MAFATLAL DENIM LTD ( FORMERLY KNOWN AS MAFATLAL BURLINGTON INDUSTIRES LTD), MUMBAI V. DCIT RG 9(2), MUMBAI

ITA 7239/MUM/2010

• Counselvise Citation: 723919914 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-11-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 22-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVIN VARMA
• Assessee Lawyers: H P SUTAR; S E DASTUR SHRI K K VED
• Keywords: Capital asset; Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 80HHC; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B , MUMBAI BEFORE SHIRI D.MANMOHAN, VP AND SHRI RAJENDRA SINGH, AM ITA NO. : 7239/MUM/2010 ASSESSMENT YEAR : 2003-04 & ITA NO. : 7240/MUM/2010 ASSESSMENT YEAR : 2004-05 & ITA NO. : 7241/MUM/2010 ASSESSMENT YEAR : 2006-07 M/S. MAFATLAL DENIM LTD (FORMERLY KNOWN AS MAFATLAL BURLINGTON INDUSTRIES LTD.) APSARA HOUSE, 1 ST FLOOR, 7, S.V. ROAD, SANTACRUZ (W), MUMBAI-400 054 PAN NO: AAACM 3977 B VS. THE D CIT - RANGE 9 ( 2 ), AAYAKAR BHAVAN, MAHARSHI KARVE MARG, MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S. E. DASTUR, SHRI K.K. VED & SHRI H.P. SUTAR RESPONDENT BY : SHRI PRAVIN VARMA DATE OF HEARING : 1 6 .11.2011 DATE OF PRONOUNCEMENT : 21.12.2011 ORDER PER RAJENDRA SINGH (AM) : THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS DATED 01.09.2010, 03.09.2010 AND 01.09.2010 OF CIT(A)-20, MUMBAI FOR THE ASSESSMENT YEARS 2003-04, 2004-05 AN D 2006-07 ITA NOS : 7239, 7240 & 7241/MUM/2010 2 RESPECTIVELY. AS THE MAIN DISPUTE RAISED IN ALL THE THREE APPEALS IS IDENTICAL, THESE ARE BEING DISPOSED OFF BY A SINGLY CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE MAIN DESPITE WHICH IS COMM ON IN ALL THE YEARS. IT IS REGARDING THE DISALLOWANCE OF LICENSE AND TECHNOLOGY FEES, TREATING THE SAME AS CAPITAL EXPENDITURE. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WAS A JOINT VENTURE FORMED BETWEEN BURLING TON MILLS INC., USA (BMI) AND MAFATLAL INDUSTRIES LTD. (MFI) AND KN OWN AS MAFATLAL BURLINGTON INDUSTRIES LTD FOR MANUFACTURE OF CERTAI N SPECIAL FORM OF DENIM FABRICS. BMI WAS ENGAGED IN THE BUSINESS OF P RODUCING AND SELLING DENIM IN MANY PARTS OF THE WORLD. SIMILARLY MIL, THOUGH IT WAS NOT ENGAGED IN THE MANUFACTURE OF DENIM, HAD CERTAI N TECHNICAL KNOWLEDGE AND TRADE MARK IN THE PRODUCTION AND SALE OF QUALITY FABRICS. BOTH ENTERED INTO THE JOINT VENTURE FOR MA NUFACTURE AND SALE OF SPECIALIZED DENIM FABRICS. THE JOINT VENTURE WAS IN CORPORATED ON 08.09.1995. SUBSEQUENTLY, THE ASSESEE, BMI AND MIL ENTERED INTO A SHAREHOLDERS AGREEMENT DATED 17.10.1995, FOR FORMAT ION AND CAPITALIZATION OF THE ASSESSEE COMPANY. LATER, THE DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION (DIPP) VIDE LETTER DATED 14.12.1995 GRANTED APPROVAL TO THE JOINT VENTURE FOR 50% FOREI GN EQUITY PARTICIPATION OF `. 21.25 CRORES OUT OF THE TOTAL PAID UP EQUITY CAPITA L OF `. 42.50 CRORES. IT ALSO APPROVED THE LUMPSUM TECHNICA L KNOWHOW FEES OF USD 7.50 LAKHS, LICENSE AND TECHNOLOGY FEES @ 4% AND COMMISSION @ 3% OF NET SALES TO BMI IN RESPECT OF SALES MADE T HROUGH THE LATTER. THE APPROVAL GIVEN BY DIPP ALSO STIPULATED THAT THE DURATION OF THE TECHNOLOGY COLLABORATION WOULD BE 10 YEARS FROM THE DATE OF AGREEMENT, OR 7 YEARS FROM THE DATE OF COMMERCIAL P RODUCTION. LATER, DIPP VIDE LETTER DATED 22.01.1996 ENHANCED THE FORE IGN EQUITY PARTICIPATION TO USD 6.625 ( `. 22.19 CRORES). IN THE SAID LETTER, APPROVAL ITA NOS : 7239, 7240 & 7241/MUM/2010 3 WAS ALSO GRANTED FOR CONVERSION OF LUMPSUM FEES OF USD 7.50 LAKHS INTO FOREIGN EQUITY OF THE COLLABORATOR WITH THE CO NDITION THAT CONVERSION INTO EQUITY WILL BE DONE IN THE SAME SEQ UENCE AND PROPORTION AS AND WHEN THE KNOWHOW FEES BECAME DUE. 3. BOTH BMI AND MIL HAD TECHNICAL INFORMATION, TRAD E NAME AND TRADE MARK IN THEIR RESPECTIVE FIELDS, I.E. IN THE MANUFACTURE OF SPECIALIZED DENIM FABRICS AND IN THE MANUFACTURER O F OTHER QUALITY FABRICS, RESPECTIVELY. THE ASSESSEE, THEREFORE, ENT ERED INTO THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT DATED 13.06.1996 , SEPARATELY WITH BMI AND MIL TO PROVIDE FOR LICENSING OF TECHNI CAL INFORMATION AND TRADE MARK TO THE ASSESSEE ON PAYMENT OF LICENSE AN D TECHNOLOGY FEES @ 4% OF THE SALES TO EACH OF THEM IN RESPECT OF SAL ES MADE THROUGH THEM. THERE WERE ALSO PROVISIONS IN AGREEMENT FOR P AYMENT OF COMMISSION @ 3% OF THE NET SALES. THE DISPUTE IN TH IS APPEAL IS REGARDING THE NATURE OF PAYMENT OF LICENSE AND TECH NICAL FEES @ 4% OF THE NET SALES PAID BY THE ASSESSEE TO EACH OF JOINT VENTURE PARTUNERS. THE PAYMENT OF COMMISSION HAS BEEN ALLOWED BY THE A O AS REVENUE EXPENDITURE AND THERE IS NO DISPUTE ON THIS POINT. THE AO HAS HOWEVER, TREATED 50% OF THE LICENSE AND TECHNOLOGIC AL FEES AS CAPITAL IN NATURE, WHEREAS CIT(A) HAS HELD THAT THE ENTIRE AMO UNT OF LICENSE AND TECHNOLOGY FEES @ 4% OF NET SALES WAS CAPITAL IN NA TURE. 3.1 BEFORE WE PROCEED TO DEAL WITH THE ISSUE, IT WI LL BE APPROPRIATE TO REPRODUCE RELEVANT PORTIONS OF THE LICENSE AND TECH NICAL ASSISTANCE AGREEMENT. WE ARE REPRODUCING THE RELEVANT PROVISIO NS ONLY FROM THE AGREEMENT WITH BMI TO AVOID REPETITION AS PROVISION S IN BOTH THE AGREEMENTS ARE ALMOST IDENTICALLY WORDED. THE AGRE EMENT WITH BMI DEFINED TECHNICAL INFORMATION IN CLAUSE 1.9 WHICH IS AS UNDER :- ITA NOS : 7239, 7240 & 7241/MUM/2010 4 1.9. TECHNICAL INFORMATION ANY KNOWLEDGE OR INFORMATION WHETHER PATENTABLE OR NOT, PERTAINING TO THE SETTING UP OF THE FACILITY FOR TH E MANUFACTURE OF THE PRODUCTS AND MANUFACTURE OR SALE OF THE PRODUCTS WHICH IS OWNED OR LICENSED BY BMI ON THE E FFECTIVE DATE, OR WHICH BMI MAY ACQUIRE LICENSE OR DEVELOP D URING THE EFFECTIVE TERM OF THIS AGREEMENT, AND WHICH BMI DETERMINES, FROM TIME TO TIME, IN ITS SOLE DISCRETI ON WOULD BE NECESSARY FOR THE MANUFACTURE OR SALE OF THE PRODUC TS BY THE COMPANY. 3.2 THE PROVISIONS FOR GRANTING OF LICENSE ARE MADE IN PARA 2.1 OF THE AGREEMENT WHICH READS AS UNDER : 2.1 GRANT OF LICENSE: SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEME NT, BMI HEREBY GRANTS TO THE COMPANY, FOR THE EFFECTIVE TER M OF THIS AGREEMENT, THE (I) EXCLUSIVE, NON TRANSFERABLE LICE NSE WITH NO RIGHT TO SUBLICENSE, TO USE THE TECHNICAL INFORM ATION IN CONNECTION WITH THE MANUFACTURE OF THE PRODUCTS IN INDIA (PROVIDED THAT THEY SHALL ONLY BE MANUFACTURED BY T HE COMPANY AT THE FACILITY), AND (II) NON EXCLUSIVE, N ON TRANSFERABLE IICENSE, WITH NO RIGHT TO SUBLICENSE, TO USE THE TECHNICAL INFORMATION IN CONNECTION WITH THE SALE O F PRODUCTS SOLELY IN ACCORDANCE WITH THE TERMS AND CO NDITIONS OF CLAUSE 7 OF THE SHAREHOLDERS AGREEMENT. 