Appeal details
Counselvise Citation
[2019] 116 COUNSELVISE.COM (IT) 9802 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 1 month(s) 12 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
23-04-2019
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
C
Assessment Year
2011-2012
Appeal Filed On
12-03-2018
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI . . . , ! ' , # '$ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ./ ITA NO.876/CHNY/2018 % &% /ASSESSMENT YEAR: 2011-12 M/S. FAURECIA EMISSIONS CONTROL TECHNOLOGIES INDIA PVT. LTD., KARUMUTHU CENTER, 1 ST FLOOR, NO.634, ANNA SALAI, CHENNAI 600 035. VS. DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(1), CHENNAI. [PAN: AAACA 8450F] ./ ITA NO.708/CHNY/2018 % &% /ASSESSMENT YEAR: 2013-14 DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(1), CHENNAI. M/S. FAURECIA EMISSIONS CONTROL TECHNOLOGIES INDIA PVT. LTD., KARUMUTHU CENTER, 1 ST FLOOR, NO.634, ANNA SALAI, CHENNAI 600 035. [PAN: AAACA 8450F] ( '( /APPELLANT) ( )*'( /RESPONDENT) '( + , / ASSESSEE BY : SHRI GIRISH S. SUNDAR, CA )*'( + , /REVENUE BY : SHRI R. CLEMENT RAMESH KUMAR, ADDL. CIT - + .# /DATE OF HEARING : 10.04.2019 /0& + .# / DATE OF PRONOUNCEMENT : 23.04.2019 / O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER : THESE TWO APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE DIRECTED AGAINST THE ORDERS OF THE LEARNED COMMISSI ONER OF INCOME TAX ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 2 -: (APPEALS)-13 & 6, CHENNAI (HEREINAFTER CALLED AS C IT(A)) DATED 21.12.2017 & 30.11.2017 FOR THE ASSESSMENT YEARS (A Y) 2011-12 & 2013-14. 2. SINCE, THE IDENTICAL FACTS AND ISSUES ARE INVOLV ED IN THESE APPEALS, WE PROCEED TO DISPOSE THE SAME VIDE THIS COMMON ORD ER. 3. FOR THE SAKE OF CONVENIENCE AND CLARITY THE FACT S RELEVANT IN ITA NO.876/CHNY/2018 FOR ASSESSMENT YEAR 2011-12 ARE ST ATED HEREIN. 4. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APP EAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAIN ST THE ORDER DATED 21 DECEMBER 2017 (SERVICED ON 12 JANUARY 2018) ISSU ED BY THE HONBLE COMMISSIONER OF INCOME-TAX (APPEALS) - 13, CHENNAI (HEREINAFTER REFERRED TO AS HONBLE CIT(A)), UNDE R SECTION 250 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT). THE FOLLOWING GROUNDS OF APPEAL ARE INDEPENDENT OF AND WITHOUT PREJUDICE TO ONE ANOTHER. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED ASSESSING OFFICER (LD. AO) HAS ERRED AND THE HON. CIT(A) HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE E D. AO IN: 1. DISALLOWANCE OF ROYALTY PAYMENTS 1.1 ERRED IN TREATING THE ROYALTY PAYMENT OF 1NR 34 ,644,391 AS CAPITAL EXPENDITURE AND DISALLOWING THE SAME. 1.2 ERRED IN NOT FOLLOWING THE DECISIONS RENDERED B Y THE HONBLE ITAT ON SIMILAR ISSUE, WHICH WERE IN FAVOUR OF THE APPEL LANT FOR EARLIER ASSESSMENT YEARS. 