J.L. Morison (India) Ltd., Kolkata V. DCIT, Central Circle - VII, Kolkata, Kolkata

ITA 913/KOL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78367 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 20-06-2011
• Court: TRIBUNAL
• Department Lawyers: RAVI JAIN
• Assessee Lawyers: S JHAJHARIA
• Keywords: Question of law; Capital expenditure
• Section: 143(3); 14A

Judgement Text

, B , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOL KATA () BEFORE , /AND , ! ) [BEFORE SHRI MAHAVIR SINGH, JM & SHRI SHAMIM YAHYA, AM] ' / I.T.A NOS.912 & 913/KOL/2011 #$ %&/ ASSESSMENT YEARS: 2005-06 & 2008-09 J. L. MORISON (INDIA) LTD. VS. DEPUTY COMMISSIO NER OF INCOME-TAX, (PAN: AAACJ0248C) CENTRAL CIRCLE-VII, KOLKATA (() /APPELLANT ) (*+()/ RESPONDENT ) DATE OF HEARING: 17.06.2014 DATE OF PRONOUNCEMENT: 30.06.2014 FOR THE APPELLANT: SHRI S. JHAJHARIA, ADVOCATE FOR THE RESPONDENT: SHRI RAVI JAIN, CIT, DR / ORDER PER SHRI MAHAVIR SINGH, JM : BOTH THESE APPEALS BY ASSESSEE ARE ARISING OUT OF S EPARATE ORDERS OF CIT(A), CENTRAL-1, KOLKATA IN APPEAL NO. 122 & 327/CC-VIICIT(A),C-1/10 -11DATED 06.05.2011 AND 27.05.2011 RESPECTIVELY. ASSESSMENT WAS FRAMED BY DCIT, CEN.C IR-VII, KOLKATA U/S. 143(3)/147 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) FOR ASSESSMENT YEAR 2005-06 VIDE HIS ORDER DATED 13.12.2010 AND U/S. 143(3) OF THE A CT FOR AY 2008-09 VIDE HIS ORDER DATED 31.12.2010. 2. FIRST WE TAKE UP ITA NO. 912/KOL/2011. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS AGAINST THE ORDER OF CIT(A) CONFIRMING THE DISALLOW ANCE OF ROYALTY PAID AS CAPITAL EXPENDITURE. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GROUND: DISALLOWANCE OF 25% OF ROYALTY PAID AS CAPITAL EXP ENDITURE: FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE OF RS.2822639/- AS CAPI TAL EXPENDITURE, BEING 25% OF ROYALTY PAID. 3 . BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF COSMETIC AND DENTAL CA RE PRODUCTS. THE ASSESSEE COMPANY HAD TWO TECHNICAL COLLABORATION AGREEMENTS WITH LICENCE TO USE TRADE MARK, COPY RIGHT AND KNOWHOW OF THE FOREIGN COLLABORATORS NAMELY BEIRSDO RF AG, GERMANY (BDF) AND DR. WILD & CO., SWITZERLAND VIDE AGREEMENT DATED 14.09.1995 AL ONG WITH SUPPLEMENTARY AGREEMENT DATED 01.04.1996 AND 14.07.2003. BOTH THE AGREEMENTS CON TAINED VARIOUS RESTRICTING AND PROHIBITIVE 2 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 COVENANTS AS TO THE LICENCE TO USE TRADE MARK, KNOW HOW ETC. THE AGREEMENT WITH BDF PROVIDES FOR ROYALTY PAYMENT @ 5% ON DOMESTIC SALES AND WAS APPROVED BY MINISTRY OF COMMERCE AND INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PRO MOTION, GOVT. OF INDIA VIDE LETTER DATED 12.06.2001 AND ALSO BY RESERVE BANK OF INDIA, EXCHA NGE CONTROL DEPTT.S LETTER DATED 02.07.2001. AGREEMENT WITH DR. WILD & CO. PROVIDE S FOR ROYALTY PAYMENT OF 5 AND 2.5% OF DOMESTIC SALES AS PER DIFFERENT PRODUCT CLASSIFICAT ION AND COVERED BY AUTOMATIC APPROVAL AS LIBERALISED BY GOVT. OF INDIA VIDE GOVT. PRESS NOTE NO. 2 OF 2003 SERIES. THE ASSESSEE COMPANY PAID TOTAL ROYALTY AMOUNTING TO RS.1,50,54, 077/- TO THE ABOVE TWO FOREIGN COLLABORATORS DURING YEAR UNDER CONSIDERATION. THE BREAK