3.3 THE PROVISIONS FOR LICENSE TO USE THE TRADE MAR K IS CONTAINED IN PARA 6.2. THE PROVISION FOR PAYMENT OF LICENSE FEES IS MADE IN PARA 7.1, WHICH IS ALSO REPRODUCED BELOW FOR READY REFERENCE: 7.1 LICENSE FEES (A) IN CONSIDERATION OF THE RIGHTS AND LICENSES GRA NTED HEREIN TO THE COMPANY BY BMI AND THE TECHNICAL ASSISTANCE TO BE FURNISHED TO THE COMPANY BY BM! PURSUANT TO THIS AGREEMENT; IN ADDITION TO THE LUMP SUM ROYALTY PAYA BLE TO BMI REFERRED TO IN CLAUSE 3.2.4 OF THE SHAREHOLDERS AGREEMENT, THE COMPANY SHALL PAY BMI A LICENSE FEE EQUAL TO. 4% OF THE NET SALES PRICE(AS DETERMINED IN AC CORDANCE ITA NOS : 7239, 7240 & 7241/MUM/2010 5 WITH PARAGRAPH 7.2 BELOW) OF ALL BMI SALES(AS SUC H TERM IS DEFINED BELOW) OF THE PRODUCTS. AS USED HEREIN, THE TERM BMI SALES MEANS SALES BY THE COMPANY OF PRODUCTS (INCLUDING SAMPLES THEREOF) FOR WHICH BMI IS ENTITL ED TO RECEIVE A SALES COMMISSION IN ACCORDANCE WITH THE T ERMS OF CLAUSE 7 OF THE SHAREHOLDERS AGREEMENT A SALE OF PR ODUCT SHALL BE DEEMED TO HAVE BEEN MADE FOR PURPOSES OF CALCULATING THE LICENSE FEE PAYABLE HEREUNDER ON TH E EARLIER TO OCCUR OF (I) SHIPMENT OF THE PRODUCTS, OR (II) D ISPATCH OF AN INVOICE OR BILL THEREFORE, (B) IN THE EVENT THAT THE COMPANY DOES NOT OBTAIN N ECESSARY GOVERNMENT APPROVALS TO CONTINUE TO PAY LICENSE FEE FOR TECHNICAL INFORMATION AT ANY TIME BEYOND THE FIRST SEVEN YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION OF PRODUCTS (PRODUCT COMMENCEMENT DATE ),THEN THE OBLIGATION OF THE COMPANY TO PAY THE LICENSE FE E FOR TECHNICAL INFORMATION SHALL CEASE AND BECOME PAID , AND THE COMPANY SHALL BE FREE TO MANUFACTURE PRODUCTS B EYOND THE SAID PERIOD OF SEVEN YEARS EVEN AFTER THE TERM OF THIS AGREEMENT. IN THAT EVENT THE LICENSE FEE FOR THE US E OF THE TRADEMARKS ON THE PRODUCTS SHALL BE 2% OF NET SALES PRICE, DETERMINED AS SET FORTH HEREIN. 3.4 THE AGREEMENT ALSO CONTAINED PROVISIONS FOR TER MINATION IN CLAUSE 9, WHICH ARE ALSO REPRODUCED BELOW FOR THE S AKE OF CLARITY :- 9. TERM AND TERMINATION 9.1. TERM THIS AGREEMENT SHALL BECOME EFFECTIVE AS OF THE EFF ECTIVE DATE AND SHALL CONTINUE IN FULL FORCE AND EFFECT UN TIL TERMINATED BY THE MUTUAL AGREEMENT OF THE PARTIES H ERETO OR PURSUANT TO PARAGRAPHS 9.2. OR 9.3. HEREOF 9.2, TERMINATION FOR MATERIAL BREACH IF EITHER PARTY MATERIALLY BREACHES ANY PROVISION O F THIS AGREEMENT AND FAILS TO CURE SUCH BREACH WITHIN SIXT Y DAYS AFTER NOTICE THEREOF IS GIVEN BY THE OTHER PARTY HE RETO (NON- ITA NOS : 7239, 7240 & 7241/MUM/2010 6 DEFAULTING PARTY) OR FAILS TO INITIATE STEPS SATIS FACTORY TO THE NON-DEFAULTING PARTY. 9.3 TERMINATION FOR SPECIFIED EVENTS AGREEMENT SHALL AUTOMATICALLY TERMINATE UPON THE EA RLIER TO OCCURRING OF ANY OF THE FOLLOWING (I) THE SALE OR T RANSFER BY BMI OF ANY OF THE SHARES OWNED BY BMI OTHER THAN TO AN AFFILIATE OF BMI (BMI SHARES SALE) (II) THE SALE OR TRANSFER BY MAFATLAL OF ANY OF THE SHARES OWNED BY MAFATLAL OTH ER THAN TO AN AFFILIATE OF MAFATLAL (MAFATLAL SHARES SALE ), (III) THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS AND BUSINES S OF THE COMPANY, WHETHER AS A SALE, LEASE OR OTHER DISPOSIT ION OR THE MERGER OR CONSOLIDATION OF THE COMPANY WITH OR INTO A THIRD PARTY (COMPANY SALE); OR (IV) THE COMPANY I S DISSOLVED, LIQUIDATED, DECLARED INSOLVENT OR BANKRU PT OR HAS ALL OR A SUBSTANTIAL PORTION OF ITS ASSETS EXPROPRI ATED BY ANY GOVERNMENT (COMPANY DISSOLUTION). 9.4 EFFECT OF TERMINATION, ENTRY INTO NEW LICENSE AGREEMENT: (A) UPON TERMINATION OF THIS AGREEMENT FOR ANY REAS ON, THE COMPANY SHALL CEASE USING THE TRADEMARKS AND THE NA ME BURLINGTON AS PART OF THE COMPANYS NAME AND COMP LY WITH THE PROVISIONS OF PARAGRAPH 6.5 HEREOF. EXCEPT AS PROVIDED IN PARAGRAPH 9.4 (B) BELOW, UPON THE TERMI NATION OF THIS AGREEMENT, THE COMPANY SHALL IMMEDIATELY (1 ) CEASE USING THE TECHNICAL INFORMATION OTHER THAN IN CONNE CTION WITH FINISHING WORK-IN-PROGRESS AND FILLING ORDERS FOR THE PRODUCTS ACCEPTED PRIOR TO THE EFFECTIVE DATE OF TH E TERMINATION OF THIS AGREEMENT AND (II) RETURN TO BM I OR DESTROY, AS BMI MAY REQUEST, ALL TECHNICAL DATA. NOTWITHSTANDING THE FOREGOING, FOR A PERIOD NOT TO EXCEED SIX MONTHS AFTER TERMINATION OF THIS AGREEMENT, THE COM PANY SHALL HAVE THE RIGHT TO SELL OR OTHERWISE DISPOSE O F, .IN THE ORDINARY COURSE OF BUSINESS, ITS EXISTING INVENTORY OF THE PRODUCTS, PROVIDED, HOWEVER, THAT THE COMPANY SHALL PAY BMI THE LICENSING TEES IN ACCORDANCE WITH THE PROVI SIONS OF ARTICLE 7 HEREOF AND PERMIT BMI, OR ITS AUTHORIZED REPRESENTATIVES, TO INSPECT OR CONDUCT AUDITS OF AL L SUCH PRODUCTS. (B) IF THIS AGREEMENT IS TERMINATED PURSUANT TO PAR AGRAPH 9.3 HEREOF AND IF THE SOLE CAUSE OF SUCH TERMINATIO N IS A ITA NOS : 7239, 7240 & 7241/MUM/2010 7 SPECIAL EVENT (AS THAT TERM IS DEFINED BELOW), BM I HEREBY AGREES THAT SIMULTANEOUSLY WITH THE TERMINATION OF THIS AGREEMENT BMI SHALL GRANT TO THE COMPANY A PERPETUA L LICENSE, ON SUCH TERMS AND CONDITIONS AS THE PARTIE S SHALL REASONABLY AGREE, TO USE THE TECHNICAL INFORMATION THERETO DISCLOSED TO THE COMPANY HEREUNDER FROM THE EFFECTI VE DATE THROUGH THE DATE OF TERMINATION OF THIS AGREEMENT ( BUT NOT THE TRADEMARK). IF SUCH TERMINATION UNDER THIS CLAU SE 9.4 (B) OCCURS (I) PRIOR TO THE SEVENTH ANNIVERSARY OF THE DATE OF COMMENCEMENT OF MANUFACTURE OF PRODUCTS, THE LICENS E FEE SHALL BE A PERCENTAGE OF THE NET SALES PRICES OF PR ODUCTS EQUAL TO THE RATIO OF SALES IN ZONE B OVER ALL SALE S OF PRODUCTS FOR THE LAST TWO QUARTERS COMPLETED PRIOR TO SUCH TERMINATION, AND (II) AFTER THE SEVENTH ANNIVERSARY OF THE DATE OF COMMENCEMENT OF MANUFACTURE OF THE PRODUCTS , SUCH LICENSE SHALL BE PAID UP, ROYALTY FREE LICENSE. NOT HING IN THIS PARAGRAPH 9.4 SHALL BE DEEMED TO GRANT TO THE COMPA NY ANY RIGHT, LICENSE OR INTEREST IN OR TO ANY TECHNIC AL INFORMATION NOT LICENSED OR DISCLOSED TO THE COMPAN Y PRIOR TO THE TERMINATION OF THIS OR TO ANY FUTURE TECHNIC AL ASSISTANCE WITH RESPECT THERETO. (C) AS USED HEREIN, THE TERM SPECIAL EVENT MEANS A BMI SHARES SALE OR MAFATLAL SHARES SALE UNDER CLAUSES 8 .3 OR 10.5 OF THE SHAREHOLDERS AGREEMENT OR A COMPANY SAL E UNDER CLAUSES 9.4.4 OR 10.5 OF THE SHAREHOLDERS AGR EEMENT. 4. THE AO DURING THE ASSESSMENT PROCEEDINGS ASKED T HE ASSESSEE TO EXPLAIN AS TO WHY THE LICENSE AND TECHNOLOGY FEE S PAID BY THE ASSESSEE @ 4% OF THE SALES SHOULD NOT BE TREATED AS CAPITAL IN NATURE. THE ASSESSEE SUBMITTED THAT THE CLAUSE 5.2 OF THE A GREEMENT CLEARLY PROVIDED THAT TECHNICAL INFORMATION WAS PROPRIETARY AND CONFIDENTIAL INFORMATION OF BMI. FURTHER, THE AGREEMENT WAS ONLY FOR LICENSING OF THE TECHNICAL INFORMATION AND TRADE MARK FOR USE IN THE BUSINESS AND THERE WAS NO TRANSFER OF TECHNICAL INFORMATION OR T HE TRADE MARK. THE AO WAS, HOWEVER, NOT SATISFIED BY THE EXPLANATION G IVEN. IT WAS OBSERVED BY HIM THAT THE LICENSE AND TECHNOLOGY FEE S HAD BEEN PAID TO BMI AND MIL FOR THE FOLLOWING SERVICES : ITA NOS : 7239, 7240 & 7241/MUM/2010 8 1. LICENSE TO USE NAME / TRADE MARK. 2. TECHNICAL INFORMATION IN CONNECTION WITH THE MANUFA CTURE OF PRODUCTS AND MARKETING. 