TMI Blog2010 (3) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Whether royalty payment be treated as revenue expenditure or capital expenditure - Held that:- question has to be decided as per the terms of the agreement - In view of Alembic Chemical Works Co. Ltd. (1989 - TMI - 5277 - SUPREME Court) where assessee is given licence to manufacture specific products for a limited period.and there is no transfer of any technical know-how it will be treated as revenue expenditure. - ITA NOS. 593 TO 595, 1453, 1454 AND 1457 (MAD.) OF 2009 - - - Dated:- 30-3-2010 - SHRI ABRAHAM P. GEORGE, AND SHRI VIJAY PAL RAO, JJ Represented by: Shri R. Vijayaraghavan for the Appellant. Shri P.B. Sekaran for the Respondent. ORDER Vijay Pal Rao, Judicial Member - These cross-appeals, three by the assessee and three by the Department are directed against the composite order dated January 16, 2009 of the Commissioner of Income-tax (Appeals), Chennai for the assessment years 2000-01, 2001-02 and 2002-03. 2. In appeals in I. T. A. Nos. 593 to 595/Mds/2009, the assessee has raised a common solitary issue as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by the learned Commissioner of Income-tax (Appeals) in the impugned order. Learned counsel for the assessee has further contended that due to inadvertence and bona fide mistake, the assessee has omitted to raise the specific ground regarding reopening of assessment being time barred as per the proviso to section 147 with respect to the assessment years 2000-01 and 2001-02 and reopening of assessment for the assessment year 2002-03 being on the basis of change of opinion as the assessee furnished all the relevant and necessary materials and particulars fully and truly. The learned authorised representative has contended that the issue is a legal issue going to the root of the matter and does not require any fresh material, record or facts to be examined for its adjudication. Thus, the learned authorised representative has pleaded that the additional grounds may be admitted and decided on the merits. He has relied upon the decision of the hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 and the decision of the hon'ble Delhi High Court in the case of CIT v. M. K. Yashwant Singh [1998] 231 ITR 145. 7. On the other hand, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of royalty and expenditure claimed by the assessee in these assessment years is not a new fact and the assessee has been claiming it since 1973 onwards. He has pointed out that the notice under section 148 for all the three assessment years was issued on January 9, 2007. For the assessment years 2000-01 and 2001-02, the notice for reopening of the assessment was issued after the expiry of four years. Therefore, the assessment under section 143(3) cannot be reopened after the expiry of four years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In support of his contention, learned counsel for the assessee has placed reliance on the following decisions : CIT v. Premier Mills Ltd. [2008] 296 ITR 157 (Mad.). CIT v. Elgi Finance Ltd. [2006] 286 ITR 674 (Mad.). Mercury Travels Ltd. v. Deputy CIT [2002] 258 ITR 533 (Cal.). CIT v. Indian Overseas Bank Ltd. [2001] 252 ITR 640 (Mad.). CIT v. Siva Traders [2002] 255 ITR 77 (Ker). Fenner (India) Ltd. v. Deputy CIT [2000] 241 ITR 672 (Mad.). CIT v. Foramer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities. 14. We have considered the rival contentions and relevant material on record. The assessee-company is engaged in the manufacture and sale of batteries. The assessee-company entered into a collaboration agreement with Matsushita Electric Industrial Company Ltd. (MEI) in the year 1973 for a period of five years, which has been periodically renewed from time to time. The latest agreement entered into between the parties on August 11, 2000 was for the period April 1, 1999 to March 31, 2000 covering the period relevant to the assessment years under consideration. Initially, the assessment for these three assessment years was completed under section 143(3). The assessee challenged the assessment before the learned Commissioner of Income-tax (Appeals) and subsequently the Assessing Officer passed the giving effect order of the learned Commissioner of Income-tax (Appeals). Subsequently, the Assessing Officer issued a notice under section 148 on January 9, 2007 in respect of all the three assessment years in question. Thus, it is undisputed that the notice under section 148 issued on January 9, 2007 for reopening of the assessment on the issue of payment of royalty is beyond four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nferment of power upon the Assessing Officer to initiate assessment proceedings upon a mere change of opinion. It was further observed that if "reason to believe" of the Assessing Officer is founded on an information which might have been received by the Assessing Officer after the completion of assessment, it may be a sound foundation for exercising the power under section 147 read with section 148 of the Act. The hon'ble Delhi High Court further observed