TMI Blog2003 (3) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... milar structures and other structural engineering. The business is being carried on for a number of years. The construction of tall structures like chimney stacks and cooling towers require scaffolding for the purpose of construction. When these tall structures are constructed, a big scaffolding is required to be erected with the help of which high rise construction is being carried out. The assessee-firm entered into foreign collaboration with an English firm called Bierrum and Partners Ltd. by an agreement dated August 18, 1988. The foreign collaborator, shortly referred as Bierrum, had developed advanced methods of construction techniques and systems. They had particularly developed and got patented a system called Bierrum System which contains latest technical know-how for construction systems and techniques suitable for tall R.C structures such as draught cooling towers for electricity power stations, chimney stacks, storage silos and other structures. A copy of the agreement has been placed on record at pages 10 to 29 of the paper book. Few clauses of the technical collaboration agreement may be noted. Clause 1.1 states that commencement of the use of Bierrum System will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four instalments ; the first instalment of 32.5 per cent. within 30 days from the effective date, 32.5 per cent. within 30 days from Bierrums transferring, delivering and imparting to the assessee Bierrums System and Bierrum know-how. 30 per cent. within 30 days after commencement of use of Bierrums Systems and balance 5 per cent. within 30 days on successful completion of first natural draught cooling tower shell and removal of the construction system. (This lump sum payment is subject-matter of dispute in the assessment year 1989-90 in the assessee s appeal and in the assessment year 1990-91 in Department s appeal). As per clause 5.2, in addition to lump-sum payment the assessee is required to pay for engineering service 30,000 for the first natural draught cooling tower shell. Out of the above, 20 per cent. is payable within 30 days of the commencement of construction, 40 per cent. within 30 days of completion of 50 per cent. work of tower shell and 40 per cent. within 30 days of completion of tower shell for which Bierrums System is put to use. For the construction of the second and subsequent cooling towers, the assessee is required to pay 20,000 in instalments mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it was incurred. In response to the Assessing Officer s intention to disallow 5/6ths of the amount claimed, it was claimed by the assessee s representative that section 35AB was not applicable in the assessee s case. According to the assessee, it was a civil contractor and not manufacturer of any article or thing. The know-how was being used for reducing the cost of construction of cooling towers and the provisions of section 35AB had no application. This contention of the assessee was, however, turned down by the Assessing Officer by holding that earlier to the introduction of the section, there was a dispute between the assessees and the Department as to whether such expenses are capital or revenue. There being considerable conflict of opinion, section 35AB was introduced with effect from April 1, 1986, and it is under section 35AB that all technical know-how fees are governed. He further held that in the context of industrial company, the definition of the term as per Finance Act, 1984, manufacture or processing of goods is treated at par with execution of projects. Because of this analogy, the assessee s business of execution of projects was held by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable under the contract was one which would help the assessee in carrying out its business efficiently. The system so made available had a limited life and consideration of Rs. 2,82,307 can be treated as revenue expenses. He further held that in the age of advancement of scientific knowledge there is no permanence of systems and hence disallowance of lump sum consideration of Rs. 2,82,307 was not correct. According to him, the Assessing Officer had allowed only 1/6th of the expenses, but he held that the entire amount of Rs. 2,82,307 was allowable as revenue expenditure and, therefore, addition of Rs. 2,35,247 was deleted. It will be seen from the above that in regard to the lump sum payment, the learned Commissioner of Income-tax (Appeals) came to diametrically opposite conclusion probably because of the subsequent pronouncement by the Supreme Court in the case of CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412that the expression manufacture or processing will not include construction activity. This finding of the learned Commissioner of Income-tax (Appeals) in the assessment year 1990-91 is challenged by the Revenue in its appeal. In the assessment year 1990-91, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax (Appeals), there was a degree of permanence and endurability in the technical know-how derived by the assessee. The assessee had relied on before the Commissioner of Incometax (Appeals) on the decision of the Bombay High Court in the case of CIT v. Kirloskar Cummins Ltd. [1993] 202 ITR 36 as also another decision of the Bombay High Court in the case of CIT v. Tata Engineering and Locomotive Co. (P.) Ltd. [1980] 123 ITR 538. The Commissioner of Income-tax (Appeals), however, held that the facts in the assessee s case are distinguishable from those in both the above decisions of the Bombay High Court. He, therefore, held that the addition of Rs. 8,19,364 had been properly made. It is against this disallowance confirmed by the Commissioner of Income-tax (Appeals) that the assessee is in appeal for the assessment year 1990-91. The issue regarding deduction on account of lump-sum payment involved in the assessment years 1989-90 and 1990-91 and deduction of engineering fees for the assessment year 1990-91 arise from the same technical know-how agreement. According to Shri K. A. Sathe, learned counsel for the assessee, the same considerations apply in regard to the allowabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other facts of the case, such as whether the know-how has been obtained for the purpose of improvement of the production techniques or for facilitating existing business or whether the technical know-how is obtained for starting manufacture of altogether new item of manufacturing. The position whether depreciation is allowable on the amounts paid towards acquisition of know-how when such acquisition was considered to be capital expenditure was a matter of dispute and the Department was contending that such capital expenditure would not be eligible for the purpose of depreciation. According to learned counsel, it is really to resolve this controversy that section 35AB has been introduced providing amortization of the expenditure incurred for acquiring technical know-how. According to Shri Sathe, the expression lump sum payment for acquiring know-how is important and suggests that the question should be in the nature of capital expenditure. If, on the other hand, technical know-how is obtained for its use in existing business, such a payment would not be for acquiring know-how and would be outside the purview of section 35AB. Thus, according to Shri Sathe, expenditure incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Departmental Representative supported the action of the Assessing Officer for both the years. According to him, while the learned Commissioner of Income-tax (Appeals) was justified in the assessment year 1989-90 in upholding the decision of the Assessing Officer on the point, he was not justified in deleting the addition for the assessment year 1990-91 for which the Revenue is in appeal. According to him, section 35AB is meant to cover all the cases of technical collaboration and the question now cannot be decided otherwise than on the basis provided under section 35AB. According to him, the purpose of the section was to resolve the long standing controversy between the assessees and the Department whether such expenditure in acquiring know-how was capital or revenue. According to the learned Departmental Representative there is no scope for holding that section 35AB has only limited application in cases where the assessee had acquired know-how and the expenditure is considered as capital as contended by Shri Sathe. According to him, the question whether the expenditure involved is revenue or capital cannot be decided as per the whims of the assessee and there is no scope for any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on agreement, salient features of which have been reproduced supra in paras 4 to 7 (pages 21 to 23) and the detailed submissions of learned counsel, we are of the considered opinion that in the assessee s case in particular section 35AB has no application, because the said section refers to know-how required for the purpose of assisting manufacturing or processing of goods or in working of a mine or oil well or other resources of mineral deposits. The assessee s business of structural engineering and construction cannot be considered to be manufacturing or processing of goods in view of the decision of the Supreme Court in the case of CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412 relied upon by the learned Commissioner of Income-tax (Appeals) while adjudicating upon the issue in the assessment year 1990-91. In the assessment year 1989-90 when the Commissioner of Income-tax (Appeals) decided the appeal, the decision of the Supreme Court in the case of N. C. Budharaja and Co. [1993] 204 ITR 412 was not available, but when he considered the same in the subsequent assessment year 1990-91, the above case from the Supreme Court was available and he rightly applied the ratio of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but only to make the carrying on of the business more efficiently and profitably. The tests laid down in this behalf by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 may be noted. In this case, it was held by the hon ble Supreme Court that the expenditure even if incurred for obtaining an advantage of enduring benefit may, none the less, be on revenue account, and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimler Benz for acquiring technical knowledge regarding methods of production and for use of trade name, it was held by the hon ble High Court that there was no acquisition of asset or advantage of enduring nature. The amounts paid for provisions of know-how and licence to use the trade name were revenue expenditure. In Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), the assessee was engaged in the manufacturing of antibiotics, including penicillin. The assessee entered into collaboration agreement for acquiring know-how to produce higher yield and sub-culture of high-yielding strain of penicillin. There was no evidence to indicate that this was not in the line of existing manufacture of penicillin. In these circumstances also a lump sum payment once for all was held to be not capital in nature and was considered to be a revenue expenditure. During the course of hearing before us, in answer to a specific query from the Judicial Member as to why lump-sum payment could not be considered to be a capital expenditure, learned counsel submitted that the above decision of the hon ble Supreme Court is a clear authority that lump-sum payment or payment once for all and pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. [1997] 224 ITR 342 also was a case where the assessee obtained technical know-how for setting up a manufacturing unit of all types of springs and suspension. This distinction that technical know-how for entirely new product is capital or revenue was also considered by the Bombay High Court in the case of Sudarshan Chemical Industries P. Ltd. [1986] 159 ITR 629 which has followed the decision of the same High Court in the case of Tata Engineering and Locomotive Co. (P.) Ltd. [1980] 123 ITR 538. We, accordingly, hold that the contentions of the learned Departmental Representative are not at all tenable and the expenditure incurred by the assessee both by way of lump sum payment as well as by way of engineering service fees