TMI Blog2011 (12) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... cense and technical co-operation agreement only grant the license to the assessee to use the trade mark as well as the technical information owned by BMI and MIL - High Court of Bombay in the case of Genon Norton Metal Diamond Dies Ltd. (1983 -TMI - 26281 - BOMBAY High Court) - Decided in favor of the assessee Regarding book profit u/s. 115JB - The dispute is regarding the allowability of deduction on account of profit eligible for deduction u/s.80HHC while computing the book profit u/s. 115 JB under the provision of Clause (iv) of Explanation 1 of Section 115JB(2) - Held that: there being no eligible profit of business for the purpose of deduction u/s.80HHC, the claim of deduction of the assessee has been rightly disallowed by the AO - Decided against the assessee - ITA No. 7239/Mum/2010, ITA No. 7240/Mum/2010 and ITA No. 7241/Mum/2010 - - - Dated:- 21-12-2011 - D. Manmohan, Rajendra Singh, JJ. S.E. Dastur, K.K. Ved and H.P. Sutar for the Appellant Pravin Varma for the Respondent ORDER Rajendra Singh, Accountant Member 1. These appeals by the assessee are directed against different orders dated 01.09.2010, 03.09.2010 and 01.09.2010 of CIT(A)-20, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turer of other quality fabrics, respectively. The assessee, therefore, entered into the License and Technical Assistance Agreement dated 13.06.1996, separately with BMI and MIL to provide for licensing of technical information and trade mark to the assessee on payment of license and technology fees @ 4% of the sales to each of them in respect of sales made through them. There were also provisions in agreement for payment of commission @ 3% of the net sales. The dispute in this appeal is regarding the nature of payment of license and technical fees @ 4% of the net sales paid by the assessee to each of joint venture partuners. The payment of commission has been allowed by the AO as revenue expenditure and there is no dispute on this point. The AO has however, treated 50% of the license and technological fees as capital in nature, whereas CIT(A) has held that the entire amount of license and technology fees @ 4% of net sales was capital in nature. 3.1 Before we proceed to deal with the issue, it will be appropriate to reproduce relevant portions of the License and Technical Assistance Agreement. We are reproducing the relevant provisions only from the agreement with BMI to avoid r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have been made for purposes of calculating the license fee payable hereunder on the earlier to occur of (I) shipment of the Products, or (ii) dispatch of an invoice or bill therefore, (b) In the event that the Company does not obtain necessary government approvals to continue to pay license fee for Technical information at any time beyond the first seven years from the date of commencement of commercial production of Products ("Product Commencement Date"),then the obligation of the Company to pay the license fee for Technical Information shall cease and become paid, and the Company shall be free to manufacture Products beyond the said period of seven years even after the Term of this agreement. In that event the license fee for the use of the Trademarks on the Products shall be 2% of Net Sales Price, determined as set forth herein. 3.4 The agreement also contained provisions for termination in Clause 9, which are also reproduced below for the sake of clarity:- 9. TERM and TERMINATION 9.1. Term This agreement shall become effective as of the Effective Date and shall continue in full force and effect until terminated by the mutual agreement of the partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sole cause of such termination is a "Special Event" (as that term is defined below), BMI hereby agrees that simultaneously with the termination of this Agreement BMI shall grant to the Company a perpetual license, on such terms and conditions as the parties shall reasonably agree, to use the Technical Information thereto disclosed to the Company hereunder from the Effective Date through the date of termination of this Agreement (but not the Trademark). If such termination under this clause 9.4 (b) occurs (I) prior to the seventh anniversary of the date of commencement of manufacture of Products, the license fee shall be a percentage of the Net Sales Prices of products equal to the ratio of sales in Zone B over all sales of Products for the last two quarters completed prior to such termination, and (ii) after the seventh anniversary of the date of commencement of manufacture of the Products, such license shall be paid up, royalty free license. Nothing in this Paragraph 9.4 shall be deemed to grant to the Company any right, license or interest in or to any Technical information not licensed or disclosed to the Company prior to the termination of this or to any future technical a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that payment for use of trade mark was only @ 2% on net sales, whereas the balance payment of 2% was on account of use of technical information. Though, the technical information was non transferable as per the agreement, but the assessee had right to use it in perpetuity. Since the assessee had not obtained the government approval for payment of the license and the technology fees beyond the seven year period, the technical information acquired by the assessee in terms of the agreement relating to the manufacturing of denim fabrics was of perpetual in nature. Further, Clause 9.4(b) of the agreement also provided that upon termination of the agreement due to special events, a perpetual license to use the technical information shall be granted to the assessee company. In this case, the agreement had been terminated due to special events being the sale of shares by BMI to Mafatlal group. The AO thus, concluded that the technical information was a capital asset acquired by the assessee with the right to use in perpetuity and the royalty paid @ 2% of net sales was capital in nature. The AO referred to the judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead and Sons ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, the Clause 9.4(b), the same applied to situations on happening of special events in which cases there was a provision for granting perpetual license, on such terms and conditions as the parties might agree. Thus, a perpetual license was to be granted as per terms and conditions to be entered into afresh. In case of termination under normal circumstances as per Clause 9.4(a), the assessee company had no right to use the technical information and was required to return/destroy the same. Therefore, it could not be said that the assessee had perpetual right to use the technical information. In relation to the judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) (supra) relied upon by the AO, the assessee submitted that in the said case the royalty included the payment for setting up of the plant, which was not so in the present case. The assessee also argued that in the Assessment Year 2005-06, similar disallowance @ 50% had been made by the AO which was not upheld by the CIT(A) and, therefore, for consistency and uniformity of treatment, the department was not expected to deviate from stand taken in that year. Reliance was placed on the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in understanding the true nature of a payment. It was held that various terms and conditions of the agreement are required to be examined carefully to find out whether whole or any part of the payment could be considered as capital expenditure. The payment could not be considered as revenue expenditure only on the ground that the payment had been made as a percentage of sales. As regards the plea of consistency based on the judgment of Hon'ble Supreme Court in the case of Radhasoami Satsang (supra), the CIT(A) observed that the Apex Court in the said case had also observed that the case was confined to the facts of that case and, therefore, in case of any material change, the Revenue would be entitled to take a different view. Reference was also made to the judgment of Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Ltd. vs. DCIT (328 ITR 81), in which the Hon'ble High Court observed that judgment of Apex Court in the case of Radhasoami Satsang (supra) was not a binding precedent and could not be applied in cases where there were material changes. 5.3 CIT(A) also referred to the judgment of Hon'ble Supreme Court in the case of C.K. Gangadharan an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad perpetual right to use information. It was pointed out that in this case, the agreement got terminated on account of purchase of entire shares by the Mafatlal Group from BMI and once the Mafatlal Group got the entire ownership, it was entitled to use all the information, as it no longer remained a joint venture. The assessee company had only right to use the information during the agreement period and, therefore, the entire payment was allowable as revenue expenditure. 6.1 As regards the judgment of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) (supra), it was submitted that the said case was distinguishable, as in that case there was a composite payment for setting up of the plant and for the manufacture of the product which was not so in the present case. The Ld. Senior Counsel placed reliance on the judgment of Hon'ble High Court of Bombay in the case of Gannon Norton Metal Diamond Dies Ltd. v. CIT (163 ITR 606), in which under similar circumstances it has been held that no part of the payment could be related to the setting up of the plant. It was, accordingly, urged that the entire payment should be allowed as revenue expenditure. Alternatively, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect to the implementation and use of the technical information for the manufacture, use and sale of the products. The agreement also clearly provided that entire expenses on such visits were to be borne by the assessee company. Therefore, it was clear that the payment of royalty under consideration was not in connection with the technical assistance, but these payments were for the use of technical information for manufacture of product and sale of product which had to be considered as revenue expenditure. 8. We have perused the records and considered the rival contentions carefully. The dispute is regarding the allowability of license and technological fees paid by the assessee to the two joint venture partners as revenue expenditure. The assessee during the relevant years was a 50-50 joint venture, named as Mafatlal Burlington Industries Ltd formed by BMI, USA and MIL, a Mafatlal Group Company. BMI, USA had experience and expertise in manufacture and sale of denim fabrics. The joint venture had, therefore, been formed for manufacture of denim fabrics using the sheet dyeing technology. The joint venture was incorporated on 08.09.1995 and thereafter, a shareholders agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the assessee company to pay license fees for technical information shall cease and be paid up and the assessee will be free to manufacture the products beyond the said period of 7 years, even after the terms of the agreement. The agreement was valid for a period of 10 years from the date of agreement or for 7 years from the date of commercial production and the payment of royalty by the government had been approved for the said period. Clause 7.1(b) also provided that in that eventuality, license fees for use of trade mark shall be 2% of net sales. Since, in this case, there was no government approval for payment of license fees beyond the 7 year period, the AO concluded that the assessee had right to use the technical information in perpetuity and also attributed 2% of royalty towards the user of technical information which was disallowed as capital expenditure. 