that, (page 19 of 256 ITR) "when a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion, we decide this issue in favour of the assessee and accordingly set aside the reopening and consequent reassessment for all three years as null and void. 20. Issue regarding whether royalty payment be treated as revenue expenditure or capital expenditure : As we have discussed in the earlier part of this order, the assessee-company had entered into a collaboration agreement with Matsushita Electric Industrial Company Ltd., for a period of 5 years from 1973, which has been renewed from time to time. The relevant facts emerging from the record is that the assessee-company is making the payment of royalty of Rs. 2 crores for each assessment year as per article 3 of the agreement dated August 11, 2000 specified as "technical know-how fee". Article 16(1) of the agreement states that the relevant approval of the Government of India with regard to the present collaboration was formed as part of this agreement. The approval letter dated May 9, 2000 also specifies a lump sum payment as technical know-how fee and makes the same subject to tax. The Assessing Officer has denied the entire royalty claim of the assessee and allowed only depreciation on the said amount. On appeal, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no transfer of technology for free use by the assessee but the assessee was using only the technical know-how under licence. He has relied upon the decision of the hon'ble Supreme Court in the case of CIT v. I.A.E C. (Pumps) Ltd. [1998] 232 ITR 316 the decision of the hon'ble jurisdictional High Court in the case of CIT v. Southern Pressings (P.) Ltd. [2000] 242 ITR 67 (Mad), and the decision of the hon'ble Delhi High Court in the case of Shriram Pistons Rings Ltd. v. CIT [2008] 307 ITR 363. Learned counsel for the assessee has also placed reliance upon decision of Delhi "B" Bench of this Tribunal in the case of Siel Ltd. v. Deputy CIT [2008] 20 SOT 144. 22. On the other hand, the learned Departmental representative has contended that the assessee is getting technical assistance from Matsushita Electric Industrial Company Ltd. for its manufacturing purpose. Without the said technical assistance, the assessee cannot manufacture the particular cells and batteries. He has further contended that the assessee is making the payment of royalty of technical know-how fee for a lump sum amount of Rs. 2 crores per year and also a royalty payment at the rate of 2 per cent. to 5 per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o had undertaken to share the expenses with reference thereto ; (5) The assessee shall not disclose to third parties any of the documents made available by Aturia to the assessee without having received a written authorisation from Aturia. We are of the opinion that the above features clearly establish that what was obtained by the assessee is only a licence and what was paid by the assessee to Aturia is only a licence fee and not the price for acquisition of any capital asset, held as under (page 318) : "We heard counsel. We are of the view that the High Court posed the correct question that arose for consideration and also applied the proper principles of law to the instant case. By applying the proper principles of law to the agreement in question, the High Court concluded that the amounts paid to the collaborator is only a 'licence fee' and not the price for acquisition of a 'capital asset'. It was concluded that the entire payment constitutes revenue expenditure and the questions were answered in favour of the assessee." 25. Accordingly, the hon'ble Supreme Court has observed that the question has to be decided as per the terms of the agreement. 26. In the case of Sout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how of Riken and there was no sale of the technical know-how which the assessee could exploit. The assessee's rights were hedged in with all sorts of conditions, clearly making it a case of right to use the technology and not sale of the technical know-how. That being our conclusion, we are in agreement with the view expressed by the Tribunal that there was no sale of technical know-how by Riken to the assessee and therefore, the payment made by the assessee to Riken was a revenue expenditure." 28. From the above referred decisions, it is settled that the issue of payment of royalty for right to use the technical know-how can be decided only after considering the terms and conditions between the parties. From the various terms and conditions as contained in the various articles of the agreement, it is clear that what the assessee obtained therein was only the right to use the technical know-how which was the property of the Japanese Company, Matsushita Electric Industrial Company Ltd. (MEI). The said company has given only an exclusive licence to the assessee to manufacture specific products in its patent name for a limited period. Therefore, it is clear from the agreement betw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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