TMI Blog2010 (12) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... y themselves only facilitate the development of the new models of these air conditioners. - this cannot be termed as capital expenditure. Decided in favour of the assessee - ITA No. 3315/Del/2006 - - - Dated:- 10-12-2010 - R.P. Tolani, Shamim Yahya, JJ. C.S. Aggarwal, Sr. Adv. and R.P. Mall, Adv., for the Appellant Mohnish Verma, CIT(DR) for the Respondent ORDER Shamim Yahya: This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 10.8.2006 pertaining to assessment year 2003-04. 2. The first issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of Rs.42,13,654/- made by the Assessing Officer on account of excess claim of depreciation on Jigs and Fixtures moulds. 3. Assessee in this case claimed depreciation to the tune of Rs.1,16,78,594/- @ 40% on Jigs and Fixtures. The Assessing Officer opined that depreciation should be restricted to 25%. 4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) noted that the ITAT, Delhi Bench in assessee's own case for earlier year has upheld the claim of the depreciation of 40% on these items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of production that are manufactured or are to be manufactured by the assessee company. Assessing Officer further observed that the assessee has claimed expenditure of 'application work fee' u/s 40(a)(i) of the IT Act. Assessing Officer was of the opinion that payment on technical know-how are now covered within the definition of section 40(a)(i). Rather the same is covered by the provisions of Section 32(1) of the IT Act, pertaining to depreciation on 'assets'. Assessing Officer concluded that the nature of work fee was regarding AC systems, the designs, drawings, prototypes, prototypes samples of AC systems etc. It was clear that the application work is industrial information or technique likely to assist in manufacture of air conditioning systems produced by the assessee and thus is squarely covered by the explanation 3 to sub-section(1) of Section 32 of the IT Act. Assessing Officer proceeded to hold that the application work fee of Rs.4,34,54,274/- claimed as deduction by the assessee is disallowed. Assessing Officer held that for the expenditure of technical know-how, thus depreciation @ 25% amounting to Rs.1,08,61,318/- was allowable as deduction in A.Y. 2003-04. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of capital asset but for carrying on its existing business to suit and serve the prevailing market conditions and needs of the customers. In C.I.T. vs. Indian Oxygen Ltd. 218 ITR 337, the Apex Court has laid down that where under agreement for supply of technical know how foreign company had not sold any informations, process or invention to assessee Indian Company and no advantage of enduring nature has been obtained by Indian Company, amount paid by the Indian Company under collaboration agreement was revenue expenditure. The same court in C.I.T. vs. Ciba of India Ltd. 69 ITR 692 held earlier that where the assessee did not, under the agreement, become entitled exclusively, even for the period of the agreement, to the patents and trademarks of the company but had mere access to the technical knowledge/experience which the foreign company commanded, the payments to the foreign company ere deductible u/s 37(1) of the IT Act. Similarly, in the case of Premier Automobiles Ltd. vs. C.I.T. reported in 16 Taxman 202/150 ITR 28 (Bom), it was enunciated that expenditure on know-how connected with techniques of production is revenue expenditure. In my view, the present issue ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a Revenue Expenditure and is allowable under section 37(1) of the IT Act. Assessee's further submissions in this regard are as under:- "The respondent submits that in the instant case, the Assessing Officer, had made a disallowance of an expenditure of Rs.4,34,45,274/- being the cost of expenditure incurred on creation of prototypes which represented a revenue expenditure, when he held such an expenditure is a capital expenditure and further he held that since the assessee had not deducted the tax at the time of crediting nor did it paid the tax remittance the amount of expenditure so incurred, the said expenditure could not be allowed. The Assessing Officer assumed that since the assessee had paid/remitted the aforesaid sum to M/s Denso Corporation Ltd., Japan and it has not deducted the tax on Rs.4,34,45,274/- being the expenditure claimed out of total sum of Rs.10,42,16,284/- (which included Rs.49,30,408/- and was R and D cess) and he disallowed the expenditure. It is respectfully submitted here that Rs.10,42,16,284/- is not the sum remitted to the M/s Denso Corporation. In fact the assessee had only paid Rs.9,93,29,876/- and after deduction of tax thereon of Rs.1,97,21,63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prototypes have been created of Air conditioners comprising of compressor, condensers, evoparoters, cooling units and other part. Prototypes are working models of entrepreneurial ideas for new products i.e. the original models on which something is patterned. It is obvious that it is not an expenditure incurred once and for all. It is submitted that by incurring such an expenditure it could not be held that the assessee has acquired any capital asset. It is well known as such that the prototype so created keeps on changing, depending upon the model and other changes in the know how of models manufactured by the assessee. It is submitted that the assessee manufactures each year air conditioners between 3 lacs to 5 lacs units and has 15 to 50 variants i.e. prototype created are 15 to 50. It may further be added that the Assessing Officer went into a confusion where she referred a Technical Assistance Agreement dated 11.5.2000 for making a disallowance. In fact the amount paid under the said agreement amounting to Rs.8,57,70,530/- had already been capitalized by the assessee on which depreciation was claimed. In fact the amount of Rs.4,34,45,274/- had been paid under a application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amount spent in this regard pertains to creation of proto types which have been shared by the Maruti Udyog Ltd. The prototype have been created on AC comprising of compressor, condenser, evoparoters, cooling units and other part. These prototypes are working models of entrepreneurial ideas for new products i.e. the original models on which something is patterned. Thus, it is obvious that it is not an expenditure incurred once and for all. The expenditure on these prototypes is kept on being incurred as per the requirement from time to time. Thus, while incurring such expenditure, it cannot be said that the assessee had acquired any capital asset. It is well known as such that the prototype so created keeps on changing, depending upon the model and other changes in the know how of models manufactured by the assessee. It has been submitted that assessee manufactures each year air conditioners between 3 to 5 lacs units and has 15 o 50 variants i.e. prototype created are 15 to 50. 17. Ld. Departmental Representative during the course of argument has also agreed that these prototypes keep on changing very frequently, as per the market conditions. Under such circumstances, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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