2. DISALLOWANCE OF FEES PAID TO REGISTRAR OF COMPAN IES (ROC) 2.1 DISALLOWING THE FEES PAID TO ROC OF INR 510,000 FOR INCREASING THE AUTHORIZED SHARE CAPITAL. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFO RE OR AT, THE TIME ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 3 -: OF HEARING OF THE APPEAL, SO AS TO ENABLE THE LD. A O TO DECIDE THIS APPEAL ACCORDING TO LAW. 5. THE BRIEF FACTS OF THE CASE ARE AS UNDER: THE APPELLANT NAMELY FAURECIA EMISSIONS CONTROL TE CHNOLOGIES INDIA PVT. LTD. IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINES S OF MANUFACTURING OF AUTOMOBILE EXHAUST SYSTEMS, CATALYTIC CONVERTORS. T HE RETURN OF INCOME FOR THE AY 2011-12 WAS FILED ON 30.09.2011 DISCLOSI NG TOTAL INCOME OF RS. 6,21,91,840/-. AGAINST THE SAID RETURN OF INCOM E, THE ASSESSMENT WAS COMPLETED BY THE DY. CIT, CORPORATE CIRCLE-2(1) , CHENNAI (HEREINAFTER CALLED AO) VIDE ORDER DATED 12.03.20 15 PASSED U/S. 143(3) R/W S. 92CA(3) OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT) AT TOTAL INCOME OF RS. 8,29,84,700/-. WHILE DOING SO, THE A O TREATED THE ROYALTY EXPENDITURE OF RS. 3,46,44,391/- PAID TO SANGO CO. LTD., JAPAN AND FAURECIA SYSTEMS DECHAPPEMENT, FRANCE AS A CAPITAL EXPENDITURE AS AGAINST CLAIM BY THE ASSESSEE AS REVENUE EXPENDITUR E. HOWEVER, THE AO ALLOWED DEPRECIATION @ 25% OF THE CAPITAL EXPEND ITURE. THE AO HAD COME TO THE CONCLUSION THAT IT IS A CAPITAL EXPENDI TURE TAKING NOTE OF THE FACT THAT THE APPELLANT HAD BEEN GRANTED THE EXCLUS IVE RIGHT TO OBTAIN THE TECHNICAL AND ENGINEERING INSTRUCTION KNOW HOW TO M ANUFACTURE, ASSEMBLE, SALE AND DISTRIBUTION OF EXHAUST PRODUCTS AND THIS EXPENDITURE HAD RESULTED IN AN ENDURING BENEFIT TO THE ASSESSEE . ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 4 -: 6. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE LD. CIT(A), WHO VIDE IMPUGNED ORDER CONFIRMED THE ACTION OF THE AO PLACING RELIANCE ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT V. SOUTHERN SWITCHGEAR LTD. [1984] 16 TAXMAN 79 (MAD) AS THE APPELLANT WAS GIVEN AN EXCLUSIVE RIGHT TO USE THE TECHNICAL K NOW-HOW FOR THE PURPOSE OF MANUFACTURING THE EXHAUST PRODUCTS IN IN DIA. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US IN T HE PRESENT APPEAL. 7. IT IS CONTENDED THAT THE ROYALTY PAYMENT WAS ONL Y FOR THE PURPOSE OF USE OF TECHNICAL INFORMATION IN THE MANUFACTURE AND SALE OF THE PRODUCTS. THE PROPRIETARY OWNERSHIP RIGHTS IN THE KNOW-HOW NE VER VESTED WITH SANGO CO. LTD., JAPAN AND FAURECIA SYSTEMS DECHAPPE MENT, FRANCE AT ALL THE TIME THERE IS NO PARTING KNOW-HOW IN FAVOUR OF THE ASSESSEE RESULTING IN THE ACQUISITION OF ANY ASSET NO BENEFI T OF ANY ENDURING NATURE HAD ACCRUED TO THE APPELLANT. IT IS FURTHER STATED THAT THE RATIO OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF SOUTHERN SWITCHGEAR LTD. (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE PRESE NT CASE AS NO LUMP SUM PAYMENT WAS MADE AND THE PAYMENT OF ROYALTY WAS MADE IN TERMS OF PERCENTAGE OF THE SALES. ON THE O THER HAND, THE LD. SR. DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE ORDERS OF LOWER AUTHORITIES. ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 5 -: 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. THE SHORT ISSUE IN THE GROUNDS OF APPEAL IS RELATES TO WHETHER THE ROYALTY PAYMENT MADE TO THE SANGO CO. LTD., JAPAN A ND FAURECIA SYSTEMS DECHAPPEMENT, FRANCE CAN BE DISALLOWED AS B EING CAPITAL IN NATURE. THE APPELLANT HAD ENTERED INTO AN AGREEMENT WITH M/S. SANGO CO., LTD., JAPAN IN TERMS OF WHICH THE APPELLANT IS GRANTED EXCLUSIVE LICENSE FOR THE MANUFACTURE IN THE TERRITORY OF THE CUSTOMER AGREED AND NON-EXCLUSIVE RIGHT OUTSIDE THE TERRITORY OF THE CU STOMER. THE ASSESSEE IS ALSO ENTERED IN AN AGREEMENT WITH M/S. FAURECIA SYS TEMS DECHAPPEMENT, FRANCE IN TERMS OF WHICH THE APPELLA NT IS GRANTED FOR EXCLUSIVE LICENSE FOR EXCLUSIVE, NON-TRANSFERABLE A ND NON-ASSIGNABLE. IN TERMS OF THE SAID AGREEMENTS, THE ASSESSEE AFTER TH E EXPIRY OF THE LICENSE GRANTED THE ASSESSEE HAS TO RETURN ALL THE DOCUMENTS RELATES TO THE TECHNICAL INFORMATION RECEIVED AND THE ROYALTY SHALL BE PAID AS A PERCENTAGE OF THE TURNOVER. THEREFORE, THE ISSUE T HAT COMES WHETHER THIS PAYMENT OF ROYALTY CAN BE CONSIDERED AS A CAPITAL O R REVENUE. THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. SOUTHERN SWITCHGEAR LTD. (SUPRA) INVOKING THE IDENTICAL FACTS IS AS FOLLOWS: 10. A PERUSAL OF THE ABOVE CLAUSES CLEARLY INDICATES TH AT THE TECHNICAL KNOWLEDGE THE ASSESSEE-COMPANY OBTAINED T HROUGH THIS AGREEMENT FROM THE FOREIGN COMPANY SECURED TO THE A SSESSEE AN ENDURING ADVANTAGE AND BENEFIT IN THAT THE SAME WAS AVAILABLE TO THE ASSESSEE FOR ITS MANUFACTURING AND INDUSTRIAL PROCE SSES EVEN AFTER ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 6 -: THE TERMINATION OF THE AGREEMENT. THE TECHNICAL ASS ISTANCE CONTEMPLATED IN THE AGREEMENT COVERS THE ESTABLISHM ENT OF THE FACTORY AND THE OPERATION THEREOF FOR THE MANUFACTU RE OF TRANSFORMERS OF ALL KINDS AND TYPES. THE FOREIGN COMPANY ALSO MA KES AVAILABLE TO THE ASSESSEE ITS PROCEDURES, DESIGNS, EXPERIENCE AN D TECHNICAL KNOW-HOW IN RESPECT OF THE SAME. THOUGH THE DURATIO N OF THE AGREEMENT IS FIVE YEARS, THE ASSESSEE EVEN AFTER TH E EXPIRY OF THE PERIOD, COULD USE THE METHODS OF PRODUCTION, PROCED URE, EXPERIMENTS, IMPROVEMENTS WHICH HAD BEEN MADE AVAIL ABLE TO THEM IN PURSUANCE OF THE AGREEMENT. THUS, THE ASSESSEE H AD ACQUIRED A KNOWLEDGE OF ENDURING NATURE. FURTHER, APART FROM T HE TECHNICAL KNOW-HOW SUPPLIED BY THE FOREIGN COMPANY AND THE GR ANT OF PATENT RIGHTS, THE FOREIGN