TMI Blog2000 (3) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of commercial production, which was on and from 10-4-1986. The royalty was payable at the rate of 4% of sales. The agreement also provided for assistance in marketing, supply of critical components and use of extensive marketing network of Honda for exports. 42. The agreement was duly approved by the Government of India as required by law and the entire royalty paid was allowed as permissible business expenditure in earlier years. 43. During the course of assessment proceedings, the Assessing Officer noted that Royalty was payable by the assessee to Honda at the rate of 3% on domestic sales and at the rate of 4% on export sales made by the Indian company as per terms of collaboration agreement and the same was payable upto 9-4-1998. The assessee informed the Assessing Officer in this connection that it had originally entered into collaboration with Honda on 21-4-1984 according to which Royalty was payable for a period of seven years which had expired on 9-4-1993. Though there was no Clause in the original agreement providing for extension of the agreement, the original agreement was renewed by the assessee for a further period of five years after obtaining the approval of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, inter alia, argued that it had made the second Agreement after obtaining the approval of the Government of India. The assessee's further argument was that tax had been deducted at source from the payments of Royalty made to Honda. However, according to the Assessing Officer, mere deduction of tax at source from the payments of Royalty was not sufficient to make the said payment an allowable expenditure. With regard to the approval of the Government of India, the Assessing Officer has mentioned in the assessment order that the same had been obtained on a specific request/application made by the assessee in this regard. The Assessing Officer further remarks in this context that the Government of 'India approves thousands of such applications and the approval of the Government of India cannot be a criterion for allowing deduction under the Income-tax Act. The assessee had raised following other contentions before the Assessing Officer in support of its claim of allowance of Royalty : (i) The assessee could not have functioned smoothly without further technical know-how from the collaborators. (ii) The critical components for manufacture were being supplied by the coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s approved by the Department of Industries Development, which cannot be considered to be an expert in Income-tax matters. What is more is that the question before the said department was definitely not the allowability of the expenditure under the Income-tax Act. In these circumstances, the approval of the appellant's Agreement by the Government would automatically not mean that the expenditure was allowable under the Income-tax Act". Accordingly, the CIT(A) confirmed the finding of the Assessing Officer. 46. Shri S.N. Inamdar, the learned counsel for the assessee, submitted that there was no justification for the impugned addition. He submitted that the first Agreement entered into between the assessee and Honda for payment of Royalty expired on 9-4-1993. At this stage, the assessee had just come out of its teething troubles having incurred losses consistently earlier and started making a dent in the scooter market competing against giants like Bajaj Auto and LML Vespa. Further at that time, new pollution norms were in the offing and also the use of unleaded petrol. The assessee was struggling hard to make changes suitable to Indian customers, conditions and roads and constant e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. He submitted that this fact was fully disclosed to the Government of India at more than one place in the renewal application and inspite of this fact, the Assessing Officer brushed aside the Government approval on the ground that it was granted routinely just for asking as it renews thousands of such Agreements. He submitted that the Assessing Officer has not examined either the Government official who approved the renewal nor anyone from Honda to understand the reasons behind renewal and approval. He also did not carry out any factual investigation. According to the learned counsel, the Assessing Officer's views are solely based on his own interpretation of various classes of the 1984 Agreement and not on any findings of fact as is clear from para 13 of his order. The learned counsel further submitted that the Assessing Officer adopted a negative approach and went on rejecting every reason given by the assessee, solely relying either on his own opinion or interpretation To the observation of the Assessing Officer that the assessee was entitled to supply of know-how not only for 10 years, but also even after expiry of the contract period, the learned counsel submitted that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g technology. Therefore, there was only a promise to transfer the technology. However, as per page 91 of the assessee's paper book No. 2, the assessee was required to pay Royalty on all the sales, i.e., domestic as well as exports. Accordingly, according to the learned senior D.R., the payment of Royalty has nothing to do with the transfer of the technology. During the course of hearing before us, the learned senior D.R. sought permission to introduce a new evidence in the form of notice for enhancement of capital by Honda. The counsel of the assessee did not object to the admission of this document. Accordingly, the D.R. was allowed to introduce this document. Pointing to page 4 of the said document, the learned senior D.R. argued that Honda had promised to make available the latest technology and extensive Research and Development facilities of Honda in view of the enhanced capital. He submitted that this resolution had twofold implications as follows : (i) The Honda company has promised to make the available latest technology and extensive R D in view of the enhancement of capital. Hence, no further royalty was required to be paid to Honda company for acquiring latest techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low to depart from a finding given by an earlier Tribunal. There is also a further limitation, namely, that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the assessee. For instance, if the court is satisfied that by depriving the assessee of his rights under the later decision, in an earlier year, the assessee lost an important advantage or lost some benefit which he could have got under the Income-tax Act, then the Court may take the view that departing from the earlier decision leads to injustice or denial of justice and the Court may prevent an Income-tax Authority from doing something which would be unjust and inequitable." It is noted that the Assessing Officer's views are merely based on his own interpretation of various clauses of the 1984 Agreement and not on any findings of fact as is clear from para 13 of his order; he is placing only his interpretation on various clauses to conclude that the assessee need not have paid any Royalty and was entitled to receive the know-how for all times to come on the basis of the first Agreement only It is significant to note that he did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... da's global operations, it was not bound to manufacture or supply such components and they could not have been imported from any other manufacturers. (b) Regarding assured supply of components, the Assessing Officer rejects the contention on the ground that the assessee has sub contracted the manufacture of components to Kinetic Engineering Ltd. a sister concern. Firstly, critical components were not sub contracted and even what was sub-contracted was only under Honda's know-how, drawings and designs and secondly, the assessee had not established any testing facility and quality control had to be approved by Honda to make the product internationally competitive and acceptable. (c) The Assessing Officer brushes aside the fact that due to Honda's technical support, there was an increase in exports of 191 % in five years, by saying that exports can be increased by paying commission. In our opinion, it is oversimplification of the matter. Exports can be increased only if the product is competitive and of high quality and not by simply paying commission which is paid mainly to take care of establishment expenses of the agent. (d) The Assessing Officer's contention that since Honda ..... X X X X Extracts X X X X X X X X Extracts X X X X
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