3. SUCH OTHER TECHNICAL ASSISTANCES, FOR WHICH SPECIAL IZED TECHNICIAN OR OTHER PERSONNEL NEED TO BE DEPLOYED S PECIALLY FOR IMPLEMENTATION AND USE OF TECHNICAL INFORMATION IN RELATION TO THE MANUFACTURING AND SALES. 4.1 THE AO FURTHER OBSERVED THAT, IN THE RELEVANT Y EARS, THERE WAS NO REIMBURSEMENT OF EXPENSES FOR DEPLOYMENT OF PERSONN EL OF BOTH THE COMPANIES FOR PROVIDING ANY TECHNICAL ASSISTANCE AN D, THEREFORE, THE ENTIRE PAYMENTS IN THE FORM OF LICENSE AND TECHNICA L FEES HAD TO BE CONSIDERED FOR THE USE OF TRADE MARK OR TECHNICAL I NFORMATION. THE AO ALSO NOTED THAT THOUGH THERE WAS NO BIFURCATION OF FEES PAYABLE FOR USE OF TRADE MARK AND THE FEES PAYABLE FOR USE OF TECHN ICAL KNOWHOW AS PER THE AGREEMENT, BUT A CAREFUL READING OF CLAUSE 7.1(B) SHOWED THAT IN CASE THE ASSESSEE WAS NOT ABLE TO OBTAIN NECESSA RY GOVERNMENT APPROVAL FOR PAYMENT OF LICENSE AND TECHNOLOGY FEES BEYOND THE PERIOD OF FIRST 7 YEARS, THE OBLIGATION OF THE ASSESSEE CO MPANY TO PAY THE LICENSE FEES SHALL CEASE AND BECOME PAID UP AND THE COMPANY SHALL BE FREE TO MANUFACTURE PRODUCTS BEYOND THE SAID PERIOD OF 7 YEARS, EVEN AFTER THE TERMS OF THE AGREEMENT AND IN THAT CASE T HE FEES PAYABLE WILL BE ONLY 2% OF NET SALE PRICE FOR USE OF THE TRADE M ARK ON THE PRODUCTS. THE AO, THEREFORE, CONCLUDED THAT PAYMENT FOR USE O F TRADE MARK WAS ONLY @ 2% ON NET SALES, WHEREAS THE BALANCE PAYMENT OF 2% WAS ON ACCOUNT OF USE OF TECHNICAL INFORMATION. THOUGH, TH E TECHNICAL INFORMATION WAS NON TRANSFERABLE AS PER THE AGREEME NT, BUT THE ASSESSEE HAD RIGHT TO USE IT IN PERPETUITY. SINCE T HE ASSESSEE HAD NOT OBTAINED THE GOVERNMENT APPROVAL FOR PAYMENT OF THE LICENSE AND THE TECHNOLOGY FEES BEYOND THE SEVEN YEAR PERIOD, THE T ECHNICAL ITA NOS : 7239, 7240 & 7241/MUM/2010 9 INFORMATION ACQUIRED BY THE ASSESSEE IN TERMS OF TH E AGREEMENT RELATING TO THE MANUFACTURING OF DENIM FABRICS WAS OF PERPETUAL IN NATURE. FURTHER, CLAUSE 9.4(B) OF THE AGREEMENT ALS O PROVIDED THAT UPON TERMINATION OF THE AGREEMENT DUE TO SPECIAL EV ENTS, A PERPETUAL LICENSE TO USE THE TECHNICAL INFORMATION SHALL BE G RANTED TO THE ASSESSEE COMPANY. IN THIS CASE, THE AGREEMENT HAD B EEN TERMINATED DUE TO SPECIAL EVENTS BEING THE SALE OF SHARES BY B MI TO MAFATLAL GROUP. THE AO THUS, CONCLUDED THAT THE TECHNICAL INFORMATI ON WAS A CAPITAL ASSET ACQUIRED BY THE ASSESSEE WITH THE RIGHT TO US E IN PERPETUITY AND THE ROYALTY PAID @ 2% OF NET SALES WAS CAPITAL IN N ATURE. THE AO REFERRED TO THE JUDGMENT OF THE HON'BLE SUPREME COU RT IN THE CASE OF JONAS WOODHEAD AND SONS (INDIA) LTD. VS. CIT (224 I TR 342) IN SUPPORT OF THE SAID FINDING, IN WHICH UNDER SIMILAR CIRCUMSTANCES, PAYMENT OF THE LICENSE FEES WAS HELD TO BE CAPITAL IN NATURE. 4.2 THE ASSESSEE IN THE ASSESSMENT YEAR 2006-07 HAD PAID A SUM OF `. 73,92,918/- AS LICENSE AND TECHNOLOGY FEES TO BMI. 50% OF WHICH I.E. `. 36,98,459/- WAS TREATED BY THE AO AS CAPITAL IN NAT URE. HE ALLOWED DEPRECIATION @ 12.5% ON THE SAID AMOUNT WHICH WAS 5 0% OF THE NORMAL DEPRECIATION, AS THE PAYMENTS HAD BEEN MADE TOWARDS THE END OF THE YEAR. THE BALANCE AMOUNT AFTER DEDUCTING THE DEPRECIATION OF `. 4,62,057/- WHICH CAME TO `. 32,34,402/- WAS DISALLOWED AS CAPITAL EXPENDITURE. SIMILARLY, THE ASSESSEE HAD PAID A SUM OF `. 3,09,28,775/- TO MFI AS LICENSE AND TECHNOLOGY FEES @ 4% OF NET SALES, 50% OF WHICH I.E. `. 1,54,64,388/- WAS TREATED BY THE AO AS CAPITAL EXPE NDITURE, ON WHICH DEPRECIATION @ 12.5% AMOUNTING TO `. 19,33,048/- WAS ALLOWED AND BALANCE AMOUNT OF `. 1,35,31,339/- WAS DISALLOWED AS CAPITAL EXPENDITURE. SIMILAR TREATMENT WAS GIVEN BY THE AO TO LICENSE AND TECHNOLOGY FEES PAID BY THE ASSESSEE IN THE ASSESSM ENT YEARS 2003-04 ITA NOS : 7239, 7240 & 7241/MUM/2010 10 AND 2004-05 AND THE AMOUNTS DISALLOWED AS CAPITAL E XPENDITURE IN THE TWO YEARS WERE AS UNDER : 1. ASSESSMENT YEAR 2003-04 A) `. 2,83,94,788/- ON ACCOUNT OF BMI B) `. 92,63,108/- ON ACCOUNT OF MIL 2. ASSESSMENT YEAR 2004-05 A) `. 1,25,37,895/- ON ACCOUNT OF BMI. B) `. 2,06,64,682/- ON ACCOUNT OF MIL 5. THE ASSESSEE DISPUTED THE DECISION OF THE AO AND SUBMITTED BEFORE THE CIT(A) THAT CLAUSE 2.1 OF THE AGREEMENT CLEARLY PROVIDED THAT THE ASSESSEE HAD BEEN GRANTED ONLY NON TRANSFE RABLE LICENSE TO USE THE TECHNICAL INFORMATION IN CONNECTION WITH T HE MANUFACTURE AND SALE OF PRODUCTS. THUS, THE TECHNICAL INFORMATION WAS NOT A PROPERTY OF THE ASSESSEE. FURTHER, CLAUSE 7.1(B) APPLIED TO A S ITUATION, WHEN THE ASSESSEE WAS NOT ABLE TO OBTAIN THE GOVERNMENT APPR OVAL TO PAY THE LICENSE AND TECHNOLOGY FEES BEYOND THE PERIOD OF 7 YEARS FROM THE DATE OF COMMERCIAL PRODUCTION. THE SAID CLAUSE NEVER CAM E INTO EFFECT AS BEFORE THE EXPIRY OF 7 YEAR PERIOD, THE GOVERNMENT VIDE A NOTIFICATION DATED 24.06.2003 HAD REMOVED THE RESTRICTION ON DUR ATION OF PAYMENT. AS PER THE SAID NOTIFICATION, LICENSE AND TECHNOLOG Y FEES UPTO 8% ON EXPORTS AND 5% ON DOMESTIC SALES COULD BE PAID TO F OREIGN COLLABORATORS WITHOUT ANY TIME LIMIT. AS REGARDS, T HE CLAUSE 9.4(B), THE SAME APPLIED TO SITUATIONS ON HAPPENING OF SPECIAL EVENTS IN WHICH CASES THERE WAS A PROVISION FOR GRANTING PERPETUAL LICENSE, ON SUCH TERMS AND CONDITIONS AS THE PARTIES MIGHT AGREE. TH US, A PERPETUAL LICENSE WAS TO BE GRANTED AS PER TERMS AND CONDITIO NS TO BE ENTERED INTO AFRESH. IN CASE OF TERMINATION UNDER NORMAL CI RCUMSTANCES AS PER CLAUSE 9.4(A), THE ASSESSEE COMPANY HAD NO RIGHT TO USE THE TECHNICAL INFORMATION AND WAS REQUIRED TO RETURN/DESTROY THE SAME. THEREFORE, IT COULD NOT BE SAID THAT THE ASSESSEE HAD PERPETUA L RIGHT TO USE THE TECHNICAL INFORMATION. IN RELATION TO THE JUDGMENT OF THE HON'BLE ITA NOS : 7239, 7240 & 7241/MUM/2010 11 SUPREME COURT IN THE CASE OF JONAS WOODHEAD AND SO NS (INDIA) (SUPRA) RELIED UPON BY THE AO, THE ASSESSEE SUBMITT ED THAT IN THE SAID CASE THE ROYALTY INCLUDED THE PAYMENT FOR SETTING U P OF THE PLANT, WHICH WAS NOT SO IN THE PRESENT CASE. THE ASSESSEE ALSO ARGUED THAT IN THE ASSESSMENT YEAR 2005-06, SIMILAR DISALLOWANCE @ 50% HAD BEEN MADE BY THE AO WHICH WAS NOT UPHELD BY THE CIT(A) A ND, THEREFORE, FOR CONSISTENCY AND UNIFORMITY OF TREATMENT, THE DEPART MENT WAS NOT EXPECTED TO DEVIATE FROM STAND TAKEN IN THAT YEAR. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CA SE OF RADHASOAMI SATSANG VS. CIT (193 ITR 521). 