAME CAN BE TREATED AS CAPITAL IN NATURE. HENCE, WE CANNOT ALLOW GROUND NOS.2.1 TO 2.3 OF REVENUES APP EAL AND DISMISS THE SAME. 12. THE NEXT ISSUE OF REVENUES APPEAL COVERED BY GROUN D NOS.3.1 AND 3.2 PERTAINS TO SIMILAR PAYMENT MADE IN THE CAS E OF ELECTRIC RICE COOKERS. 13. WE HAVE FOUND THAT THE CLAUSES OF COLLABORATION AGR EEMENT IN RESPECT OF ELECTRIC RICE COOKERS ARE SIGNIFICANTLY DIFFERENT. AS PER CLAUSE 4.01 OF THE COLLABORATION AGREEMENT, DURING THE TERM OF THE AGREEMENT, M/S MEI AGREES TO GRANT TO IMACO A NON-E XCLUSIVE LICENCE TO MANUFACTURE THE PRODUCTS AT IMACOS FACTORY. T HIS TECHNICAL KNOW- HOW HAS BEEN HELD TO BE NON-TRANSFERABLE. CLAUSE 6 .01 OF THE AGREEMENT STATES THAT NOTWITHSTANDING ANYTHING CONT AINED IN THE OTHER CLAUSES OF THE AGREEMENT, IMACO SHALL BE FREE TO PA RT WITH THE TECHNICAL ASSISTANCE AND TECHNICAL KNOW HOW IN THE FORM OF A SUB LICENCE IN FAVOUR OF ANY THIRD PARTY. THE LD. CIT( A) HAS CONSTRUED IMAGING THAT IT CANNOT BE HELD THAT THE ENTIRE ROYA LTY PAYMENT DURING THE YEAR WAS TOWARDS ACQUISITION OF THE CAPITAL ASS ET IN THE FORM OF A RIGHT TO PART WITH THE TECHNICAL KNOW-HOW BY WAY OF A SUB-LICENCE. ACCORDING TO HIM, SOME OF THE ROYALTY PAYMENT MUST HAVE BEEN IN THE ITA 82 & 1467/09 718/10 :- 13 - : REVENUE FIELD. FOR THAT MATTER, HE HAS INVOKED THE RATIO OF THE DECISION IN THE CASE OF SOUTHERN SWITCHGEAR LIMITED AND HAS SUSTAINED THE DISALLOWANCE OF 25% OF THE ROYALTY PAYMENT AS TOWAR DS ACQUISITION OF CAPITAL RIGHTS FOR ELECTRIC RICE COOKERS. 14. THE CASE OF THE REVENUE IS THAT THE IMPUGNED PAYME NT WOULD RESULT IN ENDURING BENEFIT TO THE ASSESSEE PARTICUL ARLY BECAUSE THE AGREEMENT DOES NOT BAR THE ASSESSEE FROM PARTING IT WITH THE TECHNICAL KNOW-HOW IN THE FORM OF A SUB-LICENCE IN FAVOUR OF ANY THIRD PARTY. HOWEVER, NO SUCH ACTION HAS BEEN TAKEN BY THE ASSES SEE AS AVERRED BEFORE US DURING THE HEARING OF THE CASE. WHILE DO ING THIS, THE LD. CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION THEREON. 15. THE CASE OF THE ASSESSEE IS THAT AS PER CLAUSE 4.01 , MEI HAD AGREED TO GRANT TO THE ASSESSEE-COMPANY ONLY A NON- EXCLUSIVE LICENCE TO MANUFACTURE THE PRODUCTS. IT WAS ARGUED THAT TH E ASSESSEE HAD NOT PARTED WITH ANY TECHNICAL ASSISTANCE OR TECHNICAL K NOW-HOW IN THE FORM OF SUB-LICENCE IN FAVOUR OF ANY THIRD PARTY DURING THE RELEVANT PERIOD. THE LD.AR AVERRED THAT THE LD. CIT(A) HAS NOT CAREF ULLY TREADED THROUGH CLAUSE 6.01 OF THE AGREEMENT IN A CORRECT PERSPECTI VE. AS PER THIS CLAUSE, SUB-LICENSING DOES NOT BECOME NECESSARY AND THE SUB-LICENCE FEE HAS TO BE AS MUTUALLY AGREED UPON BETWEEN THE PARTIES, IN ITA 82 & 1467/09 718/10 :- 14 - : ADVANCE AND THAT TOO IN WRITING AND SUBJECT TO APPR OVAL BY THE GOVERNMENT. 16. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE HAVE FO UND THAT THIS ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL AND COVE RED BY GROUND NOS. 2 TO 7 HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE. WITH THE SIMILAR REASONING AS WE HAVE GIVEN IN THE CASE OF PAYMENT M ADE TOWARDS MIXER GRINDERS. ACCORDINGLY, GROUND NOS. 2 TO 7 OF ASSESSEES APPEAL STAND ALLOWED AND GROUND NOS. 3.1 AND 3.2 OF REVENU ES APPEAL STAND DISMISSED. 17. THE NEXT GROUND OF ASSESSEES APPEAL PERTAINS TO RE STRICTION OF CLAIM OF DEDUCTION MADE U/S 80HHC OF THE ACT. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE HAS SHOWN CERTAIN RECEI PTS UNDER THE HEAD OTHER INCOME IN ITS BOOKS OF ACCOUNT AND THESE PE RTAIN TO SALE OF SCRAP, PROCESS SCRAP SALES, INSURANCE CLAIM RECEIVE D, PROVISIONS WRITTEN BACK, CREDIT BALANCES WRITTEN BACK AND OTHER MISCEL LANEOUS INCOMES WHICH WERE CONSIDERED BY THE ASSESSEE AS ELIGIBLE F OR DEDUCTION U/S 80HHC BEING A PART OF THE BUSINESS INCOME. AS AGAI NST THIS, THE ASSESSING OFFICER HAS HELD OTHERWISE AFTER ACCEPTIN G THAT THE RECEIPTS ARE A PART OF BUSINESS INCOME BUT STILL IT WAS HELD AS NOT ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT. IT WAS ARGUED THA T THE PROVISIONS WRITTEN BACK WOULD NOT FORM THE PART OF ASSESSED IN COME AND ITA 82 & 1467/09 718/10 :- 15 - : THEREFORE, WOULD BE OUT OF THE PURVIEW OF CLAUSE (B AA) APPENDED TO SECTION 80HHC. THE PROVISION FOR DOUBTFUL DEBTS HA S BEEN RECORDED IN THE BOOKS OF ACCOUNT BUT WAS ADDED BACK IN THE MEMO OF INCOME FILED ALONGWITH THE RETURN. BUT RECOVERY FROM OUT OF SUC H PROVISIONS MADE IN THAT YEAR OR EARLIER YEARS, THOUGH SHOWN AS OTHE R INCOME IN THE BOOKS, WOULD NOT BE IN THE NATURE OF INCOME BECAUSE THE DEDUCTION FOR THE PROVISION MADE IN THIS REGARD HAD NOT BEEN CLAI MED IN THE RETURN. 18. WE HAVE VERIFIED THE FACTS AND THE RIVAL CONTENTION S AND ARE OF THE OF THE OPINION THAT THE CONTENTION OF THE ASSES SEE-COMPANY IS FOUND TO BE CORRECT. WE HAVE FOUND THAT THE RECEI PTS FROM SALE OF SCRAP WOULD BE A PART OF THE INCOME FROM BUSINESS FOR THE PURPOSE OF COMPUTING THE ELIGIBLE DEDUCTION U/S 80HHC. 90% OF THE RECEIPTS FROM SALE OF SCRAP WOULD BE REQUIRED TO BE DEDUCTED FROM THE PROFITS OF BUSINESS IN TERMS OF CLAUSE (BAA) APPENDED TO SECTI ON 80HHC. THE RECEIPT FROM SALE DOES NOT HAVE ANY DIRECT NEXUS WI TH THE EXPORT TURNOVER. IN OUR CONSIDERED OPINION ALSO, THIS AMO UNT CANNOT BE ALLOWED U/S 80HHC. LIKEWISE, SET OFF OF BROUGHT FO RWARD LOSSES PRIOR TO COMPUTATION OF DEDUCTION ELIGIBLE U/S 80HHC