deserve to be allowed. In the light of above discussion, we hold that the lump-sum payments of Rs. 5,24,274 in the assessment year 1989-90 and of Rs. 2,82,307 in the assessment year 1990-91 are allowable as revenue expenditure. For similar reasons, engineering service fees paid under the same agreement of Rs. 8,19,364 are also allowable as revenue expenditure in the assessment year 1990-91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of Rs. 9,39,348. The assessee had claimed deduction under section 32AB at Rs. 2,15,353. On appeal, the learned Commissioner of Income-tax (Appeals) confirmed the disallowances for both the years upholding the findings of the Assessing Officer. Shri K. A. Sathe, learned counsel for the assessee, submitted that the issue is covered by the decision of this Tribunal, in the case of CIT v. Maharashtra Scooters Ltd. (I. T. A. No. 519/Pune of 1991), dated February 3, 1995, for the assessment year 1988-89. Reference filed by the Department on the point was also rejected in R. A. No. 55/PN of 1995, decided on July 3, 1995. Learned counsel further submitted that the issue was also covered by the decision of the Cochin Bench in the case of Apollo Tyres Ltd. v. Deputy CIT [1992] 43 ITD 464. Learned counsel further relied upon the following judgments : (i) Deputy CIT v. G. L. Rexroth Industries Ltd. [1999] 105 Taxman 111 (Ahd) (Mag) ; (ii) Asst. CIT v. Brij Bhushanlal and Sons [2000] 69 TTJ 379 (Delhi) ; (iii) CIT v. Diners Club India Ltd. [2001] 248 ITR 679 (Bom) ; and (iv) Eveready Industries (India) Ltd. v. Deputy CIT [2001] 78 ITD 175 (Cal). Shri K. Srinivasan, the learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Income-tax Act, but it was to be computed as per the provisions of Parts II and III of the Sixth Schedule to the Companies Act. Reference may be made to item (xi) under clause 3 of Part II whereunder profits of the business include the amount of income from investments, which are to be distinguished between trade investments and other investments. Income by way of interest is also included. Thus, as per the provisions of the Companies Act, Parts II and III of the Sixth Schedule, computation itself provided inclusion of interest on investments. The distinction which the Income-tax Act makes between computation under the head Profits and gains of the business and income from other sources is absent as far as section 32AB(1)(ii) is concerned. The case of the assessee also stands supported by the Central Board of Direct Taxes Circular No. 461, dated July 9, 1986 (see [1986] 161 ITR (St.) 17), which clearly specified that profits of the eligible business are to be computed as per the provisions of the Companies Act. The other cases relied upon by learned counsel also support the view taken by this Tribunal in the case of Maharashtra Scooters Ltd. (supra). Now, coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details of salary paid to Shri K. P. Vora have been given on page 31 of the paper book. It is seen that he was working with the assesseefirm up to 1999 or so and afterwards he is stated to have joined the firm as a partner. According to the assessee, Shri K. P. Vora was required to join the assessee-firm after completion of the education and his higher education in the field of structural engineering which was in the line of the assessee s business would have been useful to the assessee s activity. In view of this, it was contended before the Assessing Officer that the expenditure was wholly and exclusively for the purpose of business of the assessee. The Assessing Officer however, did not accept the contentions of the assessee as according to him Shri K. P. Vora was not an employee of the firm and even though it is stated that he joined the firm as an apprentice no expenses on account of salary or stipend were incurred. The assessee-firm had not provided any of his employees or their wards any such concession of bearing the expenses on such higher education. The facility of providing higher education to the employee or his ward was not followed by the assessee-firm, but only in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his family background was known. The fact that his services would be more useful to the firm could be taken into account and because of his relationship with the family he could be depended upon in providing the service to the assesseefirm. In case of a stranger, there will not be any question of his joining a competitor for more money. Shri Sathe further submitted that the fact that nobody else was sent abroad could not affect the admissibility of the expenditure in any way. Negatively, it could be said that Shri G. N. Tambe was a partner and his two sons Shri Kedar and Shri Kalyan were partners and had joined the business, but they were not sent abroad for education. This, according to learned counsel, showed that Shri K. P. Vora was not sent abroad because he was a relative, but was sent because he was expected to gain something in the business. Learned counsel drew our attention to the copy of the agreement as also permit from the Reserve Bank of India which was in the name of M/s. K. B. Mehta-the assessee and submitted that as per the agreement, Shri K. P. Vora was obliged to join the firm after completing education. He reiterated that the decision of the Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame as in the present case that her degree would not have helped the assessee s business and moreover her relationship with the directors also was considered in disallowing the expenditure. The Bombay High Court held that the relationship between the directors and the trainee concerned will confer assurance on the scrutinizing mind as far as possible the result of the training will be utilised for the benefit of the company. It was further held that the disallowance on account of close relationship of the trainee with the directors was not sustainable and it was also held that the expenditure was allowable. It was also held that the formal contract or bond was not required. The above decision of the Bombay High Court was followed by the Bombay Bench of the Tribunal in the case of Trikaya Grey Advertisement India