5.1 CIT(A) AFTER NECESSARY EXAMINATION OF THE CASE RECORDS OBSERVED THAT IN ASSESSMENT YEAR 2005-06 ONLY THE LICENSE AN D TECHNICAL ASSISTANCE AGREEMENT HAD BEEN PLACED ON RECORD. THE SHAREHOLDERS AGREEMENT DATED 17.10.1995 HAD NOT BEEN CONSIDERED WHICH STIPULATED THAT MIL AND BMI WOULD PROVIDE TO THE AS SESSEE TECHNICAL INFORMATION AND KNOWHOW RELATING TO THE SETTING UP OF THE PLANT SUITABLE TO MANUFACTURE OF THE PRODUCTS AS WELL AS TECHNICAL INFORMATION AND KNOWHOW RELATING TO THE MANUFACTUR E OF THE PRODUCT. THE TECHNICAL INFORMATION AND KNOWHOW WAS TO BE US ED IN CONNECTION WITH THE BUSINESS WHICH WAS DEFINED IN THE AGREEMEN T AS UNDER :- BUSINESS (A) TO DESIGN, CONSTRUCT, OWN, OPERATE AND MAINTAIN THE FACILITY (B) TO DESIGN AND MANUFACTURE THE PRODUCTS AT THE F ACILITY (C) TO DISTRIBUTE AND SELL THE PRODUCTS PURSUANT TO THE TERMS OF CLAUSE 7 OF THE SHAREHOLDERS AGREEMENT AND (D) TO ACQUIRE THE PROPERTY, RAW MATERIALS, SERVICE S AND PERMITS, LICENSES, APPROVALS AND OTHER AUTHORIZATIO NS, TO OBTAIN THE FINANCING, AND TO HIRE THE EMPLOYEES AND AGENTS NECESSARY TO PERMIT THE FOREGOING ACTIVITIES TO BE CARRIED OUT. ITA NOS : 7239, 7240 & 7241/MUM/2010 12 5.2 THUS THE TECHNICAL INFORMATION HAD ALSO BEEN US ED IN RELATION TO THE DESIGN AND CONSTRUCTION OF THE PLANT. BMI WAS I N PARTICULAR RESPONSIBLE FOR DESIGNING THE PLANT AND THE PRODUCT ION FACILITY INCORPORATING TECHNIQUES AND EQUIPMENTS. THE LICENS E AND TECHNICAL FEES WAS, THEREFORE, INEXTRICABLY LINKED TO THE SET TING UP OF THE BUSINESS OF THE JOINT VENTURE. THE ASSESSEE WAS NOT HAVING ANY EXISTING BUSINESS AND, THEREFORE, IT CANNOT BE SAID THAT USE OF THE TECHNICAL INFORMATION WAS FOR THE BETTERMENT OF ANY EXISTING PRODUCT. THIS WAS ALSO CLEAR FROM THE APPLICATION MADE TO DIPP, IN WH ICH IT WAS AGREED THAT BMI WOULD PROVIDE THE TECHNICAL INFORMATION AN D KNOWHOW RELATING TO THE SETTING UP OF THE PLANT AS WELL AS FOR MANUFACTURE OF THE PRODUCTS. BOTH BMI AND MIL HAD FURNISHED TECHNICAL INFORMATION FOR SETTING UP OF THE NEW BUSINESS OF THE ASSEESSEE AND EVEN AFTER THE EXPIRY OF THE AGREEMENT THERE WAS NO EMBARGE ON THE ASSESSEE TO CONTINUE MANUFACTURING OF THE PRODUCT. THE SITUATIO N WAS SIMILAR TO THE CASE OF JONAS WOODHEAD AND SONS (INDIA) LTD. (S UPRA), IN WHICH THE APEX COURT HELD THAT LUMPSUM PAYMENT OR TESTS O F ENDURING BENEFIT WAS NOT CONCLUSIVE IN UNDERSTANDING THE TRU E NATURE OF A PAYMENT. IT WAS HELD THAT VARIOUS TERMS AND CONDITI ONS OF THE AGREEMENT ARE REQUIRED TO BE EXAMINED CAREFULLY TO FIND OUT WHETHER WHOLE OR ANY PART OF THE PAYMENT COULD BE CONSIDERE D AS CAPITAL EXPENDITURE. THE PAYMENT COULD NOT BE CONSIDERED AS REVENUE EXPENDITURE ONLY ON THE GROUND THAT THE PAYMENT HAD BEEN MADE AS A PERCENTAGE OF SALES. AS REGARDS THE PLEA OF CONSIST ENCY BASED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG (SUPRA), THE CIT(A) OBSERVED THAT THE APEX COURT IN THE SAID CASE HAD ALSO OBSERVED THAT THE CASE WAS CONFINED T O THE FACTS OF THAT CASE AND, THEREFORE, IN CASE OF ANY MATERIAL CHANGE , THE REVENUE WOULD BE ENTITLED TO TAKE A DIFFERENT VIEW. REFERENCE WAS ALSO MADE TO THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE O F GODREJ & BOYCE ITA NOS : 7239, 7240 & 7241/MUM/2010 13 MANUFACTURING COMPANY LTD. VS. DCIT (328 ITR 81), I N WHICH THE HON'BLE HIGH COURT OBSERVED THAT JUDGMENT OF APEX C OURT IN THE CASE OF RADHASOAMI SATSANG (SUPRA) WAS NOT A BINDING PRE CEDENT AND COULD NOT BE APPLIED IN CASES WHERE THERE WERE MATERIAL C HANGES. 5.3 CIT(A) ALSO REFERRED TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF C.K. GANGADHARAN AND ANOTHER VS. CIT (304 ITR 61), IN WHICH IT WAS HELD THAT MERELY BECAUSE THE REVENUE H AD NOT FILED AN APPEAL IN ONE CASE, IT DID NOT OPERATE AS A BAR ON THE REVENUE TO PREFER APPEAL IN ANOTHER CASE, WHERE THERE WAS JUST CAUSE FOR DOING SO. CIT(A), THEREFORE, HELD THAT THE PRINCIPLE OF CONSI STENCY WAS OF NO HELP TO THE ASSESSEE IN THE PRESENT CASE, AS CERTAIN VIT AL FACTS WERE OMITTED TO BE CONSIDERED EARLIER. CIT(A) OBSERVED THAT DIPP HAD APPROVED A SINGLE PAYMENT OF ROYALTY @ 4% OF THE SALES AND THE AO HAD NO BASIS TO SPLIT THE SAME INTO TWO PARTS I.E. 50% FOR USE OF T RADE MARK AND 50% FOR ACQUISITION OF TECHNICAL INFORMATION. CIT(A) HE LD THAT THE ENTIRE PAYMENT WAS IN CONNECTION WITH THE SETTING UP OF TH E NEW PLANT FOR MANUFACTURE OF NEW PRODUCT AND, THEREFORE, HE HELD THAT THE ENTIRE PAYMENT HAD TO BE CONSIDERED AS CAPITAL IN NATURE. ACCORDINGLY, HE ENHANCED THE ADDITION AFTER ALLOWING OPPORTUNITY TO THE ASSESSEE WHO REITERATED ITS EARLIER STAND THAT THE ENTIRE PAYMEN T WAS REVENUE IN NATURE. AGGRIEVED BY THE SAID DECISION, THE ASSESSE IS IN APPEAL BEFORE THE TRIBUNAL IN ALL THE THREE YEARS. 6. BEFORE US, THE LD. SENIOR COUNSEL APPEARING FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) T HAT LICENSE AND TECHNOLOGY FEES WAS FOR THE USE OF TECHNICAL INFORM ATION FOR MANUFACTURE OF THE PRODUCT AND FOR SALE OF THE PROD UCTS, WHICH WAS VERY CLEAR FROM THE CLAUSE 2.1 OF THE AGREEMENT. TH E FEE WAS NOT FOR SETTING UP OF THE PLANT. IT WAS POINTED OUT THAT TH E ASSESSEE HAD ALSO ITA NOS : 7239, 7240 & 7241/MUM/2010 14 PAID A LUMPSUM FEES OF USD 7.5 LAKHS, WHICH COULD B E CONSIDERED AS THE PAYMENT FOR USE OF INFORMATION IN CONNECTION WI TH THE SETTING UP OF THE PLANT. IT WAS ARGUED THAT THE RELIANCE BY THE A O ON CLAUSE 7.1(B) TO CONCLUDE THAT THE ASSESSEE HAD PERPETUAL RIGHT TO U SE THE TECHNICAL INFORMATION WAS NOT JUSTIFIED, PARTICULARLY WHEN TH E SAID CLAUSE NEVER CAME INTO EFFECT. IT WAS POINTED OUT THAT CLAUSE 9. 4(A) CLEARLY PROVIDED THAT IN CASE OF THE TERMINATION OF THE AGREEMENT, O THER THAN BY WAY OF SPECIAL EVENTS, THE ASSESSEE WOULD CEASE TO USE THE TECHNICAL INFORMATION AND RETURN THE SAME TO BMI OR DESTROY IT ON REQUEST BY BMI. IT WAS ALSO SUBMITTED THAT THE PERPETUAL USE OF THE TECHNICAL INFORMATION AS MENTIONED IN CLAUSE 9.4(B) WAS ON SU CH TERMS AND CONDITIONS AS MAY BE MUTUALLY AGREED BETWEEN THE PA RTIES AND, THEREFORE, ON THAT BASIS IT COULD NOT BE CONCLUDED THAT THE ASSESSEE HAD PERPETUAL RIGHT TO USE INFORMATION. IT WAS POIN TED OUT THAT IN THIS CASE, THE AGREEMENT GOT TERMINATED ON ACCOUNT OF PU RCHASE OF ENTIRE SHARES BY THE MAFATLAL GROUP FROM BMI AND ONCE THE MAFATLAL GROUP GOT THE ENTIRE OWNERSHIP, IT WAS ENTITLED TO USE AL L THE INFORMATION, AS IT NO LONGER REMAINED A JOINT VENTURE. THE ASSESSEE CO MPANY HAD ONLY RIGHT TO USE THE INFORMATION DURING THE AGREEMENT P ERIOD AND, THEREFORE, THE ENTIRE PAYMENT WAS ALLOWABLE AS REVE NUE EXPENDITURE. 6.1 AS REGARDS THE JUDGMENT OF HON'BLE SUPREME COUR T IN THE CASE OF JONAS WOODHEAD AND SONS (INDIA) (SUPRA), IT WAS SUBMITTED THAT THE SAID CASE WAS DISTINGUISHABLE, AS IN THAT CASE THER E WAS A COMPOSITE PAYMENT FOR SETTING UP OF THE PLANT AND FOR THE MAN UFACTURE OF THE PRODUCT WHICH WAS NOT SO IN THE PRESENT CASE. THE L D. SENIOR COUNSEL PLACED RELIANCE ON THE JUDGMENT OF HON'BLE HIGH COU RT OF BOMBAY IN THE CASE OF GANNON NORTON METAL DIAMOND DIES LTD. V. CIT (163 ITR 606), IN WHICH UNDER SIMILAR CIRCUMSTANCES IT HAS B EEN HELD THAT NO PART OF THE PAYMENT COULD BE RELATED TO THE SETTING UP OF THE PLANT. IT ITA NOS : 7239, 7240 & 7241/MUM/2010 15 WAS, ACCORDINGLY, URGED THAT THE ENTIRE PAYMENT SHO ULD BE ALLOWED AS REVENUE EXPENDITURE. ALTERNATIVELY, IT WAS ALSO SUB MITTED THAT IN CASE THE EXPENDITURE WAS HELD AS CAPITAL IN NATURE, DEPR ECIATION SHOULD BE ALLOWED. 