UP OF THE SAME IS AS UNDER: BDF RS.13306465 DR. WILD & CO. RS. 1747612 RS.15054077 THE FACTS NOTED BY THE LOWER AUTHORITIES AND STATED BY ASSESSEE BUT NOT DISPUTED BY REVENUE NOW BEFORE US ARE THAT DURING THE YEAR UNDER CONSIDERAT ION, THE ASSESSEE HAD PAID ROYALTY TO ITS FOREIGN COLLABORATORS AS DETAILED OUT ABOVE FOR THE USE OF TRADEMARK AND KNOWHOW FOR A CERTAIN PERIOD THAT TOO UNDER STRICT TERMS AND CONDITIONS A ND NOT FOR SETTING UP OF ANY FACTORY. THE ASSESSEE CONTENDED THAT THE KNOWHOW OR TRADEMARK WA S NOT AVAILABLE TO THE ASSESSEE AFTER TERMINATION OF AGREEMENT IN BOTH THE CASES. HOWEVE R, THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS DISALLOWED THE CLAIM OF ROYALTY PAID AT 25% BY TREATING THE SAME AS CAPITAL EXPENDITURE AMOUNTING TO RS.28,23,639/- ON THE ASSU MPTION OF EXCLUSIVE LICENCE FOR TRADEMARK AND KNOWHOW. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE CONFIRMED THE ACTION OF THE AO FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN GEAR LTD. VS. CIT, 232 ITR 359 (SC) AND JONES WOODHEAD & SONS LTD. VS. CIT 224 ITR 342 (SC) BY OB SERVING IN PARA 5.1 AS UNDER: 5.1. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE LD. AR. SINCE IT IS NOW JUDICIALLY WELL SETTLED THAT THE EXPENDITURE TOWARD PAYMENT OF ROYALTY FOR EXCLUSIVE RIGHT TO MANUFACTURE AND SALE IN INDIA OR OBTAIN KNOW-HOW HA S PARTLY CAPITAL IN NATURE AND 25% HAS TO BE DISALLOWED. CONSIDERING ABOVE I DONT FI ND ANY INFIRMITY IN THE ORDER OF THE AO AND HE HAS RIGHTLY MADE DISALLOWANCE FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN GEAR LTD. VS. CIT, 232 ITR 359. ACCORDINGLY THE DISALLOWANCE OF RS.28,22,639/- MADE BY THE AO IS CONFIRMED. FURTHE R SINCE GROUND NO.2 HAS BEEN ALLOWED, THE ALTERNATIVE GROUND TAKEN BY THE APPELLANT HAS N O RELEVANCE, HENCE DISMISSED ACCORDINGLY. IN THE RESULT GROUND NO. 3 IS DISMISS ED. AGGRIEVED, NOW ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THESE AMOUNTS WERE KEPT BY THE A SSESSEE FOR USE OF TRADEMARK AND 3 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 KNOWHOW FOR CERTAIN PERIOD THAT TOO UNDER STRICT TE RMS AND CONDITIONS AND NOT FOR SETTING UP ANY FACTORY. AFTER THE TERMINATION OF AGREEMENT IN BOTH THE CASES, THE USE OF KNOWHOW OR TRADEMARK WAS NOT AVAILABLE TO THE ASSESSEE. TH IS FACT IS CLEAR FROM THE TECHNICAL COLLABORATION AND LICENSING AGREEMENT WITH BOTH THE PARTIES, WHICH ALMOST IDENTICALLY WORDED AND WE TAKE THE LANGUAGE FROM THE TECHNICAL COLLABORATION AND LICENSING AGREEMENT WITH DR. WILD & CO. THE RELEVANT CLAUSE I N ARTICLE-6 OF THE AGREEMENT VIDE 6.1 READS AS UNDER: 6.1. THE PATENT AND KNOW-HOW LICENSED UNDER THIS A GREEMENT SHALL BE AND REMAIN THE PROPERTY OF THE LICENSER AND THE LICENSEE ACKNO WLEDGES AND AGREES THAT THE LICENSER SHALL AT ALL TIMES CONTINUE TO BE THE OWNE R THEREOF UNLESS THE LICENSER INFORMS THE LICENSEE IN WRITING THAT THE OWNERSHIP THEREOF HAS CHANGED. FURTHER, 6.4 AND 7.1 OF THE AGREEMENT READ AS UNDER : 6.4. THE LICENSEE SHALL NOT BE ENTITLED TO MAKE AN Y COPIES OF THE DOCUMENTS COMPRISING THE TECHNICAL KNOWHOW AND THE IMPROVEMEN TS WITHOUT PRIOR WRITTEN CONSENT OF THE LICENSER. 