COMPANY HAS AGREED NOT TO MANUF ACTURE IN INDIA ANY OF THE SCHEDULED PRODUCTS OR TO GRANT OR MAKE A VAILABLE TO ANY OTHER PERSON, FIRM OR COMPANY ANY MANUFACTURING INF ORMATION, LICENCES, RIGHTS FOR ANY ONE OF THE SCHEDULED PRODU CTS IN INDIA, THUS CONFERRING AN EXCLUSIVE BENEFIT ON THE ASSESSEE-COM PANY TO MANUFACTURE AND SELL THE SCHEDULED PRODUCTS. THE CO NFERMENT OF AN EXCLUSIVE BENEFIT TO MANUFACTURE AND SELL THE ARTIC LES WHICH ARE THE SUBJECT-MATTER OF THE AGREEMENT CANNOT BE SAID TO B E A PART OF A MERE KNOW-HOW AGREEMENT. THE RIGHT TO MAKE OR MANUF ACTURE CERTAIN GOODS EXCLUSIVELY IN INDIA SHOULD BE TAKEN TO BE AN INDEPENDENT RIGHT SECURED BY THE ASSESSEE FROM THE FOREIGN COMPANY WH ICH IS OF AN ENDURING NATURE. THEREFORE, THE PRINCIPLE LAID DOWN BY THIS COURT IN TRANSFORMER & SWITCHGEAR LTD. VS. CIT (SUPRA), FENN ER WOODROFFE & CO. LTD. VS. CIT (SUPRA) AND M. R. ELECTRONIC COMPO NENTS LTD. VS. CIT (SUPRA), STRAIGHTAWAY APPLIES, AND, THEREFORE, THE ENTIRE TECHNICAL FEES CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. 11. THE LEARNED COUNSEL FOR THE ASSESSEE RELIES ON THE DECISION OF THE SUPREME COURT IN CIT VS. CIBA OF INDIA LTD. (19 68) 69 ITR 692 (SC), MYSORE KIRLOSKAR LTD. VS. CIT 1978 CTR (KAR) 198 (FB) : (1978) 114 ITR 443 (KAR) (FB) AND PRAGA TOOLS LTD. VS. CIT (1980) 16 CTR (AP) 356 (FB) : (1980) 123 ITR 773 (AP) (FB). BUT T HESE DECISIONS DO NOT ASSIST THE PETITIONER. IN MYSORE KIRLOSKAR L TD. VS. CIT (SUPRA), THE FULL BENCH OF THE KARNATAKA HIGH COURT, AFTER C ONSIDERING THE TERMS OF THE KNOW-HOW AGREEMENT IN THAT CASE, HELD THAT UNDER THE AGREEMENTS, THE ASSESSEE ACQUIRED MERELY THE RIGHT TO DRAW UPON THE TECHNICAL KNOWLEDGE OF THE FOREIGN COMPANIES FOR A LIMITED PERIOD, FOR THE PURPOSE OF CARRYING ON ITS BUSINESS, THAT THE F OREIGN COMPANIES DID NOT PART WITH ANY OF THEIR ASSETS ABSOLUTELY FO R EVER OR FOR A LIMITED PERIOD OF TIME, THAT THEY CONTINUED TO HAVE THE RIG HT TO USE THEIR KNOWLEDGE AND, EVEN AFTER THE AGREEMENTS HAD RUN TH EIR COURSE, THEIR RIGHTS IN THIS BEHALF WAS NOT LOST, THAT THE ASSESS EE BAD NOT, THEREFORE, ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATU RE FOR THE BENEFIT OF ITS BUSINESS AND THAT THE PAYMENTS WERE, THEREFO RE, REVENUE IN NATURE AND WERE DEDUCTIBLE. THE FULL BENCH FOLLOWED THE DECISION OF THE SUPREME COURT IN CIT VS. CIBA OF INDIA LTD. (SU PRA). IN THE SAID CASE, THE SUPREME COURT HAS HELD THAT IN MAKING THE TECHNICAL KNOWLEDGE AVAILABLE TO THE INDIAN COMPANY, THE FORE IGN COMPANY DID ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 7 -: NOT PART WITH ANY ASSETS OF ITS BUSINESS OR ADVANTA GE OF AN ENDURING NATURE FOR THE PURPOSE OF BUSINESS. THE DECISION IN PRAGA TOOLS LTD. VS. CITIS ALSO TO THE SAME EFFECT. ALL THE ABOVE T HREE CASES DEALT WITH A MERE KNOW-HOW AGREEMENT