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2014 (8) TMI 459 - MADRAS HIGH COURTRoyalty payment - revenue expenditure or capital expenditure - Amount Paid to foreign company as per collaboration agreement - Invocation of section 35AB r.w Explanation 2 to section 9(vii) – Held that:- The courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one or dependant upon certain contingencies, the right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign firm, payment whether made once for all or in different instalments co-relatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the court comes to the conclusion that it does so, then it has to be held to be a capital expenditure. Relying upon Alembic Chemical Works Company Limited Versus Commissioner of Income-Tax, Gujarat [1989 (3) TMI 5 - SUPREME Court] - no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined - The payment made in terms of the two agreements dated 24.5.1989 and 8.12.1993 is purely revenue in nature, as they provide for payment of license fee for manufacture and sale of the products which are manufactured pursuant to the first agreement dated 7/24.10.1986 – there was no justifiable reason to differ with the finding rendered by the Tribunal - the payment of royalty based on the two agreements dated 24.5.1989 and 8.12.1993 is revenue expenditure – Decided against Revenue. Exclusion of excise duty and sales tax collection for computation of total turnover – Deduction u/s 80HHC – Held that:- Following the decision in Commissioner of Income Tax v. Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME Court] - section 80HHC of the Income-tax Act, 1961, is a beneficial section - It was intended to provide incentive to promote exports - The intention was to exempt profits relatable to exports - Just as commission received by the assessee is relatable to exports and yet it cannot form part of turnover for the purposes of section 80HHC, excise duty and sales tax also cannot form part of turnover - excise duty and sales tax did not involve any such turnover such taxes had to be excluded - Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the total turnover – Decided against Revenue.
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