7.1. NEITHER PARTY SHALL ASSIGN ANY OF ITS RIGHTS AND OBLIGATIONS CONTAINED IN THIS AGREEMENT OR ANY PART THEREOF TO ANY OTHER PARTY WI THOUT THE PRIOR CONSENT IN WRITING OF THE OTHER. EVEN THE DURATION OF TERMINATION OF THIS AGREEMENT IS MENTIONED IN ARTICLE 10 AND THE RESTRICTIVE COVENANT IS IN CLAUSES 10.1, 10.2 AND 1 0.6 READ AS UNDER: 10.1. THIS CONTRACT SHALL COME INTO FORCE FROM TH E DATE ON WHICH BOTH PARTIES HAVE SIGNED IT. IT CAN ALSO BE CALLED THE BASE AGR EEMENT. THE INITIAL DURATION OF THE AGREEMENT SHALL BE FOR A PERIOD OF TEN YEARS FR OM THE DATE OF THE LAST SIGNATURE. IF FOR ANY REASON WHATSOEVER THE TRADEMARK AGREEMEN T ENTERED INTO BETWEEN THE PARTIES IS TERMINATED, THIS AGREEMENT SHALL AUTOMAT ICALLY TERMINATE FORTHWITH. 10.2. EITHER PARTY SHALL HAVE THE RIGHT TO TERMINAT E THIS AGREEMENT BY GIVING 90 DAYS WRITTEN NOTICE TO THE OTHER PARTY, IF THAT OTH ER PARTY VOLUNTARILY OR OTHERWISE COMMITS A MAIN BREACH UNDER THE TERMS OR CONDITIONS OF THIS AGREEMENT, PROVIDED SUCH BREACH IS NOT REMEDIED WITHIN THE SAID NOTICE PERIOD INCLUDING THE RECOVERY OF DAMAGES CAUSED. 10.6. IN THE EVENT THAT THIS CONTRACT IS LAWFULLY T ERMINATED, THE LICENSE GRANTED TO THE LICENSEE SHALL STAND TERMINATED AND THE LICENSE E IS NOT AUTHORISED TO MAKE ANY FURTHER USE OF THE TECHNICAL KNOWHOW AND IMPROVEMEN TS AND SHALL FORTHWITH RETURN THE SAME (INCLUDING DOCUMENTS COMPRISING THE SAME) TO THE LICENSER. EVEN THE TRADE LICENSE AGREEMENT I.E. THE TERMINATI ON CLAUSE AT 3.5 (PAGE 17 OF ASSESSEES PAPER BOOK) AND THE DURATION AND TERMINATION OF THE ARTIC LE VIDE ARTICLE 4.1, 4.2, 4.3 AND 4.5 CLEARLY ENVISAGED THAT THE ASSESSEE AFTER THE TERMINATION O F AGREEMENT OR LICENSE IS NOT LIABLE TO USE IN ANY WAY. THE RELEVANT CLAUSES READ AS UNDER: 4.1. THIS CONTRACT SHALL COME INTO FORCE FROM THE DATE ON WHICH BOTH PARTIES HAVE SIGNED IT. IT SHALL ALSO BE CALLED THE TRADEMARK AGREEMENT . IF NOT TERMINATED BECAUSE OF 4 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 DEFAULTS, IT SHALL REMAIN IN FORCE AND EFFECT UNTIL THE EXPIRY OR TERMINATION OF THE TECHNICAL COLLABORATION AND LICENSING AGREEMENT. U PON EXPIRY OR TERMINATION OF THE LATTER THIS AGREEMENT SHALL AUTOMATICALLY TERMINATE . ON THE OTHER HAND AND IF FOR ANY REASON WHATSOEVER THIS TRADEMARK AGREEMENT IS TERMI NATED THEN ALSO THE TECHNICAL COLLABORATION AND LICENSING AGREEMENT ILL AUTOMATIC ALLY AND WITHOUT ANY SPECIAL NOTIFICATION BE TERMINATED FORTHWITH. 4.2. NEITHER PARTY SHALL ASSIGN ANY OF ITS RIGHTS A ND OBLIGATIONS CONTAINED IN THIS AGREEMENT OR ANY PART THEREOF TO ANY OTHER PARTY WI THOUT THE PRIOR CONSENT IN WRITING OF THE OTHER. 4.3. EITHER, PARTY SHALL HAVE THE RIGHT TO TERMINAT E THIS AGREEMENT BY GIVING 90 DAYS WRITTEN NOTICE TO THE OTHER PARTY, IF THAT OTHER PA RTY VOLUNTARILY OR OTHERWISE COMMITS A MAIN BREACH UNDER THE TERMS OR CONDITIONS OF THIS A GREEMENT, PROVIDED SUCH BREACH IS NOT REMEDIED WITHIN THE SAID NOTICE PERIOD INCLUDING TH E RECOVERY OF DAMAGES CAUSED. 