STAN DS DECIDED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE HON'B LE SUPREME COURT RENDERED IN THE CASE OF IPCA LABORATORIES, 266 ITR 521. REGARDING COMPONENT OF ELIGIBLE DEDUCTION U/S 80HHC ON EXPORT INCENTIVE HAS NEITHER BEEN QUANTIFIED NOR BEEN GRANTED. ACCORDING LY, FOR THESE ITA 82 & 1467/09 718/10 :- 16 - : ISSUES, WE GO ALONGWITH THE LD. CIT(A) AND DISMISS GROUND NOS. 8 TO 12 OF ASSESSEES APPEAL. 19. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED AND THAT OF THE ASSESSEE STANDS PARTLY ALLOWED. I.T.A.NO. 718/MDS/2010 - A.Y 2005-06 20. THE GROUNDS RAISED IN THIS APPEAL OF THE REVENUE FO R ASSESSMENT YEAR 2005-06 READ AS UNDER: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1. THE LEARNED CIT(A) ERRED IN HOLDING THAT TH E ENTIRE PAYMENT MADE BY THE ASSESSEE TO MATSUSHITA ELECTRIC INDUSTRIAL COMPANY LTD. (MEI), JAPAN UNDER A COLLABORATION AGREEMENT FOR MIXER GRINDERS CONSTITU TE EXPENDITURE AND NO PORTION OF THE SAME CAN BE DISALLOWED. RELIANCE HAS BEEN PLACED ON THE ORDER OF HIS PREDECESSOR IN ITA NO.598/06-07 DATED 9.7.08 FOR TH E A-Y 2004-05. 2.2. IT IS SUBMITTED THAT THE RELIED UPON ORDER H AS NOT BECOME FINAL AND APPEAL BEFORE THE HON'BLE ITAT HA S BEEN PREFERRED AGAINST THE SAME. 3.1. THE LEARNED CIT(A) ERRED IN DELETING THE DIS ALLOWANCE OF ROYALTY PAYMENT MADE BY THE ASSESSEE COMPANY TO MEI IN RESPECT OF ELECTRIC RICE COOKERS. 3.2. THE LEARNED CIT(A) FAILED 0 NO E THAT THE IMPU GNED PAYMENT WILL RESULT IN ENDURING BENEFIT TO THE ASSE SSEE, IN THE LIGHT OF THE FACT THAT THE COLLABORATION AGREEM ENT BETWEEN THE ASSESSEE AND MEI DOES NOT BAR THE ASSESSEE FROM PARTING WITH THE TECHNICAL KNOWHOW IN THE FORM OF A SUB LICENCE IN FAVOUR OF ANY THIRD PARTY. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASS ESSING OFFICER RESTORED. ITA 82 & 1467/09 718/10 :- 17 - : 21. AFTER GOING THROUGH THE GROUNDS, FACTS AND THE CIRC UMSTANCES OF THE CASE, WE HAVE FOUND THAT BOTH THE GROUNDS RA ISED BY THE REVENUE ARE IDENTICAL TO THE GROUNDS RAISED IN ASSE SSMENT YEAR 2004- 05. ACCORDINGLY, WE DISMISS BOTH THESE ISSUES WIT H THE SIMILAR REASONINGS WHICH WE HAVE TAKEN IN ASSESSMENT YEAR 2 004-05. 22. IN THE RESULT, THE APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2005-06 STANDS DISMISSED. 23. TO SUMMARIZE THE RESULT, REVENUES APPEALS FOR ASS ESSMENT YEARS 2004-05 AND 2005-06 STAND DISMISSED WHEREAS T HE ASSESSEES APPEAL FOR ASSESSMENT YEAR 2004-05 STANDS PARTLY AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06-01-2012. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 6 TH JANUARY, 2012 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR