TMI Blog2008 (2) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... he expiry of the term on any of the grounds stated in the agreement. [Tata Engineering and Locomotive Co. [ 1979 (2) TMI 20 - BOMBAY HIGH COURT] and Shirram Refrigeration Industries Ltd.[ 1980 (8) TMI 72 - DELHI HIGH COURT] ; (2) where lump sum payment is made only for obtaining access to information which does not become its own, the payment cannot be elevated to the status of payments of capital nature. (3) the terms of the agreement in each case are to be taken into consideration before deciding the question of the expenditure being revenue or capital in nature on the basis of the principles laid down by the various High Courts and the apex Court in their decisions; (4) if whole object of the agreement is only to obtain the benefit of technical know-how for running the business and the assessee does not absolutely acquire the technical know-how the expenditure incurred by the assessee for obtaining the same would be allowable as a revenue expenditure and cannot be treated as capital expenditure; (5) the term acquired / acquisition means and implies the acquiring of the entire title of the expropriated owner, whatever the nature or extent of that title might be. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground of appeal taken by the Revenue is rejected and ground No. 1 of the appeal of the assessee is allowed. Disallowance of PF under the provision of s. 43B - Payment by cheque Within the grace period - We are of the opinion that in case the assessee has made the payment by cheque Within the grace period and the cheque has not been dishonored, the assessee is entitled to claim deduction of this amount on account of the payment of PF through cheque under s. 43B of the Act. Hence, for this limited purpose, we restore this matter for verification to the file of AO and in case he finds the claim of the assessee to be correct he should allow the deduction to the assessee under s. 43B of the Act. With these observations, this ground of appeal of the assessee stands allowed for statistical purposes and order of CIT(A) sustaining the impugned addition is set aside. In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee stands partly allowed for statistical purposes in terms of the order passed hereinabove. - Member(s) : D. R. SINGH., RAJENDRA SINGH. ORDER-D.R. SINGH, J.M.: The appeal filed by the Revenue and the appeal fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all kinds for the said articles used in the manufacture thereof. 5. In the earlier years after incorporation, by the method of 'Reverse engineering', the company developed and manufactured latches for automobile industry. The reverse engineering means from a given sample of the produce one goes back to the extent of making drawings and plans after dismantling the given products. In the engineering field such a method has to be adopted when there is a lack of know-how in respect of development of any product, in layman's language, it could also be called as copying. In the earlier years, its main customer was M/s Maruti Udyog Ltd. and others were added from year to year. In order to remain as a leader in the business so as to avoid possible competition, it entered into "license, know-how and assistance contract" with Kiekert AG, which are recognized worldwide in the development and supply of locking system for automobile industry. The relevant clauses of the agreement are stated as under: (i) M/s Kiekert AG agreed to co-operate with Shivani with the transfer of production for mechanical latches. (ii) As per clause No. 4.2 of the licence contract M/s Kiekert AG reserved the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement with Kiekert, a German company, has acquired the technical know-how and thereafter used the same for manufacturing of its products while observing as under: (a) It has already capitalized in the accounts to treat as a capital expenses in the books. (b) As per provisions of s. 32 technical know-how is in the nature of capital assets. (c) This amended provision came into effect w.e.f.1st April, 1999. The decisions of the cases relied upon by the assessee pertain to earlier period when this amended provision was not on the statute hence the decisions are not applicable now. (d) Decision of the Supreme Court capitalized asset. (e) Sec. 35AB amended w.e.f.31st March, 1999is no longer applicable. 7. Further, that the agreement revealed that the payment of royalty @ 5 per cent, 3 per cent and 2 per cent on the basis of supply of services as per cl. 12(2) proves that the technical know-how fee paid was actually a capital payment and royalty paid with reference to the sale no doubt was a revenue outgoing, therefore, the AO treated total payment of technical know-how fee amounting to Rs. 27,93,969 as capital expenditure and added the same to the income of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company as capital expenditure and added the same to the income of the assessee by confirming the order of AO and directed the AO to allow depreciation on the same by treating it as intangible asset while making following relevant observations in the order: "For appreciation of the facts and the legal position of the issue involved in the instant case, first of all one has to look into the statute viz. the IT Act, 1961. Needless to reiterate, there has been lot of litigation with regard to the treatment to be given to the payment of fees for technical know-how. There have been different views of different Courts at different levels. In some cases, while it has been held that such lump sum payment was a capital expenditure; in others it has been held to be revenue expenditure. As such, as per observations made by various authorities, the line of distinction is/was very thin and the conclusion has to be derived on the basis of facts of each case. To end this controversy, the IT Act, 1961 was amended by the Finance Act, 1985 when s. 35AB of the IT Act, 1961 was inserted w.e.f.1st April, 1986. As an effect of this amendment, any lump sum consideration for acquiring any know-how for u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lump sum expenditure incurred by the assessee for acquiring the same was a capital expenditure. Learned Departmental Representative for the Revenue, in order to support the contention, further submitted that even the assessee in its balance sheet/books of accounts has shown the amortization of expenditure on acquisition of know-how under s. 35AB which clearly indicated that this expenditure incurred by the assessee on acquisition of know-how was not a revenue expenditure. Further, that in the order passed for asst. yr. 2001-02, while referring to provisions of ss. 32 and 35AB, the CIT(A) rightly concluded that the case law relied upon by learned Authorised Representative for the assessee related to the period prior to the incorporation of these sections in the statute and, hence, the same was not applicable to the facts and issue under consideration before the Tribunal. Further, according to learned Departmental Representative for the assessee (sic-Revenue), the CIT(A) rightly concluded that the definition of intangible assets as provided in s. 32(1) of the Act after 1st April, 1999 was wide enough to cover the consideration of technical know-how and though the provision of s. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (j) CIT vs. Bhai Sunder Dass Sons (P) Ltd. (1986) 158 ITR 195 (Del); (k) CIT vs. Tata Engineering Locomotive Co. (P) Ltd. (1979) 13 CTR (Bom) 209 : (1980) 123 ITR 538 (Bom); (l) Bajaj Tempo Ltd. vs. CIT (1993) 111 CTR (Bom) 131 : (1994) 207 ITR 1017 (Bom); (m) CIT vs. Avery India Ltd. (1994) 207 ITR 813 (Cal); (n) CIT vs. Madras Rubber Factory Ltd. (1995) 212 ITR 443 (Mad); (o) S.R.P. Tools Ltd. vs. CIT(1998) 148 CTR (Mad) 133 : (1999) 237 ITR 684 (Mad); (p) CIT vs. Southern Pressings (P) Ltd. (1999) 157 CTR (Mad) 511 : (2000) 242 ITR 67 (Mad); (q) CIT vs. Power Build Ltd. (2000) 162 CTR (Guj) 41 : (2000) 244 ITR 19 (Guj); (r) CIT vs. Gujarat Carbon Ltd. (2002) 173 CTR (Guj) 389 : (2002) 254 ITR 294 (Guj); (s) CIT vs. Kirloskar Tractors Ltd. (1998) 148 CTR (Bom) 121 : (1998) 98 Taxman 112 (Bom); (t) CIT vs. Swaraj Engines Ltd. (2006) 203 CTR (P H) 310 : (2006) 154 Taxman 243 (P H); (u) CIT vs. Zaverchand Gaekwad (P) Ltd. (2006) 202 CTR (Guj) 94; (v) CIT vs. JCT Electronics Ltd. (2006) 203 CTR (P H) 315; (w) CIT vs.KanpurCigarettes (P) Ltd. (2005) 198 CTR (All) 414 : (2006) 287 ITR 485 (All); (x) CIT vs. Eicher Motors Ltd. (2008) 214 CTR (MP) 629 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) mere length of the period of the agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset in case the agreement itself could be terminated by any party before the expiry of the term on any of the grounds stated in the agreement. [Tata Engineering and Locomotive Co.-Bombay High Court and Shirram Refrigeration Industries Ltd.-DelhiHigh Court]; (2) where lump sum payment is made only for obtaining access to information which does not become its own, the payment cannot be elevated to the status of payments of capital nature. [Shriram Refrigeration Industries Ltd.]; (3) the terms of the agreement in each case are to be taken into consideration before deciding the question of the expenditure being revenue or capital in nature on the basis of the principles laid down by the various High Courts and the apex Court in their decisions; (4) if whole object of the agreement is only to obtain the benefit of technical know-how for running the business and the assessee does not absolutely acquire the technical know-how the expenditure incurred by the assessee for obtaining the same would be allowable as a revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding depreciation on technical know-how as intangible asset and, second, because the other condition provided in s. 32(1) of the Act i.e. the assessee must wholly or partly own and use the asset for the purpose of its business or profession still remained as it is. It means that for the assessee to be entitled to depreciation on intangible assets as provided in s. 32(1)(ii), from asst. yr. 1999-2000, all the other conditions are still required to be fulfilled for claiming the depreciation on tangible assets like ownership of the asset and user thereof etc. 21. In order to find whether the assessee under the agreement acquired exclusive ownership in contractual proprietary rights and technical know-how supplied by the German company or merely received right to use the technical know-how with the abovementioned principles/guidelines in mind. We have examined the various relevant clauses of the agreement, referred to by both the parties, which are reproduced as under: "4. Sales license 4.1 Kiekert grants Shivani under the conditions of cls. 4.3 and 5 an exclusive license for the sale of the subjects of the contract to the car manufacturers in the contractual territory Shivan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inated, Shivani shall have the right of permanent use of all 'documentation obtained from Kieket during the term of the contact'. Moreover, after the termination of the contract all material and other obligations of Shivani with respect to Kiekert shall also terminate. 22. Notice of termination of the contract This contract may be terminated before expiration of the term agreed in the contract in the event that one of the parties grossly violates, does not perform in full or does not properly perform the obligations arising from this contract and in the event that the violation of the obligations is not corrected or the contractual obligations are not performed within six months after the other party has sent a warning in writing. In the event that Kiekert terminates the contract because of non-performance by Shivani, Shivani is obliged to cease without delay to manufacture and sell the subjects of the contract and shall immediately return to Kiekert all documents received in connection with this contract. Shivani may, however, deliver outstanding orders according to the stipulations of this contract. 23. Liability Kiekert shall in no way be liable for the risk of the techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the use of this technical know-how received from the German company. Hence, from the restrictions laid down in the above-discussed clauses of the agreement, it is evident that the assessee company did not become the exclusive and absolute owner of the technical know-how received from the German company but it simply acquired a license or a limited right to use this technical know-how and, hence, the payment made by the assessee to the German company cannot be held to be on capital account but the payment is held to be on revenue account and, hence, deductible as revenue expenditure under s. 37(1) of the Act as laid down in the various cases. 23. Hence, for the reasons stated above, we hold that the technical know-how fee paid by the assessee, under the agreement with the German company, is to be treated as revenue expenditure and so the assessee is entitled to claim deduction under s. 37(1) of the Act of the impugned expenditure in the asst. yrs. 2000-01 and 2001-02 under consideration before us. Accordingly, the order of the CIT(A) passed in asst. yr. 2000-01 deleting the impugned addition is upheld and the order of CIT(A) passed in asst. yr. 2001-02 in sustaining the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of Rs. 1,59,677 on this ground." 28. Before us, the learned Authorised Representative for the assessee submitted that the employees' and employers' contribution to PF aggregating to Rs. 1,65,676 for the month of March, 2001 was deposited by the assessee on 18th April, 2001, Within the grace period of five days, provided under the Employee's Provident Fund Organization Rules. However, the payment was cleared by the bank on23rd April, 2001and placed reliance on p. 50 of the paper book in support of this contention. He further submitted that since the assessee has deposited the cheque on 18th April, 2001 i.e. Within the grace period of five days, the payment shall be deemed to have been made by the assessee Within the grace period because the date of tendering of the cheque is to be taken as date of payment irrespective of the clearance by the bank on a later date as the cheque has not been dishonored. In support thereof, he placed reliance on the decision of apex Court in the case of CIT vs. Ogale Glass Works Ltd. (1954) 25 ITR 529 (SC); Sahara Airlines Ltd. vs. Commr. of Customs (Appeals) (2000) 110 Taxman 378 (GOI) and CIT vs. Kumudam Publications (P) Ltd. (1981) 21 CTR (Mad) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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