4.5. IMMEDIATELY UPON EXPIRY OR TERMINATION FOR ANY CAUSE HEREOF OR ANY OR ALL INCENSES, RIGHTS OR PERMISSIONS HEREIN GRANTED, THE LICENSEE SHALL DISCONTINUE ANY AND EVERY USE WHATSOEVER OF THE SAID TRADEMARKS IN CONNECTION WIT H ANY GOODS (INCLUDING THE SAID PRODUCTS), SERVICES OR BUSINESS OR TRADE AS ALSO OF ANY OTHER WORD, NAME LOGO, DEVICE IN ANY ALPHABET, SCRIPT OR LANGUAGE SO VAGUELY SIMILAR IN SOUND, APPEARANCE OR MEANING TO THE SAID TRADEMARKS AND WORDS, NAMES LOGOS, DEVICE IN ANY ALPHABET, SCRIPT OR LANGUAGE USED IN CONJUNCTION WITH THE SAID TRADEMARKS AS TO BE LIKELY TO CAUSE CONFUSION OR DECEPTION OR WHICH ARE CLOSELY SIMILAR OR DETRACT O R ADVERSELY AFFECT THE RIGHT TITLE OR INTEREST OF THE LICENSER IN OR THE SAID TRADEMARKS IN ANY MANNER WHATSOEVER. ANY REGISTRATION OF THE LICENSEE AS REGISTERED USER OF THE SAID TRADEMARKS SHALL BE CANCELLED/EXPUNGED ON TERMINATION OR EXPIRATION OF THIS AGREEMENT AND THE PARTIES SHALL TAKE SUCH STEPS TAKE SUCH STEPS AS MAY BE NECESSARY TO SECURE FORTHWITH CANCELLATION OF SUCH REGISTRATION. FOR THE ABOVE COVENANTS, RESTRICTIONS AND USABLE CL AUSES IT IS CLEAR THAT EVEN THE USE OF KNOW- HOW OR TRADEMARK WAS NOT AVAILABLE TO THE ASSESSEE AFTER TERMINATION OF AGREEMENTS IN BOTH THE CASES. IT IS CLEAR FROM THE ABOVE COVENANTS THAT T HE ASSESSEE COMPANY DID NOT OBTAIN ANY PROPRIETARY OR OWNERSHIP RIGHT OF TRADEMARK OR KNOW HOW, NO ASSET WAS CREATED OR ACQUIRED. ACCORDINGLY, IN OUR VIEW, THERE WAS NO ENDURING BEN EFIT TO THE ASSESSEE AND THERE WAS NO ELEMENT OF CAPITAL EXPENDITURE IN THE PAYMENT OF RO YALTY. THE ROYALTY PAID TO BDF OR DR. WILD & CO. WAS NOT FOR ANY OUTRIGHT OR ACQUISITION OF KN OWHOW OR TRADEMARK OR ANY OTHER ASSET BUT WAS FOR THE USE ONLY FOR A SPECIFIED PERIOD THAT TO O UNDER VARIOUS RESTRICTIVE COVENANTS. WE FIND THAT THE RELIANCE PLACED BY CIT(A) ON THE TWO JUDGM ENTS OF HONBLE APEX COURT IN THE CASE OF SOUTHERN GEAR LTD. (SUPRA) JONES WOODHEAD & SONS LT D. (SUPRA) IS CLEARLY DISTINGUISHABLE FROM THE FACTS OF THE PRESENT CASE AND IN THOSE CAS ES, THE ROYALTY WAS PAID FOR SETTING UP OF FACTORY AND THE KNOW-HOW WAS USABLE EVEN AFTER THE TERMINATION OF LICENSE, WHEREAS IN THE PRESENT CASE THERE IS NO SUCH BENEFIT AVAILABLE TO THE ASSESSEE AFTER TERMINATION OF AGREEMENT IN BOTH THE CASES. THIS ISSUE IS COVERED BY THE DECIS ION OF HONBLE DELHI HIGH COURT IN THE CASE OF SHRIRAM PISTONS & RINGS LTD. VS. CIT (2008) 307 ITR 363 (DEL.), WHEREIN IT IS HELD AS UNDER: 5 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 UNDER THESE CIRCUMSTANCES, THE QUESTION THAT HAS A RISEN FOR CONSIDERATION IS WHETHER THE AMOUNT PAID BY THE ASSESSEE TO RIKEN IS A REVENUE E XPENDITURE OR NOT. TO ANSWER THIS QUESTION, IT IS NECESSARY FOR US TO DETERMINE AS TO WHETHER WHAT WAS TRANSFERRED TO THE ASSESSEE WAS ONLY A RIGHT TO USE THE TECHNICAL KNOW -HOW OR WAS IT A SALE OF KNOW-HOW TO THE ASSESSEE IN PERPETUITY. THE LEADING DECISION ON THE SUBJECT IS CIT V. CIBA OF INDIA LTD. [1968] 69 ITR 692 (SC). IN THIS DECISION, THE TERMS OF THE AGREEMENT ENTERE D INTO BY A SWISS COMPANY WITH CIBA PHARMA WERE CONSIDERED. SOME OF THE CLAUSES OF THE AGREEMENT ARE SIMILAR TO THE AGREEMENT THAT WE ARE CONSIDERING NAMELY THAT IT WA S TO REMAIN IN FORCE FOR A PERIOD OF FIVE YEARS AND THERE WAS A PROVISION FOR EARLIER T ERMINATION OF THE AGREEMENT. IT WAS ALSO PROVIDED IN