TMI Blog2014 (9) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not an admitted fact that the expenditure incurred by the assessee was of a capital nature. – Decided in favour of assessee. - ITA Nos. 912 & 913/Kol/2011 - - - Dated:- 30-6-2014 - Mahavir Singh, JM And Shamim Yahya, AM,JJ. For the Appellant : Shri S Jhajharia, Adv. For the Respondent : Shri Ravi Jain, CIT, DR ORDER Per: Mahavir Singh,JM. Both these appeals by assessee are arising out of separate orders of CIT(A), Central-1, Kolkata in Appeal No. 122 327/CC-VIICIT(A),C-1/10-11dated 06.05.2011 and 27.05.2011 respectively. Assessment was framed by DCIT, Cen.Cir-VII, Kolkata u/s. 143(3)/147 of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Year 2005-06 vide his order dated 13.12.2010 and u/s. 143(3) of the Act for AY 2008-09 vide his order dated 31.12.2010. 2. First we take up ITA No. 912/Kol/2011. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of royalty paid as capital expenditure. For this, assessee has raised following ground: Disallowance of 25% of royalty paid as capital expenditure: For that on the facts and in the circumstances of the case, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grieved, assessee preferred appeal before CIT(A), who after considering the submissions of the assessee confirmed the action of the AO following the decision of Hon ble Supreme Court in the case of Southern Gear Ltd. Vs. CIT, 232 ITR 359 (SC) and Jones Woodhead Sons Ltd. Vs. CIT 224 ITR 342 (SC) by observing in para 5.1 as under: 5.1. I have carefully considered the submission of the Ld. AR. Since it is now judicially well settled that the expenditure toward payment of royalty for exclusive right to manufacture and sale in India or obtain Know-how has partly capital in nature and 25% has to be disallowed. Considering above I don t find any infirmity in the order of the AO and he has rightly made disallowance following the decision of the Hon ble Supreme Court in the case of Southern Gear Ltd. Vs. CIT, 232 ITR 359. Accordingly the disallowance of ₹ 28,22,639/- made by the AO is confirmed. Further since ground no.2 has been allowed, the alternative ground taken by the appellant has no relevance, hence dismissed accordingly. In the result ground no. 3 is dismissed. Aggrieved, now assessee is in appeal before us. 4. We have heard rival submissions and gone through fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Licensee shall stand terminated and the Licensee is not authorised to make any further use of the technical knowhow and improvements and shall forthwith return the same (including documents comprising the same) to the Licenser. Even the trade license agreement i.e. the termination clause at 3.5 (page 17 of assessee s paper book) and the duration and termination of the Article vide Article 4.1, 4.2, 4.3 and 4.5 clearly envisaged that the assessee after the termination of agreement or license is not liable to use in any way. The relevant clauses read as under: 4.1. This contract shall come into force from the date on which both parties have signed it. It shall also be called the Trademark Agreement. If not terminated because of defaults, it shall remain in force and effect until the expiry or termination of the Technical collaboration and Licensing Agreement. Upon expiry or termination of the latter this Agreement shall automatically terminate. On the other hand and if for any reason whatsoever this Trademark Agreement is terminated then also the Technical Collaboration and Licensing Agreement ill automatically and without any special notification be terminated forthwith. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Apex Court in the case of Southern Gear Ltd. (supra) Jones Woodhead Sons Ltd. (Supra) is clearly distinguishable from the facts of the present case and in those cases, the royalty was paid for setting up of factory and the know-how was usable even after the termination of license, whereas in the present case there is no such benefit available to the assessee after termination of agreement in both the cases. This issue is covered by the decision of Hon ble Delhi High Court in the case of Shriram Pistons Rings Ltd. Vs. CIT (2008) 307 ITR 363 (Del.), wherein it is held as under: Under these circumstances, the question that has arisen for consideration is whether the amount paid by the assessee to Riken is a revenue expenditure or not. To answer this question, it is necessary for us to determine as to whether what was transferred to the assessee was only a right to use the technical know-how or was it a sale of know-how to the assessee in perpetuity. The leading decision on the subject is CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). In this decision, the terms of the agreement entered into by a Swiss company with Ciba Pharma were considered. Some of the clauses of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secrecy of the know-how. The Supreme Court interpreted this to mean that the right pertained more to the use of the know-how than to its exclusive acquisition by the assessee. The Supreme Court also noted that there is no single definitive criterion which by itself is determinative of the question whether a particular outlay was revenue in nature. What is relevant is to see the intended object and effect of the agreement between the parties, considered in a common sense manner having regard to business realities. The Supreme Court noted that in a given case, the test of enduring benefit might break down as laid down by the Supreme Court in CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257. In Triveni Engineering Works Ltd. v. CIT [1982] 136 ITR 340, a Division Bench of this court dealt with an agreement entered into between the assessee and a company in the U. K. where, in terms of the agreement, the British company agreed to sell outright to the assessee, technical knowhow in respect of steam turbines for use in India. It was provided in the agreement that the technical know-how would be exclusive to the assessee and shall not be disposed of by the British comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench came to the conclusion that the assessee had merely obtained a licence for limited use of the knowledge and information possessed by the British company. Learned counsel for the Revenue relied upon Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC). But we find that the controversy in that case is not quite apposite to the controversy in the presen case. This is clear from the question of law that was framed in that decision. The question of law framed reads as follows (page 88) : Whether, on the facts and in the circumstances of the case and on a true interpretation of the collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment of ₹ 1,60,000 by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset ? On a reading of the decision, it appears that there was no dispute about the fact that the payment made by the assessee to the Hungarian company on the basis of the collaboration agreements was a capital expenditure incurred by it. The limited question was whether the drawings and designs that the Hungarian company had p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the application of Rule 8D(2)(iii) of the Income Tax Rules, 1962. 8. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO during the course of assessment proceedings disallowed % of average of investment excluding investing in bonds of National Housing Bank while applying Rule 8D of the I. T. Rules read with section 14A of the Act at ₹ 4,98,650/-. For this, he observed as under: Further the assessee had earned exempted income in the form of dividend received from investment in different quoted/unquoted shares shown under the head Investment . Therefore, as per rule 8D read with sec. 14A, an amount of ₹ 4,98,615/- calculated @ % of average Investment excluding investment in Bonds of National Housing Banks, is being disallowed. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO vide para 5.2 of his order as under: 5.2. Since in the case under consideration no expenditure on account of administrative expenses has been claimed to have been incurred in relation to income which does not form part of the total income, the A.O has rightly calculated disallowance as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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