7. THE LD. DR ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A) AND PLACED RELIANCE ON THE FINDINGS GIVE N IN HIS ORDER. IT WAS POINTED OUT THAT THE TERM TECHNICAL INFORMATION H AD BEEN DEFINED IN CLAUSE 1.9 OF THE AGREEMENT, WHICH CLEARLY MENTIONE D THAT IT ALSO RELATED TO THE SETTING UP OF THE FACILITY AND, THER EFORE, THE PAYMENT FOR TECHNICAL INFORMATION WAS ALSO FOR THE SETTING UP O F THE PLANT. IT WAS ALSO ARGUED THAT ULTIMATELY THE JOINT VENTURE AGREE MENT HAD BEEN TERMINATED AND, UPON TERMINATION, THE ASSESSEE HAD PERPETUAL RIGHT TO USE THE INFORMATION IT HAD ACQUIRED FROM THE PARTIE S AND, THEREFORE, THE PAYMENT WAS FOR ACQUISITION FOR CAPITAL ASSET O F ENDURING NATURE. THE LD. DR FURTHER ARGUED THAT THE PAYMENT WAS ALSO FOR TECHNICAL ASSISTANCE IN RELATION TO THE SETTING UP OF THE PLA NT AND, THEREFORE, ITS NATURE WAS CAPITAL. HE REFERRED TO THE LETTER DAT ED 22.01.1996 OF DIPP PLACED AT PAGE NO.38 OF THE PAPER BOOK TO POINT OUT THAT THERE WAS A PROVISION OF CONVERSION OF LUMPSUM FEES OF USD 7.5 LAKHS INTO EQUITY, WHICH WAS TO BE DONE IN THE SAME SEQUENCE AND PROPO RTION IN WHICH THE KNOWHOW FEES BECAME DUE AND, THEREFORE, THE PAY MENT FOR KNOWHOW OR THE TECHNICAL INFORMATION WAS OF THE SAM E NATURE AS THE LUMPSUM PAYMENT. HE SUPPORTED THE FINDING OF THE CI T(A) THAT, IN EFFECT, THE ENTIRE PAYMENT WAS IN CONNECTION WITH T HE SETTING UP OF THE PLANT AND, THEREFORE, THE ENTIRE PAYMENT SHOULD BE TREATED AS CAPITAL IN NATURE. 7.1 IN REPLY, THE LD. SENIOR COUNSEL SUBMITTED THAT THE LUMPSUM PAYMENT OF USD 7.5 LAKHS WAS NOT IN THE PROPORTION OF KNOWHOW ITA NOS : 7239, 7240 & 7241/MUM/2010 16 PAYMENT, BUT THE SAME HAD TO BE PAID IN ONE INSTALL MENT, AS WAS CLEAR FROM THE LETTER DATED 14.12.1995 OF DIPP PLACED AT PG. 39 OF THE PAPER BOOK. THERE WAS A PROVISION FOR CONVERSION OF LUMPS UM PAYMENT INTO EQUITY UPTO 13% IN A PHASED MANNER, BUT FROM THIS N O CONCLUSION COULD BE DRAWN THAT THE ROYALTY PAYMENT FOR USE OF THE TECHNICAL INFORMATION WAS CAPITAL IN NATURE. 7.2 IN REGARD TO THE TECHNICAL ASSISTANCE, THE LD. SENIOR COUNSEL SUBMITTED THAT THE SAME HAD BEEN DEFINED IN PARAS 3 AND 4 OF THE AGREEMENT, AS PER WHICH THE EMPLOYEES OF THE COMPAN Y COULD VISIT BMI AND MIL TO RECEIVE TRAINING, OR TECHNICIANS AND OTH ER PERSONNEL OF BMI AND MIL COULD VISIT THE ASSESSEE COMPANY WITH RESPE CT TO THE IMPLEMENTATION AND USE OF THE TECHNICAL INFORMATION FOR THE MANUFACTURE, USE AND SALE OF THE PRODUCTS. THE AGRE EMENT ALSO CLEARLY PROVIDED THAT ENTIRE EXPENSES ON SUCH VISITS WERE T O BE BORNE BY THE ASSESSEE COMPANY. THEREFORE, IT WAS CLEAR THAT THE PAYMENT OF ROYALTY UNDER CONSIDERATION WAS NOT IN CONNECTION WITH THE TECHNICAL ASSISTANCE, BUT THESE PAYMENTS WERE FOR THE USE OF TECHNICAL INFORMATION FOR MANUFACTURE OF PRODUCT AND SALE OF PRODUCT WHICH HAD TO BE CONSIDERED AS REVENUE EXPENDITURE. 8. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE ALLOWABILITY OF LICENSE AND TECHNOLOGICAL FEES PAID BY THE ASSESSEE TO THE TWO JOINT VENTURE PARTNERS AS REVENUE EXPENDITURE. THE ASSESS EE DURING THE RELEVANT YEARS WAS A 50-50 JOINT VENTURE, NAMED AS MAFATLAL BURLINGTON INDUSTRIES LTD FORMED BY BMI, USA AND MI L, A MAFATLAL GROUP COMPANY. BMI, USA HAD EXPERIENCE AND EXPERTIS E IN MANUFACTURE AND SALE OF DENIM FABRICS. THE JOINT VE NTURE HAD, THEREFORE, BEEN FORMED FOR MANUFACTURE OF DENIM FAB RICS USING THE ITA NOS : 7239, 7240 & 7241/MUM/2010 17 SHEET DYEING TECHNOLOGY. THE JOINT VENTURE WAS INCO RPORATED ON 08.09.1995 AND THEREAFTER, A SHAREHOLDERS AGREEMENT WAS SIGNED ON 17.10.1995 FOR FORMATION AND CAPITALIZATION OF THE JOINT VENTURE COMPANY. SUBSEQUENTLY, DEPARTMENT OF INDUSTRIAL POL ICY AND PROMOTION (DIPP) APPROVED 50% FOREIGN EQUITY PARTIC IPATION BY THE FOREIGN PARTNER ALONG WITH THE LUMPSUM PAYMENT OF T ECHNICAL KNOWHOW FEES OF USD 7.5 LAKHS TO BMI. THE DEPARTMEN T ALSO APPROVED PAYMENT OF LOYALTY @ 4% AND COMMISSION @ 3% TO BMI ON SALES MADE THROUGH THEM. SINCE, BOTH BMI AND MIL HAD TECHNICAL INFORMATION AND THE TRADE MARK FOR THE MANUFACTURE AND SALE OF FABR ICS, THE ASSESSEE SIGNED LICENSE AND TECHNICAL CO-OPERATION AGREEMENT WITH BMI AND MIL ON 13.06.2006 SEPARATELY BUT ALMOST IDENTICALLY WORDED, MAKING THE PROVISIONS FOR USE OF TRADE MARK AS WELL AS THE TECHNICAL INFORMATION OWNED BY THE TWO JOINT VENTURE PARTNERS , ON PAYMENT OF ROYALTY @ 4% OF NET SALES TO EACH OF THEM IN RESPEC T OF SALES MADE THROUGH THEM AND PAYMENT OF SALES COMMISSION @ 3% O F NET SALES TO EACH OF THEM WHICH HAD ALREADY BEEN APPROVED BY THE GOVERNMENT. THE EXPENDITURE ON ACCOUNT OF PAYMENT OF COMMISSION @ 3% OF THE SALES MADE THROUGH THE JOINT VENTURE PARTNERS HAS B EEN ALLOWED BY THE AO AS REVENUE EXPENDITURE. THE DISPUTE IS ONLY ABOU T ALLOWABILITY OF ROYALTY @ 4% OF NET SALES. THE AO HAS ALLOWED THE R OYALTY ONLY @ 2% OF NET SALES AND THE BALANCE HAS BEEN DISALLOWED, TREA TING THE SAME AS CAPITAL EXPENDITURE. CIT(A) ON THE OTHER HAND, HAS HELD THAT THE ENTIRE ROYALTY OF 4% IS RELATABLE TO THE SETTING UP OF THE PLANT AND, THEREFORE, HELD THE SAME AS CAPITAL IN NATURE AND DISALLOWED. 8.1 IT MAY BE PERTINENT TO POINT OUT HERE THAT LICE NSE AND TECHNICAL CO-OPERATION AGREEMENT ONLY GRANT THE LICENSE TO TH E ASSESSEE TO USE THE TRADE MARK AS WELL AS THE TECHNICAL INFORMATION OWNED BY BMI AND MIL. THERE WAS NO PROVISION FOR TRANSFER OF THE TRA DE MARK OR THE ITA NOS : 7239, 7240 & 7241/MUM/2010 18 TECHNICAL INFORMATION TO THE ASSESSEE. THEREFORE, T HE ASSESSEE DID NOT ACQUIRE THE OWNERSHIP OVER THE TRADE MARK OR TECHNI CAL INFORMATION. THE AO, HOWEVER, HAS HELD THAT THE ASSESSEE HAD THE RIGHT TO USE THE TECHNICAL INFORMATION IN PERPETUITY. THE SAID CONCL USION HAS BEEN DRAWN BY THE AO AFTER GOING THROUGH THE PROVISIONS OF CLAUSE 7.1(B), IN WHICH IT WAS PROVIDED THAT IN CASE THE ASSESSEE WAS NOT ABLE TO OBTAIN GOVERNMENT APPROVAL TO CONTINUE PAYMENT OF LICENSE FEES FOR TECHNICAL INFORMATION BEYOND THE PERIOD OF 7 YEARS FROM THE D ATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, THE OBLIGATI ON OF THE ASSESSEE COMPANY TO PAY LICENSE FEES FOR TECHNICAL INFORMATION SHALL CEASE AND BE PAID UP AND THE ASSESSEE WILL BE FREE TO MANUFACTURE THE PRODUCTS BEYOND THE SAID PERIOD OF 7 YEARS, EVEN AF TER THE TERMS OF THE AGREEMENT. THE AGREEMENT WAS VALID FOR A PERIOD OF 10 YEARS FROM THE DATE OF AGREEMENT OR FOR 7 YEARS FROM THE DATE OF C OMMERCIAL PRODUCTION AND THE PAYMENT OF ROYALTY BY THE GOVERN MENT HAD BEEN APPROVED FOR THE SAID PERIOD. CLAUSE 7.1(B) ALSO PR OVIDED THAT IN THAT EVENTUALITY, LICENSE FEES FOR USE OF TRADE MARK SHA LL BE 2% OF NET SALES. SINCE, IN THIS CASE, THERE WAS NO GOVERNMENT APPROV AL FOR PAYMENT OF LICENSE FEES BEYOND THE 7 YEAR PERIOD, THE AO CONCL UDED THAT THE ASSESSEE HAD RIGHT TO USE THE TECHNICAL INFORMATION IN PERPETUITY AND ALSO ATTRIBUTED 2% OF ROYALTY TOWARDS THE USER OF T ECHNICAL INFORMATION WHICH WAS DISALLOWED AS CAPITAL EXPENDITURE. 8.2 THE AO ALSO DREW SUPPORT FROM THE PROVISIONS OF CLAUSE 9.4(B), AS PER WHICH IN CASE THE AGREEMENT WAS TERMINATED D UE TO SOME SPECIAL EVENT, BMI WAS REQUIRED TO GRANT THE ASSESS EE COMPANY A PERPETUAL LICENSE TO USE THE TECHNICAL INFORMATION. IT MAY BE POINTED OUT HERE THAT CLAUSE 9 OF THE AGREEMENT CONTAINED P ROVISIONS FOR TERMINATION OF THE AGREEMENT. THE AGREEMENT COULD B E TERMINATED UNDER NORMAL SITUATIONS SUCH AS BY MUTUAL CONSENT O R FOR MATERIAL ITA NOS : 7239, 7240 & 7241/MUM/2010 19 BREACH OF THE PROVISION OF THE AGREEMENT BY ANY OF THE PARTIES UNDER CLAUSE 9.4(A). THE AGREEMENT COULD ALSO BE TERMINAT ED ON OCCURRING OF SPECIFIED EVENTS SUCH AS ON TRANSFER OF SHARES BY E ITHER OF THE TWO JOINT VENTURE PARTNERS OR ON THE SALE OF SUBSTANTIALLY AL L THE ASSETS AND BUSINESS OF THE COMPANY I.E. ON SALE OF THE COMPANY OR ON DISSOLUTION OF THE COMPANY. IN CASE OF TERMINATION OF THE AGREE MENT FOR ANY REASON, THE ASSESSEE COMPANY WILL LOOSE THE RIGHT T O USE THE TRADE MARK UNDER THE PROVISIONS OF CLAUSE 9.4(A) AND IN C ASE OF SPECIAL EVENTS I.E. ON SALE OF SHARES BY EITHER OF THE JOIN T VENTURE PARTNERS OR ON SALE OF THE COMPANY, THE JOINT VENTURE PARTNERS SHALL GRANT PERPETUAL LICENSE TO THE COMPANY TO USE THE TECHNIC AL INFORMATION. IN THE PRESENT CASE, SINCE BMI HAD TRANSFERRED ALL THE SHARES TO THE MAFATLAL GROUP ON 31.03.2006, THE AO OBSERVED THAT BMI WAS BOUND TO GRANT THE ASSESSEE COMPANY A PERPETUAL LICENSE F OR USE OF TECHNICAL INFORMATION. SINCE, THE ASSESSEE HAD THE PERPETUAL RIGHT TO USE THE LICENSE, THE AO CONCLUDED THAT THE ASSESSEE HAD ACQ UIRED A CAPITAL ASSET, THE PAYMENT FOR WHICH HAD TO BE TREATED AS C APITAL IN NATURE. 8.3 IN OUR VIEW, THE REASONING ADOPTED BY THE AO FO R TREATING PART OF THE ROYALTY AS CAPITAL EXPENDITURE, CANNOT BE ACCEP TED. FIRSTLY, IT IS NOT THE CASE THAT THE ROYALTY PAYMENT WAS NOT APPROVED BY THE GOVERNMENT BEYOND THE PERIOD OF 7 YEARS AND, THEREFORE, THE PR OVISIONS OF CLAUSE 7.1 (B) ARE NOT APPLICABLE. BEFORE THE EXPIRY OF 7 YEAR PERIOD, GOVERNMENT BY PRESS NOTIFICATION DATED 24.06.2003 R EMOVED THE RESTRICTION ON THE DURATION OF THE PAYMENT OF ROYAL TY. EARLIER WHOLLY OWNED SUBSIDIARIES WERE PERMITTED TO MAKE ROYALTY P AYMENT @ 8% ON EXPORTS AND 5% ON DOMESTIC SALES TO THEIR OFFSHORE PARENT COMPANIES WITHOUT ANY RESTRICTION ON DURATION OF PAYMENT. THE SAID FACILITY WAS EXTENDED BY THE GOVERNMENT TO ALL THE COMPANIES BY THE NOTIFICATION DATED 24.06.2003 AND, THE RESTRICTION ON THE DURATI ON OF PAYMENT WAS ITA NOS : 7239, 7240 & 7241/MUM/2010 20 DONE AWAY WITH AND, THEREFORE, THE PAYMENT OF ROYAL TY BEYOND THE SEVEN YEAR PERIOD STOOD AUTOMATICALLY APPROVED AND THE PROVISIONS OF CLAUSE 7.1(B) WERE NOT APPLICABLE. THUS THE CONCLUS ION DRAWN BY THE AO BASED ON THE PROVISIONS OF CLAUSE 7.1(B) THAT TH E ASSESSEE HAD PERPETUAL RIGHT TO USE THE TECHNICAL INFORMATION CA NNOT BE UPHELD. AS REGARDS, THE PROVISIONS OF CLAUSE 9.4(B), THE SAME WAS APPLICABLE ON TERMINATION OF THE AGREEMENT ON SPECIAL EVENTS AND I.E. ON THE SALE OF SHARES EITHER BY BMI OR MIL OR IN CASE OF SALE OF T HE JOINT VENTURE COMPANY IN WHICH CASE THE JOINT VENTURE PARTNER WAS BOUND TO GRANT PERPETUAL LICENSE TO THE ASSESSEE, BUT THIS WAS ON SUCH TERMS AND CONDITIONS AS MAY BE REASONABLY AGREED TO BETWEEN T HE PARTIES. IN THE PRESENT CASE, BMI HAD SOLD ALL THE SHARES TO THE MA FATLAL GROUP AND, THEREFORE, IT WAS A CASE OF SPECIAL EVENT, BUT THE GRANT OF PERPETUAL LICENSE HAD TO BE DONE ON FRESH TERMS AND CONDITION S AND PRICE FOR SUCH PERPETUAL LICENSE COULD BE INBUILT INTO THE TR ANSFER PRICE OF SHARES. SECONDLY, ONCE THE SHARES HAD BEEN SOLD BY BMI, THE JOINT VENTURE ENDED AND, THEREFORE, SUCH PERPETUAL LICENS E COULD BE USED ONLY BY THE NEW COMPANY WHICH NO LONGER REMAINED JO INT VENTURE COMPANY. THEREFORE, BASED ON THE PROVISION OF CLAUS E 9.4(B), IT CANNOT NOT BE SAID THAT THE JOINT VENTURE COMPANY HAD PERP ETUAL LICENSE TO USE THE TECHNICAL INFORMATION ON PAYMENT OF ROYALTY OF 4%. THE PERPETUAL LICENSE WAS TO BE GRANTED ON FRESH TERMS AND CONCLUSIONS TO BE ENTERED INTO BY THE NEW COMPANY AND THE JOINT VE NTURE PARTNERS. THEREFORE, THE DECISION OF THE AO TO HOLD THAT THE ASSESSEE HAD THE RIGHT TO USE THE TECHNICAL INFORMATION IN PERPETUIT Y CANNOT BE SUSTAINED. THE ASSESSEE HAD ONLY THE RIGHT TO USE T HE TECHNICAL INFORMATION AND THE TRADE MARK DURING THE AGREEMENT PERIOD AND IN TERMS OF CLAUSE 9.4(A), IN CASE OF TERMINATION, UND ER NORMAL SITUATION, IT HAD NO RIGHT TO USE THE TECHNICAL INFORMATION AN D WAS REQUIRED TO RETURN OR DESTROY THE SAME AS PER REQUEST OF THE JO INT VENTURE PARTNER ITA NOS : 7239, 7240 & 7241/MUM/2010 21 AND, THEREFORE, PAYMENT FOR THE SAME HAS TO BE CONS IDERED AS REVENUE EXPENDITURE. 9. CIT(A) HAS HELD THAT THE ENTIRE PAYMENT OF ROYAL TY @ 4% ON NET SALES HAS TO BE TREATED AS CAPITAL EXPENDITURE. HIS REASONING WAS THAT THE TECHNICAL INFORMATION WAS TO BE USED IN RELATIO N TO THE SETTING UP OF THE PLANT FOR MANUFACTURE OF PRODUCTS AS WELL AS TH E TECHNICAL KNOWHOW RELATING THE SETTING UP OF THE PLANT ITSELF . THE JOINT VENTURE WAS SETTING UP A NEW BUSINESS WHICH CONSISTED OF DE SIGNING AND CONSTRUCTING THE PLANT, DESIGNING AND MANUFACTURE O F PRODUCTS AND DISTRIBUTION AND SALE OF PRODUCTS. THE BMI WAS PART ICULARLY RESPONSIBLE FOR DESIGNING THE PLANT AND PRODUCTION FACILITIES. BOTH BMI AND MIL HAD NOT ONLY PROVIDED THE TECHNICAL INFORMA TION AND TECHNICAL KNOWHOW, BUT HAD ALSO RENDERED VALUABLE SERVICES IN SETTING UP OF THE PLANT ITSELF AND, THEREFORE, THE CIT(A) HAS HELD TH AT THE ENTIRE PAYMENT OF ROYALTY @ 4% ON NET SALES WAS IN RELATION TO SET TING UP OF THE PLANT AND HAS TO BE TREATED AS CAPITAL EXPENDITURE. 