TMI Blog2011 (4) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... r is royalty earned during the subsistence of the agreement - the assessee has not been able to show that it has to incur or it has incurred any of the expenditures relating to the receipt of USD 1 million which has been received by the assessee in the shape of one time technology transfer cost - In the result, the appeal filed by the assessee is dismissed - ITA No. 288/Del/2011 - - - Dated:- 21-4-2011 - I.P. Bansal, K.G. Bansal, JJ. Ajay Vohra, Adv. and Avdhesh Bansal, ACA, for the Appellant Ashok Pandey, CIT, DR, for the Respondent ORDER I.P. Bansal: This is an appeal filed by the assessee. It is directed against the order dated 27th December, 2010 passed by CIT, Delhi-V, New Delhi u/s 263 of the Income Tax Act, 1961 (the Act). The grounds of appeal read as under:- 1. That on the facts and circumstances of the case and in law the order dated 27.12.2010 passed by the Commissioner of Income Tax, Delhi-V ('CIT') under section 263 of the Income Tax Act, 1961 ('the Act') revising the assessment to an income of Rs.3,75,28,005 is beyond jurisdiction, bad in law and void ab initio. 2. That on the facts and circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was adjusted against the brought forward losses to the extent of assessable income. 3. Later on, the Commissioner of Income Tax-V, New Delhi (CIT) issued show cause notice to the assessee dated 9th December, 2010 on the ground that the assessee had only credited a sum of Rs. 92,85,000/- in the Profit and Loss Account under 'other income' as against the total receipt of Rs. 4,64,25,000/- received by the assessee on account of one time technology transfer fee and the remaining sum of Rs. 3,71,40,000/- was shown in the balance sheet as under the head 'other liabilities.' According to the show cause notice, learned CIT has observed that the assessee is following mercantile system of accounting and, according to the provisions of Section 28 read with Section 5 describing the scope of total income, the assessee was liable to be assessed on the entire receipts of one time technology transfer fees. During the course of assessment proceedings, the assessee company was neither asked for any explanation regarding the entire one time technology transfer fees of Rs. 4,64,25,000/- nor any explanation in this regard was ever furnished by the assessee company. In view of all these circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome chargeable to tax in the initial year on account of contractual obligation that was fastened to receipt i.e., to provide services in future over term of contract. Finally, it was submitted that no prejudice has caused to the revenue by the action of the assessee in not treating the entire receipt as income in the current financial year as the assessee is having brought forward losses to the tune of Rs. 13,16,18,770/- and, in this manner, it was submitted that the order was neither erroneous nor prejudicial to the interest of revenue, therefore, powers u/s 263 could not be invoked. However, learned CIT has rejected such contention of the assessee and has come to the conclusion that the entire amount of Rs. 4,64,25,000/- was required to be brought to the tax instead of only a sum of Rs. 92,85,000/- and he directed the Assessing Officer to modify the order. He also directed the Assessing Officer to give a consequential effect to assessment years 2007-08 to 2010-11 by reducing the amount of Rs. 92,85,000/- in each of the said assessment years in view of the assessment of the entire amount in the year under consideration. In this manner, an addition of Rs. 3,71,40,000/- has been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stinct terms. So far as receiving of income is concerned, there is no difficulty. The word 'accrue' and 'arise' are also not defined in the Act. The word 'accrue' is synonymous with 'arising' in the sense of springing as a natural growth or result. Both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less incohate. Thus, it was held that what is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income.' It was further observed as under:- "It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to clause 4.5, the licensee was to bear the traveling expenses to and fro India by the persons of the licensor. Then, learned DR referred to Article 5.1 according to which the assessee as well as other party were entitled to exchange the improvements and further inventions relating to licensed products or in connection with the designs, manufacture and repair and use and sale of the products. Learned DR also referred to clause 6 according to which the assessee was to give soft loan to the other party for upgradation of plant and machinery. He also referred to clause 8 whereby the assessee was under an obligation to supply components, parts and raw materials, etc. to the other party if the same is required to be given as per written request. In regard to such requests, the other party was required to make the payment by letter of credit. Referring to all these clauses, it was submitted by him that for each and every act, the other party has to bear the cost and not the assessee. He submitted that for all these further activities the payment was to be received by the assessee in the shape of royalty as per clause 7.1 (b) which was to be paid @ 5% of the total ex-work sale of the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the light of the material placed before us. It is noticed that the CIT has clearly recorded in his order that during the course of assessment proceedings the assessee company was neither asked for any explanation regarding the entire one time technology transfer fee of Rs. 4,64,25,000/- nor any explanation in this regard was ever furnished by the assessee company. Such fact is also not denied by learned AR. Hence, it is clear that during the course of assessment proceedings the issue regarding taxability of the entire amount in the year under consideration was not touched upon by the Assessing Officer or by the assessee. Therefore, it is a case where no examination was done by the Assessing Officer and the assessee also did not give any explanation on this issue. If it is so, then, the law is well established by the decision of jurisdictional High Court in the case of Gee Vee Enterprises vs. Addl. CIT 99 ITR 375 (Del) which is later on approved in the case of Malabar Industrial Company Ltd. vs. CIT 243 ITR 83 (SC) wherein it was held that vide Section 263 the intention of the legislature was to give a wide power to the Commissioner. He may consider the order of the ITO as err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue and such prejudice cannot be washed away simply for the reason that there was ample brought forward losses against which such income could be wiped out. Now, as per well established law, reduction of loss also is at par with enhancement in taxable income, hence, it cannot be said that no prejudice can be caused to the revenue if there are sufficient brought forward losses to set of current addition. 