UNDER WHICH THE INDI AN COMPANY ACQUIRED ONLY TECHNICAL KNOWLEDGE FROM THE FOREIGN COMPANY AND DID NOT ACQUIRE ANY OTHER RIGHT OR ADVANTAGE OF AN ENDU RING NATURE FOR THE PURPOSE OF ITS BUSINESS, UNLIKE THE FACTS IN THIS C ASE. HERE, IN ADDITION TO THE ACQUISITION OF TECHNICAL KNOWLEDGE, THE ASSE SSEE-COMPANY GOT AN EXCLUSIVE RIGHT TO MANUFACTURE AND SELL ITS ARTI CLES WITHOUT ANY OBJECTION FROM ANYONE INCLUDING THE FOREIGN COMPANY AND THIS IS CLEARLY AN ADVANTAGE OF ENDURING NATURE. 12. IT IS WELL-ESTABLISHED THAT EVEN WITHOUT ACQUISITIO N OF AN ASSET, A RIGHT OF A PERMANENT ADVANTAGE COULD BE ACQUIRED AN D THE COST OF ACQUISITION OF SUCH A RIGHT COULD BE TAKEN TO BE CA PITAL EXPENDITURE. IN REGENT OIL CO. LTD. VS. STRICK (INSPECTOR OF TAXES) (1966) AC 295 : (1969) 73 ITR 301 (HL), THE HOUSE OF LORDS HAD EXPR ESSED THE VIEW THAT PAYMENTS MADE BY AN ASSESSEE TO SECURE EXCLUSI VE SALES STATIONS ARE PAYMENTS FOR PERMANENT ASSETS AND FOR AN ENDURING BENEFIT, AND, THEREFORE, THE EXPENDITURE IS CAPITAL IN NATURE. LORD REID IN THAT CASE OBSERVED THUS : ' WHETHER A PARTICULAR OUTLAY BY A TRADER CAN BE SE T AGAINST INCOME OR MUST BE REGARDED AS A CAPITAL OUTLAY HAS PROVED TO BE A DIFFICULT QUESTION ...... SO IT IS NOT SURPRIS ING THAT NO ONE TEST OR PRINCIPLE OR RULE OF THUMB IS PARAMOUNT. THE QUE STION IS ULTIMATELY A QUESTION OF LAW FOR THE COURT, BUT IT IS A QUESTION WHICH MUST BE ANSWERED IN THE LIGHT OF ALL THE CIRC UMSTANCES WHICH IT IS REASONABLE TO TAKE INTO ACCOUNT, AND TH E WEIGHT WHICH MUST BE GIVEN TO A PARTICULAR CIRCUMSTANCE IN A PARTICULAR CASE MUST DEPEND RATHER ON COMMON SENSE THAN ON STR ICT APPLICATION OF ANY SINGLE LEGAL PRINCIPLE.' 13. WE HAVE, THEREFORE, TO HOLD, FOLLOWING THE ABOVE SA ID DECISIONS OF THIS COURT THAT IN THIS CASE, THE TRIBUNAL IS RIGHT IN HOLDING THAT 25 PER CENT OF THE TECHNICAL FEE HAS TO BE TAKEN AS A CAPI TAL EXPENDITURE AND AS SUCH CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. 14. COMING TO THE SECOND ISSUE AS TO WHETHER THE TRIBUN AL IS RIGHT IN UPHOLDING THE DISALLOWANCE OF 25 PER CENT OF THE RO YALTY PAID, THE ITO, THE APPELLATE AUTHORITY AS WELL AS THE TRIBUNAL HAV E ALL CONCURRENTLY HELD THAT THE DISALLOWANCE OF 25 PER CENT OF THE RO YALTY IS JUSTIFIED. UNDER THE TERMS OF THE KNOW-HOW AGREEMENT, THE ROYA LTY IS PAYABLE ON ALL SWITCHGEAR PRODUCTS AND THE PARTS THEREOF SO LD ON BEHALF OF THE INDIAN COMPANY AT THE RATE OF 2 1/2 PER CENT OF THE INVOICE VALUE OF ALL LOW TENSION SWITCHGEAR PRODUCTS AT 5 PER CENT IN AL L THE HIGH TENSION SWITCHGEAR PARTS AND A ROYALTY OF 7 PER CENT IN ALL SWITCHGEAR PRODUCTS EXPORTED. THUS, IT IS SEEN THAT THE ASSESSEE PAID A ROYALTY FOR THE ACQUISITION OF AN EXCLUSIVE PRIVILEGE OF MANUFACTUR ING AND SELLING THE PRODUCTS. THE ACQUISITION OF SUCH A RIGHT HAS RIGHT LY BEEN TREATED ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 8 -: PARTLY TOWARDS CAPITAL AND PARTLY TOWARDS THE REVEN UE. THE TRIBUNAL HAS CHOSEN TO ESTIMATE THE VALUE OF THAT PORTION OF THE ROYALTY WHICH IS RELATABLE TO ACQUISITION OF RIGHT OF AN ENDURING NATURE. IN THIS VIEW, THE TRIBUNAL IS RIGHT IN HOLDING THAT 25 PER CENT O F THE ROYALTY IS TO BE DISALLOWED. 