9.1 ON CAREFUL PERUSAL OF THE MATERIAL ON RECORD IN CLUDING THE AGREEMENTS, WE ARE UNABLE TO ACCEPT THE CONCLUSION DRAWN BY THE CIT(A). THE CLAUSE 2.1 OF THE AGREEMENT ONLY PROVID ED FOR USE OF THE TECHNICAL INFORMATION IN CONNECTION WITH THE MANUFA CTURE OF THE PRODUCT AND IN CONNECTION WITH THE SALE OF THE PROD UCT. SIMILARLY, THE CLAUSE 6 PROVIDED FOR USE OF THE TRADE MARK IN CONN ECTION WITH THE MANUFACTURE AND SALE OF THE PRODUCT AND THE PROVISI ONS OF ROYALTY @ 4% UNDER CLAUSE 7.1(A) WAS TOWARDS THE USER OF THE TECHNICAL INFORMATION AND THE TRADE MARK IN CONNECTION WITH T HE MANUFACTURE OF THE PRODUCT AND THE SALE OF THE PRODUCT. THOUGH THE DEFINITION OF TECHNICAL INFORMATION UNDER CLAUSE 1.9 ALSO INCLU DED INFORMATION PERTAINING TO THE SETTING UP OF THE PLANT IN ADDITI ON TO INFORMATION ON ITA NOS : 7239, 7240 & 7241/MUM/2010 22 MANUFACTURE AND SALE OF THE PRODUCTS, THERE WAS NO PROVISION IN THE AGREEMENT FOR PAYMENT OF ROYALTY TO USE ANY INFORMA TION FOR SETTING UP OF THE PLANT. THE MANUFACTURE AND SALE OF THE PRODU CT TAKES PLACE ONLY AFTER SETTING UP OF THE PLANT AND, THEREFORE, ANY P AYMENT IN CONNECTION WITH THE MANUFACTURE OF THE PRODUCT AND SALE OF THE PRODUCT WHICH IS A TRADING ASSET HAS TO BE TREATED AS REVENUE EXPENDIT URE. NO DOUBT, IT IS TRUE THAT BMI HAD THE NECESSARY EXPERTISE IN SETTIN G UP OF DENIM FABRIC PLANTS AND IT HAD PROVIDED TECHNICAL INFORMATION AN D KNOWHOW IN CONNECTION WITH THE SETTING UP OF THE PLANT WHICH W AS ITS RESPONSIBILITY AND, THEREFORE, IT COULD BE ARGUED THAT PART OF THE ROYALTY PAYMENT EVEN IF THERE WAS NO SPECIFIC PROVISION IN THE AGREEMENT COULD BE ATTRIBUTED TOWARDS THE USE OF THE TECHNICAL INFORMATION FOR SE TTING UP OF THE PLANT. SUCH ATTRIBUTION, HOWEVER, CAN BE MADE ONLY IN CASE THERE HAS BEEN NO PAYMENT FOR SERVICES IN CONNECTION WITH THE SETTING UP OF THE PLANT OR THE PAYMENT IF MADE IS FOUND TO BE INADEQUATE. IN T HE PRESENT CASE, BMI HAD BEEN PAID A LUMPSUM AMOUNT OF USD 7.5 LAKHS AS TECHNICAL KNOWHOW FEES IN ONE INSTALLMENT, WHICH WAS LATER CO NVERTED INTO EQUITY. THIS PAYMENT HAS TO BE ATTRIBUTED ONLY TOWA RDS THE TECHNICAL SERVICES RENDERED BY BMI FOR SETTING UP OF THE PLAN T. IN SO FAR AS MIL WAS CONCERNED, IT HAD NO EXPERTISE IN SETTING UP OF DENIM FABRICS PLANTS AND, THEREFORE, IT HAD NO TECHNICAL INFORMAT ION OR KNOWHOW IN RELATION TO THE SETTING UP OF THE DENIM FABRICS PLA NTS. EVEN CIT(A) IN HIS ORDER HAS NOTED THAT IN THE APPLICATION MADE TO DIPP IT WAS AGREED THAT BMI WOULD PROVIDE THE TECHNICAL INFORMATION AN D KNOW HOW RELATING TO THE SETTING UP OF THE PLANT. THERE IS A LSO NO MATERIAL PLACED ON RECORD TO SHOW THAT MIL HAD PROVIDED TECHNICAL I NFORMATION OR KNOWHOW IN RELATION TO SETTING UP OF THE PLANT. THE FINDING OF CIT(A) THAT MIL HAD ALSO PROVIDED TECHNICAL INFORMATION FO R THE SETTING UP OF THE PLANT IS THUS WITHOUT ANY BASIS. THEREFORE, NO PART OF ROYALTY PAID TO MIL COULD BE ATTRIBUTED TOWARDS THE SETTING UP O F THE PLANT. AS FOR ITA NOS : 7239, 7240 & 7241/MUM/2010 23 OTHER SERVICES, SUCH AS PROVIDING TECHNICAL INFORMA TION AND TRADE MARK IN CONNECTION WITH THE MANUFACTURE AND SALE OF THE PRODUCT, BMI AND MIL HAD BEEN PAID ROYALTY SEPARATELY UNDER THE PROV ISIONS OF THE AGREEMENT. THERE IS NO FINDING BY EITHER OF THE AUT HORITIES BELOW THAT NO TECHNICAL INFORMATION WAS REQUIRED TO BE USED IN CONNECTION WITH THE MANUFACTURE AND SALE OF THE PRODUCTS OR THAT LU MPSUM PAYMENT OF USD 7.5 LAKHS PAID TO BMI WAS NOT ADEQUATE FOR THE SERVICES RENDERED BY BMI FOR SETTING UP OF THE PLANT. UNDER THESE CIR CUMSTANCES, TREATING THE ROYALTY PAYMENT @ 4% AS EXPENDITURE TOWARDS SET TING UP OF THE PLANT AND TREATING THE SAME AS CAPITAL EXPENDITURE CANNOT BE JUSTIFIED. 9.2 THE LD. DR ARGUED THAT LICENSE AND TECHNICAL CO OPERATION AGREEMENT ALSO PROVIDED FOR TECHNICAL ASSISTANCE IN RELATION TO THE SETTING UP OF THE PLANT AND, THEREFORE, PART OF THE ROYALTY PAYMENT HAS TO BE ATTRIBUTED TOWARDS THE TECHNICAL ASSISTANCE. HOWEVER, ON CAREFUL PERUSAL OF THE PROVISION OF THE AGREEMENT WE DO NOT FIND ANY SUBSTANCE IN THE ARGUMENT ADVANCED. THE PHRASE TECHNICAL ASS ISTANCE HAS BEEN DEFINED IN PARAS 3 AND 4 OF THE AGREEMENT AS PER WH ICH THE EMPLOYEES OF THE COMPANY COULD VISIT BMI AND MIL TO RECEIVE T RAINING, OR TECHNICIANS AND OTHER PERSONNEL OF BMI AND MIL COUL D VISIT THE ASSESSEE COMPANY WITH RESPECT TO THE IMPLEMENTATION AND USE OF THE TECHNICAL INFORMATION FOR THE MANUFACTURE, USE AND SALE OF THE PRODUCTS. THE AGREEMENT ALSO CLEARLY PROVIDED THAT ENTIRE EXPENSES ON SUCH VISITS WERE TO BE BORNE BY THE ASSESSEE COMPAN Y. IT IS THUS CLEAR THAT THE TECHNICAL ASSISTANCE WAS NOT IN RELATION T O SETTING UP OF THE PLANT BUT IN RELATION TO MANUFACTURE, USE AND SALE OF THE PRODUCTS. SECONDLY, THE AO HIMSELF HAS GIVEN A FINDING THAT N O EXPENDITURE RELATING TO THE TECHNICAL ASSISTANCE WAS INCLUDED I N THE ROYALTY PAYMENT UNDER CONSIDERATION. THEREFORE, THE ARGUMEN T OF THE LD. DR HAS NO MERIT AND IS ACCORDINGLY REJECTED. ITA NOS : 7239, 7240 & 7241/MUM/2010 24 10. THE AUTHORITIES BELOW HAVE RELIED ON THE JUDGME NT OF HON'BLE SUPREME COURT IN THE CASE OF JONAS WOODHEAD AND SO NS (INDIA) (SUPRA), WHICH IN OUR VIEW IS DISTINGUISHABLE AND N OT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE, THE ASSESS EE WHO WAS IN THE BUSINESS OF MANUFACTURE OF AUTOMOBILE SPRINGS, HAD ENTERED INTO AN AGREEMENT WITH THE UK COMPANY FOR MANUFACTURE OF AL L TYPES OF SPRINGS. AS PER THE AGREEMENT, THE UK COMPANY WAS T O PROVIDE TECHNICAL INFORMATION FOR MANUFACTURE OF THE PRODUC TS AND TECHNICAL KNOWHOW RELATING TO THE SETTING UP OF THE PLANT ITS ELF, FOR WHICH A COMPOSITE PAYMENT OF ROYALTY AS PERCENTAGE OF TURNO VER OF THE LICENSED PRODUCT HAD BEEN MADE IN TWO INSTALLMENT, WHICH FEL L IN THE ASSESSMENT YEARS 1967-68 AND 1968-69. THE AO ATTRIB UTED 25% OF THE PAYMENT TOWARDS THE SERVICES PROVIDED FOR SETTING U P OF THE PLANT. IT MAY BE NOTED THAT IN THAT CASE THOUGH THE USER COMP ANY HAD PROVIDED SERVICES IN CONNECTION WITH THE SETTING UP OF THE P LANT, NO SEPARATE PAYMENT HAD BEEN MADE FOR THESE SERVICES. THE TRIBU NAL GAVE A FINDING THAT THE USER COMPANY HAD NOT ONLY PROVIDED TECHNIC AL INFORMATION FOR THE MANUFACTURE OF THE PRODUCT, BUT HAS ALSO RENDER ED VALUABLE SERVICES FOR THE SETTING UP OF THE PLANT ITSELF. IT WAS UNDER THESE CIRCUMSTANCES THAT CONTRIBUTION OF 25% OF THE ROYAL TY TOWARDS THE SETTING UP OF THE PLANT WAS UPHELD. IN THE PRESENT CASE, THE ROYALTY HAD BEEN PAID IN CONNECTION WITH THE MANUFACTURE OF THE PRODUCT AND SALE OF THE PRODUCT. FOR SERVICES RENDERED BY BMI TOWARD S SETTING UP OF THE PLANT, SEPARATE LUMPSUM PAYMENT HAD BEEN MADE AND, THEREFORE, IT WOULD NOT BE REASONABLE TO ATTRIBUTE PART OF THE RO YALTY TOWARDS THE SETTING UP OF THE PLANT. 10.1 THE JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. G4S SECURITY SYSTEM (INDIA) PVT. LTD (SUPRA) RE LIED UPON BY THE LD. DR IS ALSO OF NO HELP TO THE REVENUE. IN THAT CASE, THE ISSUE WAS ITA NOS : 7239, 7240 & 7241/MUM/2010 25 REGARDING ALLOWABLITLY OF ROYALTY PAYMENT FOR USE O F TECHNICAL KNOWHOW TO THE DENMARK COMPANY. IT WAS FOUND THAT ALL RIGHT S AND KNOW HOW CONTINUED TO VEST IN THE PROVIDER COMPANY AND IT WA S ONLY RIGHT TO USE THE KNOWHOW THAT WAS MADE AVAILABLE TO THE ASSESSEE AND THAT TO BASED ON ITS NET SALES. THE ASSESSEE WAS NOT ENTITL ED TO BECOME THE OWNER OF THE TECHNICAL KNOWHOW AND THE TRADE MARK. THE HON'BLE HIGH COURT, THEREFORE, FOUND THE EXPENDITURE ALLOWABLE A S REVENUE EXPENDITURE. THE CASE IN FACT SUPPORTS THE CASE OF THE ASSESSEE. 