14. However, to examine whether real prejudice has been caused to the revenue, the contention of learned AR regarding validity of addition is also to be considered on the basis of material available on record and on the basis of arguments submitted by both the parties as the Commissioner has held that the entire amount was taxable in the year under consideration and he has also directed the Assessing Officer to exclude the similar amount of Rs. 92,85,000/- in all the subsequent years from assessment year 2007-08 to 2010-11 as the entire amount is being added in the current year. 15. The addition of the entire amount in the year under consideration is contested by learned AR mainly on the ground that according to the obligations of the assessee in the agreement, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall generate the full foreign currency requirements for the payment of the licensing fees, royalty fees and for the imported raw materials. 7.4 It is understood that all expenses such as custom duties, VAT, handling, local transport and any taxes payable in Zimbabwe shall be borne by the Licensee." 16. The perusal of the aforementioned article 7 will reveal that against one time technology transfer cost, the assessee was to receive USD 1 million which is equivalent to a sum of Rs. 4,64,25,000/-. Further to that the assessee was to receive a royalty fee of 5% of the total ex works sale of the licensed products. To see the volume of such receipts, it can be seen that minimum payment of USD 25,000/- per month was to be paid by the licensee to the assessee to cover the cost incurred by the licensor in the execution of the project. 17. Apart from the above, the licensee was to pay the cost relating to raw material for which the amount was approximately fixed at USD 2 million and the licensee was required to establish the letter of credit through a first class bank for initial value of USD 1.8 million. 18. If the cost relating to raw material is excluded, then, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture, repair, use and sell the licensed products using the industrial property rights and technical information furnished by the licensor in the contract territory. As per article 3, under the head 'sales and information' upon written request of licensee, the licensor is required to furnish to the licensee with the necessary drawings, technical data and price information on a break down basis in order to enable the licensee to prepare quotations, in so far as such information is currently available from Licensor. Article 4 stipulates 'technical assistance and services' according to which the licensor was required to supply the following data in order to enable licensee manufacture and repair to the best advantage the licensed products without delay:- a) Drawings for designs, repair and assembling b) Specifications c) Materials list d) General calculation sheet in respect of basic engineering parameters e) Data for inspections and trial operations. f) Fabrication and assembly procedures, g) Operating and instruction manuals h) Any other necessary technical data and know how generally used by Licensor. 21. Article 4.2 stipulates the conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form all outstanding obligations not affected by the termination. 24. Article 12 describe 'use of trade mark and brand name' whereby the licensee has been granted with the licence by the licensor on the terms and conditions contained in the agreement with certain conditions stipulated therein. Article 12.4 states as under:- "12.4 This License to use the Licensed Trademark is provided on a royalty fee basis." 25. The Article 12.5 stipulates that if the agreement is terminated, licensee shall immediately cease using the licensed trade mark. Article 13 deals with patent infringement and Article 14 deals with secrecy which stipulates that licensee has agreed that it shall not, without prior written consent of the licensor, shall, assign or divulge the technical information disclosed and furnished by the licensor in any manner to anyone except those of its employees and its subcontractors who will be using such information in the repair, manufacture and erection of the licensed products. Article 15 to 23 contains general conditions which are not relevant for the purpose of determining the issue raised in the present appeal. 26. If the entire agreement is to be seen in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received by the assessee and is to be assessed only in the year under consideration. Therefore, on merits also the assessee has no case for coming to the conclusion that the entire receipts of USD 1 million has to be divided into five parts. The case law relied upon by learned AR also do not support the case of the assessee. Coming to the decision in the case of CIT vs. Dinesh Kumar Goyal (supra), the assessee was running an institution for coaching students and the tuition fee was received in advance and it was held that if the entire receipts are treated as income, it would lead to an anomalous situation inasmuch as the expenses which will be incurred in the next year, are to be deducted to arrive at the net income. Here, the assessee has not been able to show that it has to incur or it has incurred any of the expenditures relating to the receipt of USD 1 million which has been received by the assessee in the shape of one time technology transfer cost. 27. In the case of Shriram Refrigeration Industries Ltd. (supra), the assessee was to receive USD 50,000/- in three installments starting from the signing of the agreement till 24th months of signing of the agreement and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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