9. THE ABOVE DECISION WAS AFFIRMED BY THE HON'BLE SU PREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. V. CIT 232 ITR 359 (SC) . FURTHER RECENTLY THE HON'BLE SUPREME COURT IN THE CASE OF HONDA SIEL CARD INDIA LTD. V. CIT [2019] 101 TAXMANN.COM 222 (SC) HELD AS FOLLOWS: NO DOUBT, THIS TECHNICAL KNOW-HOW IS FOR THE LIMIT ED PERIOD I.E. FOR THE TENURE OF THE AGREEMENT. HOWEVER, IT IS IMPORTANT T O NOTE THAT IN CASE OF TERMINATION OF THE AGREEMENT, JOINT VENTURE ITSE LF WOULD COME TO AN END AND THERE MAY NOT BE ANY FURTHER CONTINUATION O F MANUFACTURE OF PRODUCT WITH TECHNICAL KNOW-HOW OF FOREIGN COLLABOR ATOR. THE HIGH COURT HAS, THUS, RIGHTLY OBSERVED THAT VIRTUALLY LI FE OF MANUFACTURE OF PRODUCT IN THE PLANT AND MACHINERY, ESTABLISHES WIT H ASSISTANCE OF FOREIGN COMPANY, IS CO-EXTENSIVE WITH THE AGREEMENT . THE AGREEMENT IS FRAMED IN A MANNER SO AS TO GIVEN A CO LOUR OF LICENCE FOR A LIMITED PERIOD HAVING NO ENDURING NATURE BUT WHEN A CLOSE SCRUTINY INTO THE SAID AGREEMENT IS UNDERTAKEN, IT SHOWS OTHERWISE. IT IS SIGNIFICANT TO NOTE IN THIS BEHALF THAT THE AGRE EMENT PROVIDES THAT IN THE EVENT OF EXPIRATION OR OTHERWISE TERMINATION, W HATSOEVER, LICENSEE, I.E., JOINT VENTURE COMPANY/ ASSESSEE SHA LL DISCONTINUE MANUFACTURE, SALE AND OTHER DISPOSITION OF PRODUCTS , PARTS AND RESIDUARY PRODUCTS. ALL THESE THINGS THEN SHALL BE AT THE OPTION OF LICENSOR. IN OTHER WORDS, LICENSEE IN SUCH CONTINGE NCY WOULD HAND OVER UNSOLD PRODUCT AND PARTS TO LICENSOR FOR SALE BY HIM. IN CASE LICENSOR DOES NOT EXERCISE SUCH AN OPTION AND THE P RODUCT IS ALLOWED TO BE SOLD BY LICENSEE, IT WOULD CONTINUE TO PAY RO YALTY AS PER RATES AGREED UNDER THE AGREEMENT. CLAUSES 19 AND 21, IN O UR VIEW, MAKE THE AGREEMENT IN QUESTION, I.E., ESTABLISHMENT OF P LANT, MACHINERY AND MANUFACTURE OF PRODUCT WITH THE HELP OF TECHNIC AL KNOW-HOW, CO- EXTENSIVE, IN CONTINUANCE OF AGREEMENT. THE AGREEME NT ALSO HAS A CLAUSE OF RENEWAL WHICH, IN OUR VIEW, IN TOTALITY O F TERMS AND CONDITIONS, WILL MAKE THE UNIT CONTINUE SO LONG AS MANUFACTURE OF PRODUCT IN PLANT AND MACHINERY, ESTABLISHED WITH AI D AND ASSISTANCE OF FOREIGN COMPANY, WILL CONTINUE. SINCE, IT IS FOU ND THAT THE AGREEMENT IN QUESTION WAS CRUCIAL FOR SETTING UP OF THE PLANT PROJECT IN QUESTION FOR MANUFACTURING OF THE GOODS, THE EXP ENDITURE IN THE FORM OF ROYALTY PAID WOULD BE IN THE NATURE OF CAPI TAL EXPENDITURE AND NOT REVENUE EXPENDITURE. THE TRIBUNAL IS CONCLUSION THAT IT IS ONLY THE OTHER THREE MEMORANDA WHICH WERE NECESSARY FOR SETT ING UP THE MANUFACTURING FACILITIES AND PAYMENT THEREUNDER WOU LD QUALIFY AS CAPITAL EXPENDITURE, AND NOT THE PAYMENT OF TECHNIC AL FEES/ROYALTY ON ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 9 -: THE GROUND THAT THIS AGREEMENT WAS NOT IN CONNECTIO N WITH THE SETTING UP OF A PLANT OR MANUFACTURING FACILITIES, IS NOT C ORRECT. IT WOULD BE INTERESTING TO NOTE THAT EVEN THE TRIBUNAL HAD NURT URED DOUBT ON THE NATURE OF THIS EXPENDITURE AS TCA WAS SIGNED SIMULT ANEOUSLY WITH THE OTHER MEMORANDA TO FACILITATE SETTING UP OF A N EW FACTORY AND NOT IMPROVISING THE EARLIER SET UP. THIS DOUBT HAS EXPR ESSED BY THE ITAT ITSELF IN THE FOLLOWING WORDS: OUR DOUBT WAS WHY THE PAYMENT, AT LEAST OF THE LU MP SUM TECHNICAL KNOW-HOW FEES, CANNOT BE CONSIDERED AS BE ING CONNECTED TO THE INITIAL STARTING UP OF THE BUSINES S AND HENCE NOT ALLOWABLE SINCE THE KNOW-HOW WAS BRING OBTAINED FOR THE FIRST TIME AND WAS CRUCIAL TO THE SETTING UP OF THE BUSINESS OF THE ASSESSEE WHICH UNDISPUTEDLY WAS TO MANUFACTURE HONDA CARS IN INDIA. IT MAY BE RECALLED THAT THIS WAS ALSO THE VIEW TAKEN BY THE ASSESSING OFFIC ER. FURTHER, THE ASSESSEE WAS NOT ALREADY IN THE MANUFA CTURE OF CARS AND WAS COMMENCING SUCH AN ACTIVITY FOR THE FIRST TIME. IT WAS NOT A CASE OF A BUSINESS ALREADY IN EX ISTENCE. THE PAYMENT WAS AN ONCE FOR ALL PAYMENT, THOUGH STAGGERED OVER A PERIOD OF YEARS. 10. IN THE LIGHT OF THE ABOVE PRINCIPLES, THE EXPEN DITURE OF ROYALTY CANNOT BE TREATED AS REVENUE EXPENDITURE AND THEREF ORE, WE UPHELD THE ACTION OF THE LOWER AUTHORITIES. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO.876/CHNY/2018 FOR ASSESSMENT YEAR 2011-12 IS DIS MISSED. REVENUE APPEAL IN ITA NO.708/CHNY/2018 FOR ASSESSME NT YEAR 2013-14 : 12. SINCE, THE FACTS IN THE PRESENT APPEAL ARE IDEN TICAL TO THE FACTS IN APPEAL ITA NO.876/CHNY/2018 FOR ASSESSMENT YEAR 201 1-12, IN THE REASONS MENTIONED THEREIN, THE ROYALTY EXPENDITURE CANNOT BE TREATED AS A REVENUE EXPENDITURE AND ACCORDINGLY, WE REVERSE T HE FINDINGS OF LD. CIT(A) AND ALLOW THE REVENUES APPEAL. HENCE, THE A BOVE CAPTIONED APPEAL FILED BY THE REVENUE IS ALLOWED. ITA NOS.2173 & 2174/CHNY/2018 (AY: 2015-16) :- 10 -: 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO.876/CHNY/2018 FOR ASSESSMENT YEAR 2011-12 IS DIS MISSED AND THE APPEAL FILED BY THE REVENUE IN ITA NO.708/CHNY/2018 FOR ASSESSMENT YEAR 2013-14 IS ALLOWED. ORDER PRONOUNCED ON THE 23 RD DAY OF APRIL, 2019 IN CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ! ' ) (INTURI RAMA RAO) # /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 23 RD APRIL, 2019. EDN, SR. P.S + ).23 43&. /COPY TO: 1. '( /APPELLANT 2. )*'( /RESPONDENT 3. - 5. ( )/CIT(A) 4. - 5. /CIT 5. 36 ). /DR 6. 7% 8 /GF