10.2 THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY I N THE CASE OF GENON NORTON METAL DIAMOND DIES LTD. (SUPRA) RELIED UPON BY THE LD. SR. COUNSEL FOR THE ASSESSEE SUPPORTS THE CASE OF T HE ASSESSEE. IN THAT CASE, THE ASSESSEE HAD TECHNICAL COLLABORATION AGRE EMENT WITH THE UK COMPNAY FOR MANUFACTURE OF CERTAIN PRODUCTS. UNDER THE AGREEMENT, THE UK COMPANY HAD OBLIGATION TO PROVIDE AND ALLOW USER OF TECHNICAL KNOWHOW AND IT HAD ALSO THE OBLIGATION TO COLLABORA TE TECHNICALLY WITH THE ASSESSEE FOR SETTING UP A FACTORY IN INDIA TO M ANUFACTURE DIES. IN THE AGREEMENT, AS IN CASE OF THE PRESENT ASSESSEE, THERE WAS NO PROVISION FOR GIVING TECHNICAL ASSISTANCE AND COLLA BORATION FOR SETTING UP OF THE FACTORY. THE TRIBUNAL NOTED THAT THE AGRE EMENT HAD BEEN MADE SIX MONTHS AFTER THE COMMERCIAL PRODUCTION STA RTED AND, THEREFORE, HELD THAT THE PROVISION OF NO PAYMENT IN THE AGREEMENT IN CONNECTION WITH THE SETTING UP OF THE FACTORY HAD T O BE ACCEPTED AS CORRECT. THE PAYMENT WAS ONLY FOR USER OF THE TECHN ICAL KNOWHOW AND INFORMATION FOR MANUFACTURING OF THE PRODUCT WHICH WAS ALLOWABLE AS REVENUE EXPENDITURE. THE CASE OF THE ASSESSEE IS SI MILAR. THOUGH IN CASE OF THE ASSESSEE, THE AGREEMENT HAD BEEN ENTERE D INTO PRIOR TO THE DATE OF COMMERCIAL PRODUCTION, IN THIS CASE THERE H AS ALREADY BEEN A LUMPSUM PAYMENT OF USD 7.5 LAKHS WHICH HAS TO BE CO NSIDERED AGAINST THE ASSISTANCE PROVIDED BY BMI IN RELATION TO THE SETTING UP OF ITA NOS : 7239, 7240 & 7241/MUM/2010 26 THE PLANT AND THERE BEING NO FINDING BY THE AUTHORI TIES BELOW THAT THE PAYMENT WHICH WAS APPROVED BY THE GOVERNMENT WAS IN ADEQUATE, NO PART OF THE ROYALTY PAYMENT AS HELD EARLIER CAN IN OUR VIEW BE ATTRIBUTED TOWARDS THE SETTING UP OF THE PLANT. 11. IN VIEW OF THE FOREGOING DISCUSSION AND FOR THE REASONS GIVEN EARLIER WE ARE OF THE VIEW THAT THE ENTIRE PAYMENT OF ROYALTY @ 4% OF NET SALES ON THE FACTS OF THE CASE HAS TO BE ALLOWE D AS REVENUE EXPENDITURE. THE ORDER OF THE CIT(A) IS ACCORDINGLY , SET ASIDE ON THIS POINT AND THE CLAIM OF THE ASSESSEE IS ALLOWED. 12. IN THE ASSESSMENT YEAR 2003-04 THERE IS ALSO A GROUND REGARDING THE COMPUTATION OF BOOK PROFIT U/S. 115JB . THE ASSESSEE WHILE COMPUTING THE BOOK PROFIT HAD REDUCED THE PRO FIT ELIGIBLE FOR DEDUCTION U/S.80HHC UNDER THE PROVISIONS OF CLAUSE (IV) OF THE EXPLANATION 1 OF SECTION 115JB(2) AND WHILE COMPUTI NG THE ELIGIBLE PROFIT FOR THE PURPOSE OF SECTION 80HHC, THE ASSESS EE HAD NOT SET OFF THE BROUGHT FORWARD LOSS AND DEPRECIATION. THE AO R EFERED TO THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENT LTD. (291 ITR 380), IN WHICH IT WAS HELD THAT FOR COMPUTING THE ELIGIBLE PROFIT FOR THE PURPOSE O F SECTION 80HHC BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPR ECIATION HAD TO BE SET OFF. THE AO OBSERVED THAT AFTER SETTING OFF THE BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION, THERE WAS NO POSITIVE ELIGIBLE PROFIT OF THE BUSINESS AND, THEREFORE, HE DID NOT ALLOW ANY DEDUCTION ON ACCOUNT OF 80HHC WHILE COMPUTING THE B OOK PROFIT. IN APPEAL, CIT(A) OBSERVED THAT THE AO HAD RIGHTLY DEC LINED THE DEDUCTION IN CONFORMITY WITH THE DECISION OF HON'BLE HIGH COU RT OF BOMBAY IN THE CASE OF AJANTA PHARMA LTD. (318 ITR 252). AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBU NAL. ITA NOS : 7239, 7240 & 7241/MUM/2010 27 13. BEFORE US, THE LD. SENIOR COUNSEL ARGUNED THAT THE CIT(A) HAD CONFIRMED THE ORDER OF THE AO FOLLOWING THE JUDGMEN T OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF AJANTA PHARMA LTD. (SUPRA) WHICH HAD NOW BEEN REVERSED BY THE HON'BLE SUPREME COURT IN T HE SAME CASE AS REPORTED IN 327 ITR 305. IT WAS, ACCORDINGLY, URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 14. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE ALLOWABILITY OF DEDUCTION ON ACCOUNT OF PROFIT ELIGIBLE FOR DEDUCTI ON U/S.80HHC WHILE COMPUTING THE BOOK PROFIT U/S. 115 JB UNDER THE PRO VISION OF CLAUSE (IV) OF EXPLANATION 1 OF SECTION 115JB(2). THE HON' BLE SUPREME COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMEN T LTD. (SUPRA) HAVE HELD THAT THE PROVISIONS OF SECTION 80AB WHICH SPEC IFY THAT PROFITS ARE THOSE AS DETERMINED FOR THE PURPOSE OF THE ACT, WIL L APPLY FOR DETERMINING THE PROFIT FROM EXPORT BUSINESS FOR THE PURPOSE OF DEDUCTION U/S.80HHC AND, THEREFORE, WHILE DETERMINI NG THE BUSINESS PROFIT FOR THE PURPOSE OF SECTION 80HHC, THE UNABSO RBED BUSINESS LOSSES AND DEPRECIATION OF EARLIER YEARS HAVE TO BE SET OFF. THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF A JANTA PHARMA LTD. (SUPRA) IS ON A DIFFERENT ISSUE, WHICH IS WHETHER T HE PROFIT ELIGIBLE FOR DEDUCTION U/S.80HHC SHOULD BE ALLOWED AS DEDUCTION OR ONLY THE DEDUCTION ACTUALLY ALLOWABLE U/S. 80HHC FOR THE PUR POSE OF COMPUTATION OF BOOK PROFIT U/S.115JB. THE HON'BLE S UPREME COURT IN THE SAID CASE HELD, REVERSING THE JUDGMENT OF HON'B LE HIGH COURT OF BOMBAY THAT PROFIT ELIGIBLE FOR DEDUCTION HAS TO BE ALLOWED AS A DEDUCTION U/S.115JB. IN VIEW OF THE JUDGMENT OF HON 'BLE SUPREME COURT IN THE CASE OF SHIRKE CONSTRUCTION EQUIPMENT LTD. (SUPRA) ITA NOS : 7239, 7240 & 7241/MUM/2010 28 PROFIT ELIGIBLE FOR DEDUCTION U/S.80HHC HAS TO BE C OMPUTED AFTER SETTING OFF THE BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION. IN THIS CASE, AFTER SETTING OFF THE B ROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION, THERE IS NOT PROFIT LEFT FOR THE PURPOSE OF DEDUCTION U/S.80HHC. THEREFORE, IN OUR VIEW, THERE BEING NO ELIGIBLE PROFIT OF BUSINESS FOR THE PURPOS E OF DEDUCTION U/S.80HHC, THE CLAIM OF DEDUCTION OF THE ASSESSEE H AS BEEN RIGHTLY DISALLOWED BY THE AO. THEREFORE, THE ORDER OF THE C IT(A) CONFIRMING THE DISALLOWANCE MADE BY THE AO IS UPHELD. 15. THE ASSESSEE IN THE ASSESSMENT YEARS 2003-04 AN D 2004-05 HAS ALSO RAISED DISPUTE REGARDING THE VALIDITY OF THE R EOPENING OF THE ASSESSMENT U/S.147 OF THE I.T. ACT. IN THE ASSESSME NT YEAR 2003-04, A GROUND HAS ALSO BEEN RAISED REGARDING THE NOTICE U/ S.143(2) BEING BARRED BY LIMITATION. AS WE HAVE ALREADY ALLOWED TH E CLAIM OF THE ASSESSEE ON MERIT, WE DO NOT CONSIDER IT NECESSARY TO GO INTO THESE LEGAL ISSUES. THESE GROUNDS ARE, THEREFORE, DISMIS SED AS HAVING BECOME INFRUCTUOUS. 16. THERE IS ALSO A GROUND RAISED WHICH IS COMMON I N ALL THE THREE APPEALS REGARDING THE CLAIM OF DEPRECIATION, IN CAS E THE ROYALTY PAYMENT WAS DISALLOWED AS CAPITAL EXPENDITURE. AS W E HAVE ALREADY ALLOWED THE CLAIM OF THE ASSESSEE AS REVENUE EXPEND ITURE, THESE GROUNDS HAVE BECOME ONLY ACADEMIC AND, THEREFORE, A RE BEING DISMISSED AS HAVING BECOME INFRUCTUOUS. ITA NOS : 7239, 7240 & 7241/MUM/2010 29 17. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 21 ST DAY OF DECEMBER, 2011. SD/ - SD/ - ( D. MANMOHAN ) ( RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DT: 21.12.2011 FIT FOR PUBLICATION SD/- SD/- (VP), (MZ) (AM) COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI