TMI Blog2008 (7) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground that no income-tax has been paid on this amount and has further erred in not allowing this payment. 3. That in any case and in any view of matter, action of learned CIT(A) in not allowing the payment of royalty as business expenditure of the assessee for the year under consideration is illegal, unjustified, contrary to law, facts and circumstances of the case, more so when such disallowance was based on incorrect facts and inferences." 3. The assessee company is engaged in the manufacture of sheet metal components and dies and supply are mainly to M/s Honda Siel Car (India) Ltd., Noida. In the course of assessment proceedings, it was noticed by the AO that during the current year, Rs. 18,73,789 has been shown as payment to M/s Hongo Company Ltd., Japan (hereinafter referred to M/s HCL, Japan) on account of technical assistance provided by M/s HCL, Japan for production of door panel skin parts of Honda Siel Car (India) Ltd. Apart from the same, Rs. 79,66,532 was also claimed as royalty towards the manufacturing expenses. The AO required the assessee to justify the basis of which these expenses have been debited as revenue expenses in its accounts, in response to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of this assessee company which was subsequently updated on 31st July, 2001. (ii) The assessee company has income of 95 per cent of the subsidiary company of M/s HCL, Japan and the technical collaboration agreement provided for exclusive and non-transferring licence of manufacture and sell the licensed products of M/s HCL, Japan by using its know-how, which shall include the use of abovementioned licence transferring of know-how as well as technical collaboration and purchase of manufacturing equipments etc. (iii) It was also agreed that M/s HCL,Japanwould not give the same licence to manufacture or of technical assistance to any other company. In fact the assessee company, a subsidiary, could only set up its unit and conduct its business with the technical assistance and know-how and management services provided by the parent company. (iv) The claim of the assessee that there is no enduring benefit is also not a technical collaboration agreement and transfer of know-how was put into place at the time of setting up of the assessee company and thus gives enduring benefit to it. (v) The fact that the payment of royalty is linked to the sales of the assessee company, it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the appellant has debited a sum of Rs. 19,73,789 being payment on account of technical assistance. The AO, however, treated the same as expenditure of capital nature and made the addition. During the appellate proceedings it was submitted that M/s Honda Siel Car (India) Ltd. provided certain dies to the appellant for use in manufacture of certain components for its models 'City'. On the request of the appellant, technical assistance was provided by ECL through its supervisors and technically competent employees in the first stage of production at the appellant's plant and this payment of Rs. 18,73,789 was made for such technical assistance. It was argued that the payment of Rs. 18,73,789 on account of technical assistance is an expenditure of revenue nature. I agree with the appellant's submission that the payment of Rs. 18,73,789 on account of technical assistance is an expenditure of revenue nature. The addition made by the AO at Rs. 18,73,789 is, therefore, hereby deleted. (Relief: Rs. 18,73,789)." 7. Still aggrieved, the assessee is in appeal before us. 8. The learned counsel for the assessee has invited our attention to various terms and conditions of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garded as revenue expenditure even though the advantage may be for an indefinite future. What is relevant is the purpose of the outlay and it is intended object and effect, considered in a common sense way, having regard to the business realities. However, despite various tests given by the Court in a long given case to determine what is attributable to the capital and what is revenue, the controversy is to be decided afresh in each case applying one test or the other. 11. The Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) has indicated that in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. It was further held that there is no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue and, therefore, the "once for all" payment test as well as test of "enduring benefit" may not be conclusive. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the company to the foreign firm whether a definite one or dependant upon production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of technical informations received from a firm, payment whether made 'once for all' or in different instalments co-relatable to the percentage or gross turnover of the product to ultimately find out whether the expenditure or the payment thus made makes an accretion to the capital asset and held to be a capital expenditure. As has been held by this Court and already indicated in Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) no single definite 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. But in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide, therefore, on which side of the line a case falls, its broad resemblance to another case, is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases." 15. Having noticed so, we proceed to consider the different clauses of the agreement entered into by the assessee with M/s HongoJapanto resolve the controversy as to whether the expenses in question claimed by the assessee as deduction are on account of revenue or capital. In the case before us, the agreement between the assessee and HongoJapanwas to provide a licence and technical collaboration in the manner set out in the agreement with M/s HongoJapanso as to enable the assessee to manufacture and sell specified automobile components in theRepublicofIndia. The licence products in the agreement were defined to mean those components and parts for the use of the automobiles, details of which were specified as agreed to in writing by the parties to the agreement for each model of automobiles which were spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f termination of the joint venture agreement entered into between Hongo and Pawha Builders (P) Ltd. Article 44 of the agreement gives either party a right to terminate the agreement at any time by a written notice to the other party in the case of happening of certain events mentioned in the art. 14 of the agreement. Article 18 provides for the effect of termination. In the event of the expiration of the agreement or any other termination of the agreement for any reason whatsoever, the assessee shall promptly discontinue (i) the manufacture, sell and other disposition of the licensed product, and (ii) the use of the know-how furnished by HongoJapanunder the said agreement. It has also been provided that the assessee company shall on its own return to Hongo Japan such books, notings, drawings and writings and other documents, samples, models and other materials relating to the know-how as provided by Hongo Japan to assessee company and all improvements and inventions made by the assessee company regarding the licensed products and Hongo Japan shall not be liable to the assessee company for, and the assessee company shall not be entitled to, any damages, reimbursements or other payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit to that assessee. However, in the present case applying the principle laid down by the decision of Jonas Woodhead Sons Ltd., the royalty paid by the assessee equal to 3 per cent of the net sale value during the term of agreement has not resulted in any enduring benefit to the assessee inasmuch as after the termination or the expiry of the agreement there is an embargo upon the assessee company to manufacture, sell and even other disposition of the licensed products and for use of the know-how furnished by Bongo Japan to the assessee company vide the agreement. 17. The Hon'ble Supreme Court in the case of Jonas Woodhead Sons Ltd. has referred to its earlier decision in the case of CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) and it has observed as under: "In the case of CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC), the question for consideration was whether the contribution payable by the assessee at the rate of six per cent of the net selling price of pharmaceuticals which the assessee produced on getting the formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered and developed in the Swis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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