CLAUSE IV OF THE AGREEMENT THAT CIBA PH ARMA COULD NEITHER ASSIGN THE BENEFIT AND THE OBLIGATIONS OF THE AGREEMENT WITHOUT THE W RITTEN CONSENT OF CIBA BASLE NOR COULD CIBA PHARMA GRANT ANY SUBLICENCE UNDER THE PATENTS AND/OR TRADE MARKS OF CIBA BASLE WITHOUT ITS PREVIOUS WRITTEN CONSENT. ON THESE BROAD TERMS OF THE AGREEMENT, THE SUPREME COURT HELD THAT THE ASSESSEE DID NOT BECOME ENTITLED EXCLUSIVELY EVEN FOR THE PERIOD OF THE AGREEMENT TO THE PATENT AND TRADE MARK OF THE SWISS COMPANY. IT HAD MERELY ACCESS TO THE TECHNICAL KNOWLEDGE AND EXPERIENCE IN THE PHARMACEUTICAL FIELD WHICH THE SW ISS COMPANY COMMANDED. IN THAT SENSE, THE ASSESSEE WAS A MERE LICENSEE FOR A LIMI TED PERIOD OF THE TECHNICAL KNOWLEDGE OF THE SWISS COMPANY WITH THE RIGHT TO USE THE PATE NTS AND TRADE MARKS OF THAT COMPANY. THE ASSESSEE MERELY HAD ACCESS TO THE TECHNICAL KNO WLEDGE OF THE ASSESSEE FOR THE PURPOSE OF RUNNING ITS BUSINESS. THE SUPREME COURT HELD THAT THERE WAS NO ATTEMPT ON THE PART OF THE SWISS COMPANY TO PART WITH THE TECHNICAL KNOWLEDGE ABSOLUTELY IN FAV OUR OF THE ASSESSEE INASMUCH AS THE SECRET PROCESSES WERE NOT SOLD BY THE SWISS COMPAN Y TO THE ASSESSEE ; IT WAS ENTITLED TO USE THE TECHNICAL KNOWLEDGE FOR A LIMITED PERIOD O F FIVE YEARS ONLY OR FOR A LESSER PERIOD IN CASE OF EARLIER TERMINATION OF THE CONTRACT. THE INDIAN COMPANY WAS EXPRESSLY PROHIBITED FROM DIVULGING CONFIDENTIAL INFORMATION TO THIRD PARTIES WITHOUT THE CONSENT OF THE SWISS COMPANY AND THERE WAS NO TRANSFER OF THE FRUITS OF RESEARCH ONCE FOR ALL. SIMILARLY, IN ALEMBIC CHEMICAL WORKS CO. LTD. V. CI T [1989] 177 ITR 377, THE SUPREME COURT DEALT WITH AN AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND A JAPANESE COMPANY FOR THE PURPOSE OF INCREASING THE YIELD OF PENICILLIN. AS PER THE AGREEMENT, THE JAPANESE COMPANY AGREED TO SUPPLY TO THE ASSESSEE THE REQUISITE TECHNICAL KNOW-HOW SO AS TO ACHIEVE SUBSTANTIALLY HIGHER LEVELS OF PERFOR MANCE OR PRODUCTION. ONE OF THE TERMS OF THE AGREEMENT ENTERED INTO BETW EEN THE PARTIES CONCERNED ITSELF WITH THE PLACING OF LIMITATIONS ON THE RIGHT OF THE ASSE SSEE IN DEALING WITH KNOW-HOW AND THE CONDITIONS AS TO NON-PARTIBILITY, CONFIDENTIALITY A ND SECRECY OF THE KNOW-HOW. THE SUPREME COURT INTERPRETED THIS TO MEAN THAT THE RIGHT PERTAINED MORE TO THE USE OF THE KNOW-HOW THAN TO ITS EXCLUSIVE ACQUISITION BY T HE ASSESSEE. THE SUPREME COURT ALSO NOTED THAT THERE IS NO SINGLE DEFINITIVE CRITERION WHICH BY ITSELF IS DETERMINATIVE OF THE QUESTION WHETHER A PARTICULAR OUTLAY WAS REVENUE IN NATURE. WHAT IS RELEVANT IS TO SEE THE INTENDED OBJECT AND EFFECT OF THE AGREEMENT BETWEEN THE PARTIES, CONSIDERED IN A COMMON SENSE MANNER HAVING REGARD TO BUSINESS REALITIES. T HE SUPREME COURT NOTED THAT IN A GIVEN CASE, THE TEST OF ENDURING BENEFIT MIGHT BR EAK DOWN AS LAID DOWN BY THE SUPREME COURT IN CIT V. ASSOCIATED CEMENT COMPANIES LTD. [ 1988] 172 ITR 257. IN TRIVENI ENGINEERING WORKS LTD. V. CIT [1982] 136 ITR 340, A DIVISION BENCH OF THIS COURT DEALT WITH AN AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND A COMPANY IN THE U. K. WHERE, IN TERMS OF THE AGREEMENT, THE BRITIS H COMPANY AGREED TO SELL OUTRIGHT TO THE ASSESSEE, TECHNICAL KNOWHOW IN RESPECT OF STEAM TURBINES FOR USE IN INDIA. IT WAS 6 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 PROVIDED IN THE AGREEMENT THAT THE TECHNICAL KNOW-H OW WOULD BE EXCLUSIVE TO THE ASSESSEE AND SHALL NOT BE DISPOSED OF BY THE BRITIS H COMPANY TO ANY OTHER PERSON IN INDIA. CLAUSE 8 OF THE AGREEMENT BETWEEN THE PARTIES PROVI DED THAT ALL COPIES OF DRAWINGS SUPPLIED UNDER THE AGREEMENT SHALL BE DEEMED TO BE THE PROPERTY OF THE ASSESSEE AS SOON AS THEY ARE RECEIVED. CLAUSE 9 PROVIDED THAT COPYR IGHT IN SUCH DRAWINGS, PATTERNS AND JIGS SHALL, HOWEVER, REMAIN VESTED WITH THE BRITIS H COMPANY WHEN THE ASSESSEE IS HAVING A LICENCE TO USE THE SAME FOR THE PURPOSE OF THE A GREEMENT ONLY. THE DIVISION BENCH CONSIDERED THE JUDGMENT OF THE S UPREME COURT IN CIBA OF INDIA LTD. [1968] 69 ITR 692 AND NOTED THAT THE QUESTION FOR C ONSIDERATION WAS WHETHER THE AGREEMENT RESULTED IN AN ABSOLUTE SALE OF KNOW-HOW AND WHETHER THE PAYMENT WAS FOR THE USE OF KNOW-HOW PROVIDED BY THE BRITISH COMPANY TO THE ASSESSEE. THE DIVISION BENCH CONSIDERED THE USE OF THE EXPRESSION AGREED TO SELL OUTRIGHT OCCURRING IN THE AGREEMENT AS WELL AS SOME SIMILAR WORDS SUCH AS SO LD, ABSOLUTE PROPERTY, DEEMED TO BE THE PROPERTY IN OTHER PARTS OF THE AGREEMENT AND AFTER OBSERVING THE USE OF THESE EXPRESSIONS, THE DIVISION BENCH NOTED THAT ON AN E XAMINATION OF THE AGREEMENT, IT WAS CLEAR THAT IT WAS VALID FOR ONLY 10 YEARS AND IT C OULD BE TERMINATED EARLIER ; IT WAS LIMITED TO THE REPUBLIC OF INDIA THOUGH EXCLUSIVE TO THE ASSESSEE ; THOUGH THE DATA, DOCUMENTS AND DIES, ETC. WERE SAID TO BE THE ABSOL UTE PROPERTY OF THE ASSESSEE, YET THE COPYRIGHT REMAINED VESTED IN THE BRITISH COMPANY WH EN THE ASSESSEE IS HAVING ONLY A LICENCE TO USE THE SAME DURING THE AGREEMENT ; THE ASSESSEE WAS OBLIGED TO OBSERVE COMPLETE CONFIDENTIALITY WITH REGARD TO THE KNOWHOW AND COULD NOT DISCLOSE ANY INFORMATION OR ASSIGN THE AGREEMENT WITHOUT THE WRI TTEN CONSENT OF THE BRITISH COMPANY. HAVING NOTED THIS, THE DIVISION BENCH HELD THAT THI S COULD HARDLY BE EQUATED TO A SITUATION WHERE A SELLER SELLS HIS GOODS OUTRIGHT T O A BUYER. THE DIVISION BENCH NOTED THAT THERE WAS NO PROVISION IN THE AGREEMENT FOR THE RE TURN OF DRAWINGS, DOCUMENTS ETC. THE COPIES OF WHICH WERE DEEMED TO BECOME THE PROPERTY OF THE ASSESSEE ON TRANSMISSION BUT IT WAS OBSERVED THAT WITH FAST TECHNOLOGICAL DEVEL OPMENT AND SCIENTIFIC RESEARCH, SUCH DRAWINGS BECOME OBSOLETE AND MERE SCRAPS OF PAPER V ERY SOON UNLESS THEY WERE UPDATED. FOLLOWING THE LAW LAID DOWN BY THE SUPREME COURT IN CIBA OF INDIA LTD. [1968] 69 ITR 692, AND DESPITE THE USE OF THE WORDS TO SELL OUTR IGHT, THE DIVISION BENCH CAME TO THE CONCLUSION THAT THE ASSESSEE HAD MERELY OBTAINED A LICENCE FOR LIMITED USE OF THE KNOWLEDGE AND INFORMATION POSSESSED BY THE BRITISH COMPANY. LEARNED COUNSEL FOR THE REVENUE RELIED UPON SCIENTI FIC ENGINEERING HOUSE P. LTD. V. CIT [1986] 157 ITR 86 (SC). BUT WE FIND THAT THE CONTRO VERSY IN THAT CASE IS NOT QUITE APPOSITE TO THE CONTROVERSY IN THE PRESEN CASE. TH IS IS CLEAR FROM THE QUESTION OF LAW THAT WAS FRAMED IN THAT