8.2 The AO also drew support from the provisions of Clause 9.4(b), as per which in case the agreement was terminated due to some special event, BMI was required to grant the assessee company a perpetual license to use the technical information. It may be pointed out here that Clause 9 of the agreement contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpetual right to use the technical information cannot be upheld. As regards, the provisions of Clause 9.4(b), the same was applicable on termination of the agreement on special events and i.e. on the sale of shares either by BMI or MIL or in case of sale of the joint venture company in which case the Joint Venture partner was bound to grant perpetual license to the assessee, but this was on such terms and conditions as may be reasonably agreed to between the parties. In the present case, BMI had sold all the shares to the Mafatlal Group and, therefore, it was a case of special event, but the grant of perpetual license had to be done on fresh terms and conditions and price for such perpetual license could be inbuilt into the transfer price of shares. Secondly, once the shares had been sold by BMI, the joint venture ended and, therefore, such perpetual license could be used only by the new company which no longer remained Joint Venture Company. Therefore, based on the provision of Clause 9.4(b), it cannot not be said that the Joint Venture Company had perpetual license to use the technical information on payment of royalty of 4%. The perpetual license was to be granted on fresh term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sale of the products, there was no provision in the agreement for payment of royalty to use any information for setting up of the plant. The manufacture and sale of the product takes place only after setting up of the plant and, therefore, any payment in connection with the manufacture of the product and sale of the product which is a trading asset has to be treated as revenue expenditure. No doubt, it is true that BMI had the necessary expertise in setting up of denim fabric plants and it had provided technical information and knowhow in connection with the setting up of the plant which was its responsibility and, therefore, it could be argued that part of the royalty payment even if there was no specific provision in the agreement could be attributed towards the use of the technical information for setting up of the plant. Such attribution, however, can be made only in case there has been no payment for services in connection with the setting up of the plant or the payment if made is found to be inadequate. In the present case, BMI had been paid a lumpsum amount of USD 7.5 lakhs as technical knowhow fees in one installment, which was later converted into equity. This payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be borne by the assessee company. It is thus clear that the technical assistance was not in relation to setting up of the plant but in relation to manufacture, use and sale of the products. Secondly, the AO himself has given a finding that no expenditure relating to the technical assistance was included in the royalty payment under consideration. Therefore, the argument of the Ld. DR has no merit and is accordingly rejected. 10. The authorities below have relied on the judgment of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) (supra), which in our view is distinguishable and not applicable to the facts of the present case. In that case, the assessee who was in the business of manufacture of automobile springs, had entered into an agreement with the UK company for manufacture of all types of springs. As per the agreement, the UK company was to provide technical information for manufacture of the products and technical knowhow relating to the setting up of the plant itself, for which a composite payment of royalty as percentage of turnover of the licensed product had been made in two installment, which fell in the Assessment Years 1967-68 and 1968-69. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal noted that the agreement had been made six months after the commercial production started and, therefore, held that the provision of no payment in the agreement in connection with the setting up of the factory had to be accepted as correct. The payment was only for user of the technical knowhow and information for manufacturing of the product which was allowable as revenue expenditure. The case of the assessee is similar. Though in case of the assessee, the agreement had been entered into prior to the date of commercial production, in this case there has already been a lumpsum payment of USD 7.5 lakhs which has to be considered against the assistance provided by BMI in relation to the setting up of the plant and there being no finding by the authorities below that the payment which was approved by the government was inadequate, no part of the royalty payment as held earlier can in our view be attributed towards the setting up of the plant. 11. In view of the foregoing discussion and for the reasons given earlier we are of the view that the entire payment of royalty @ 4% of net sales on the facts of the case has to be allowed as revenue expenditure. The order of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of deduction u/s.80HHC and, therefore, while determining the business profit for the purpose of section 80HHC, the unabsorbed business losses and depreciation of earlier years have to be set off. The judgment of Hon'ble Supreme Court in the case of Ajanta Pharma Ltd. (supra) is on a different issue, which is whether the profit eligible for deduction u/s.80HHC should be allowed as deduction or only the deduction actually allowable u/s. 80HHC for the purpose of computation of book profit u/s.115JB. The Hon'ble Supreme Court in the said case held, reversing the judgment of Hon'ble High Court of Bombay that profit eligible for deduction has to be allowed as a deduction u/s.115JB. In view of the judgment of Hon'ble Supreme Court in the case of Shirke Construction Equipment Ltd. (Supra) profit eligible for deduction u/s.80HHC has to be computed after setting off the brought forward business losses and unabsorbed depreciation. In this case, after setting off the brought forward business losses and unabsorbed depreciation, there is not profit left for the purpose of deduction u/s.80HHC. Therefore, in our view, there being no eligible profit of business for the purpose of deduction u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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