Ltd. v. Deputy CIT (I. T. A. No. 941/Bom of 1993 dated April 7, 1999, reported in B. C. A. J. February, 2001-page 1070). In our opinion, the case of the assessee is on stronger footing and the expenditure should have been allowed as an allowable expenditure. Coming to the reliance placed by the learned Departmental Representative on the judgment of the Bombay High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executed even after the tickets for foreign trip was already purchased. The assessee has simply filed one bio-data without furnishing any copy of a degree or other relevant documents to establish that said Mr. K. P. Vora actually obtained the qualification/experience as indicated therein. It is the case of the assessee that Shri K. P. Vora was the most suitable candidate in the assessee s business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India. The fact that he was related to a partner was no disqualification. The assessee-firm was consisting of partners of close families and the business was run as a family business. The employees were selected not by giving advertisement, but through personal contacts. A firm like that of the assessee would prefer known persons to partners. If the question arise whether a candidate of similar qualification was to be considered by the assessee, the assessee would have naturally preferred a relative of the partner, because his family background was known. The fact that his services would be more useful to the firm could be taken into account and because of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 does not support the case of the assessee. So the Assessing Officer has rightly disallowed such claim and the learned Commissioner of Income-tax (Appeals) is fully justified in confirming the action of the Assessing Officer. It was urged for further confirmation of the impugned order. After hearing both the sides and considering the material on record and the case law cited, it is found from the record that no expenditure on account of salary to Mr. K. P. Vora, nephew of one of the partners of the assessee-firm, has been debited to the profit and loss account and there is no other evidence available to show that he was employee of the assessee-firm prior to leaving for education abroad. The so-called agreement dated August 11, 1988, makes mention about Mr. K. P. Vora being employee without salary who is purported to have undertaken to serve the assessee-firm for a period of three years or double the period for which he remains abroad on the expenses to be incurred by the assessee-firm. Similarly, situation arose before the Bombay High Court in the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 when i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision as relied upon by the assessee s counsel is concerned, same loose importance in view of the jurisdictional High Court which is latest and covers the case of the assessee in hand, hence the same cannot be held to be applicable. Orders of reference to Third Member B. L. Chhibber (Accountant Member).-As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire : Whether on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is justified in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora ? U. B. S. Bedi (Judicial Member).-As there is a difference of opinion between the members on the Bench, following point of difference is being referred to President for hearing on such point or for nominating the Third Member or to pass such orders as the President may deem fit and proper. Whether, on the facts and circumstances of the case, the learned Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be recoverable by the employer from the employee with interest at the rate of 18 per cent per annum from the date of breach of any of the conditions. This clause is just compensatory. There is no stipulation for any damages for the breach. My attention was also invited on the bio-data of Shri K. P. Vora. From the said bio-data it appears that he completed his M. S. in Civil Engineering in May, 1989. From August 1989, onwards he worked as design engineer with Morrison Knudsen Engineers, Inc. San Francisco, CA ; immediately after completing the study, he did not come back to India to join the firm. Shri K. A. Sathe, learned counsel for the assessee, submitted that Shri K. P. Vora obtained a degree of foreign University. He worked in U. S. A. to gain experience. There was a bona fide arrangement between the employer and the employee. The fact that the employee is related to the employer is not a material alliunde to which the claim can be disallowed. It was emphasised that the expenditure was incurred exclusively for the purposes of business. Reliance was placed on the decision of the jurisdictional High Court rendered in the case of Sakal Papers Pvt. Ltd. v. CIT [1978] 114 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, the result of the training would be utilised for the benefit of the company. Therefore, the expenditure incurred on the foreign education of the daughter was allowed. I find that the facts of the present case are different from the facts of Sakal Papers Pvt. Ltd. [1978] 114 ITR 256 (Bom). In the present case the assessee could not establish that Shri K. P. Vora was the employee of the company. No evidence in this regard was ever adduced. From the bio-data of Shri K. P. Vora it is clear that he did not join the company soon after the completion of education. He joined some American firm after completing his education. It was not demonstrated that how the expenditure was incurred for the benefit of the business of the assessee. In the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 (Bom) the expenditure was incurred for sending to USA one of the partners of the assessee-firm, a manufacturer of nylon socks and underwear, for obtaining a degree in business management from an American university. The expenditure was held not allowable as business expenditure as there was no nexus between the expenditure and the business of the assessee-firm. Therefore, it is sine q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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