DECISION. THE QUESTION OF LAW FR AMED READS AS FOLLOWS (PAGE 88) : WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND ON A TRUE INTERPRETATION OF THE COLLABORATION AGREEMENTS BETWEEN THE ASSESS EE AND M/S. METRIMPEX HUNGARIAN TRADING COMPANY, BUDAPEST, THE PAYMENT OF RS. 1,60, 000 BY THE ASSESSEE TO THE FOREIGN COLLABORATOR WAS ATTRIBUTABLE PARTLY OR WHOLLY TOWA RDS THE ACQUISITION OF A DEPRECIABLE ASSET ? ON A READING OF THE DECISION, IT APPEARS THAT THERE WAS NO DISPUTE ABOUT THE FACT THAT THE PAYMENT MADE BY THE ASSESSEE TO THE HUNGARIAN COMPA NY ON THE BASIS OF THE COLLABORATION AGREEMENTS WAS A CAPITAL EXPENDITURE INCURRED BY IT. THE LIMITED QUESTION WAS WHETHER THE DRAWINGS AND DESIGNS THAT THE HUNGA RIAN COMPANY HAD PARTED WITH COULD FALL IN THE CATEGORY OF BOOKS AND PLANT AS LAID DOWN IN SECTION 43(3) OF THE ACT AND IF SO, WHETHER THE CAPITAL EXPENDITURE BROU GHT INTO EXISTENCE A DEPRECIABLE ASSET. 7 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 THE SUPREME COURT ANSWERED THE QUESTION BY COMING T O THE CONCLUSION THAT THE DRAWINGS/DESIGNS ETC. WERE ACTUALLY PLANT AS DEFI NED UNDER SECTION 43(3) OF THE ACT AND WOULD THEREFORE, BE A DEPRECIABLE ASSET. AS ALREADY NOTED ABOVE, THIS IS NOT THE QUESTION BE FORE US INASMUCH AS IT IS NOT AN ADMITTED FACT THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS OF A CAPITAL NATURE. ON THE CONTRARY, WHAT WE HAVE TO ANSWER IS WHETHER THE EXPENDITURE INCURRED WAS OF A CAPITAL NATURE OR OF A REVENUE NATURE UNLIKE THE FA CTUAL MATRIX IN SCIENTIFIC ENGINEERING HOUSE P. LTD. [1986] 157 ITR 86 (SC). AS THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT, WHEREIN AFTER CONSIDERING VARIOUS CASE LAWS THE ISSUE IS DECIDED, THE FACTS BEING IDENTICAL IN THE PRESENT CASE BEFORE US, WE ALLOW THE CLAIM OF ASSESSEE. THIS IS SUE OF ASSESSEES APPEAL IS ALLOWED. 5. NOW, WE TAKE UP ITA NO. 912/K/2011. THE FIRST I SSUE IN THIS APPEAL OF ASSESSEE IS AGAINST THE ORDER OF CIT(A) CONFIRMING THE DISALLOW ANCE OF ROYALTY PAID AS CAPITAL EXPENDITURE. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GROUND: DISALLOWANCE OF 25% OF ROYALTY PAID AS CAPITAL EXP ENDITURE: FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE OF RS.718332/-, AS CAPI TAL EXPENDITURE, BEING 25% OF ROYALTY PAID. 6. THIS ISSUE WE HAVE ALREADY EXAMINED IN ITA NO. 9 12/K/2011 IN AY 2005-06, WHEREIN WE HAVE ALLOWED THE CLAIM OF ASSESSEE. THE FACTS A ND CIRCUMSTANCES BEING EXACTLY IDENTICAL IN THE PRESENT YEAR ALSO, FOLLOWING THE ABOVE DECISION , WE ALLOW THE CLAIM OF THE ASSESSEE. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 7. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) CONFIRMING THE DISALLOWANCE MADE BY AO BY APPLYING RULE 8D(2)(III) OF THE I. T. RULES, 1962 READ WITH SECTION 14A OF THE ACT. FOR THIS, ASSESSEE HAS RAI SED FOLLOWING GROUND NO.2: 2. A) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE, THE LD. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE OF RS.498615/-, MADE U/S. 14A OF THE INCOME TAX ACT, 1961. B) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. CIT(A) ERRED IN SUSTAINING THE APPLICATION OF RULE 8D(2)(III) OF TH E INCOME TAX RULES, 1962. 8. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS DISALLOWED % OF AVERAGE OF INVESTMENT EXCLUDING INVESTING IN BONDS OF NATIONAL HOUSING BANK WHILE APPLYING RULE 8D OF THE I. T. RULES READ WITH SECTION 14A OF THE ACT AT RS.4,98,650/-. FOR THIS, HE OBSERVED AS UNDER: 8 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 FURTHER THE ASSESSEE HAD EARNED EXEMPTED INCOME IN THE FORM OF DIVIDEND RECEIVED FROM INVESTMENT IN DIFFERENT QUOTED/UNQUOTED SHARES SHOW N UNDER THE HEAD INVESTMENT. THEREFORE, AS PER RULE 8D READ WITH SEC. 14A, AN AM OUNT OF RS.4,98,615/- CALCULATED @ % OF AVERAGE INVESTMENT EXCLUDING INVESTMENT IN BO NDS OF NATIONAL HOUSING BANKS, IS BEING DISALLOWED. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO ALSO CONFIRMED THE ACTION OF AO VIDE PARA 5.2 OF HIS ORDER AS UNDER: 5.2. SINCE IN THE CASE UNDER CONSIDERATION NO EXPE NDITURE ON ACCOUNT OF ADMINISTRATIVE EXPENSES HAS BEEN CLAIMED TO HAVE BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE A.O HAS RIGHTLY CALCULATED DISALLOWANCE AS PRESCRIBED IN RULE 8D (2)(III) OF THE INCOME TAX RULE. THE FAC TS OF THE DECISION OF THE APEX COURT RELIED BY THE ASSESSEE IS TOTALLY DIFFERENT. MOREOV ER THIS ISSUE HAS BEEN CONSIDERED IN DETAIL IN THE CASE OF I.T.O VS DAGA CAPITAL MANAGEM ENT (P) LTD. 119 ITJ 289 I.T.A.T MUMBAI SP. BENCH AND IN THE RECENT JUDGMENT OF HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE VS DCIT MUMBAI (ITA NO 626 O F 2010 AND OF 2010 AND W.P NO 758 OF 2010) DATED AUGUST 12 ,2010 (328 ITR 8 1 (BOM.) THE HONBLE COURT HAS HELD THAT RULE 8D IS NOT ARBITRARY AND ARE CONSTITUTIONA LLY VALID. IT HAS BEEN FURTHER HELD THAT RULE 8D OF THE INCOME TAX RULES SHALL APPLY WITH EF FECT FROM A.Y 2008-09. CONSIDERING ABOVE THE DISALLOWANCE OF RS. 4,98,615/- MADE BY TH E A.O UNDER RULE 8D(2)(III) IS CONFIRMED. FURTHER THE ALTERNATIVE GROUND TAKEN BY THE LD A.R HAS NO MERIT AS SPECIFIC METHOD IN RULE 8D(III) HAS BEEN PRESCRIBED . ACCORD INGLY THE GROUND NO.3 TAKEN BY THE APPELLANT IS DISMISSED. AGGRIEVED, NOW ASSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT IN THE PRESENT CASE, NO EXPENDITURE ON ACCOUNT OF ADMINISTRATIVE EXPENSES HAVE BEEN CLAIMED TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME OR QUA THE EXEMPTED INCOME. ONCE THIS IS THE POSITION , THE AO HAS RIGHTLY MADE THE DISALLOWANCE AND CIT(A) HAS RIGHTLY CONFIRMED THE SAME. WE ALSO CONFIRM THIS ADDITION. THIS ISSUE OF ASSESSEES APPEAL IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF ASSESSEE IN ITA NO . 912/K/2011 IS ALLOWED AND APPEAL IN ITA NO. 913/K/2011 IS PARTLY ALLOWED. 11. ORDER IS PRONOUNCED IN THE OPEN COURT ON 30.06. 2014. SD/- SD/- , ! , (SHAMIM YAHYA ) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30TH JUNE, 2014 -. #/0 1 JD.(SR.P.S.) 9 ITA NO.912 & 913/K/2011 J.L. MORISON (INDIA) LTD.. AY 2005-06 & 2008-09 2 *3 4 3%5- COPY OF THE ORDER FORWARDED TO: 1 . () / APPELLANT J.L. MORISON (INDIA) LTD., 20, SIR R. N . MUKHERJEE ROAD, KOLKATA-700 001. 2 *+() / RESPONDENT DCIT, CENTRAL CIRCLE-VII, KOLKATA. 3 . # ( )/ THE CIT(A), KOLKATA 4. 5. # / CIT KOLKATA 3:; *# / DR, KOLKATA BENCHES, KOLKATA +3 */ TRUE COPY, #