TMI Blog2015 (2) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... ot like to decide the present appeal for this ground and reason, as the High Court orders do not set out and indicate any ground or reason. We do not comment or express an opinion on whether the High Court under Section 260A of the Act can at the time of hearing, frame any additional question of law. Tribunal has held that payments made by respondent to Honda were revenue expenditure and not capital. On the said finding on merit, the Tribunal observed that there was no error in the order passed by the Assessing Officer. Power under Section 263 can be invoked by the Commissioner only when the order passed by the Assessing Officer is erroneous and not otherwise. It is in these circumstances, that no specific question of law with reference to power under Section 263 of the Act, has been framed in the appeal relating to assessment year 2001-02. - Decided in favour of assessee. - INCOME TAX APPEAL NOS. 694/2011, 696/2011, 698/2011, 699/2011, 625/2012 & 633/2012 - - - Dated:- 3-2-2015 - MR. SANJIV KHANNA AND MR. V. KAMESWAR RAO, JJ. For the Appellant : Mr. Rohit Madan, Mr. P. Roy Chaudhury Mr. Ruchir Bhatia, Advocates For the Respondent : Mr. Ajay Vohra, Sr. Advocate wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital and revenue expenditure is the enduring nature test. When an assessee incurs expenditure which gives enduring benefit in the capital field, as distinct from expenditure of concurrent and reoccurring nature in revenue field, it is treated and regarded as capital expenditure. Albeit, said test is applied on the basis of commercial principles and not as a strait-jacket formula. Empire Jute Company Limited versus CIT, (1980) 124 ITR 1 (SC) exemplified that even if expenditure is incurred for obtaining an advantage of enduring benefit, the said test would break down when the nature of advantage considered in a commercial sense merely facilitates the assessee's trading operations or enables the management to conduct assessee's business more efficiently or more profitability, while leaving the fixed capital untouched. Such expenditure would be on revenue account, though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not unconditional or conclusive test; it cannot be applied impetuously and mechanically without regard to the particular and realistic terra firma. The conclusion must be practical, common sensical and down to earth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Company did not part with any asset of its business, nor did the Indian assessee acquire any asset or advantage of enduring nature. The right empowered the Indian assessee to draw for the purpose of carrying on its business as a manufacturer and rely upon the technical knowledge of the Swiss Company. There was no attempt to part with technical knowledge absolutely in favour of the Indian assessee. It was not a case of transfer of intellectual rights once for all. Thus, the expenditure incurred was revenue in nature. 7. The aforesaid legal position finds resonance in subsequent decisions of the Supreme Court in CIT vs. British Indian Corp. Ltd. (1987) 165 ITR 51 (SC), CIT vs. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC) and CIT vs. Wavin (India) Ltd. (1999) 236 ITR 314 (SC). These were not cases of outright sale of technical information and know-how and what was granted was non-exclusive or non-transferrable right to use. In Indian Oxygen (supra), the Indian company was not entitled to use the know-how after termination of agreement. 8. Absence of stipulation as to duration of time for use of know-how etc., and whether it would be determinative and crucial, when we answer whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court observed that use of words like sold , absolute property and deemed to be the property of was made in the agreement, but on careful and closer scrutiny and reading the agreement as a whole, it emerged that the agreement was for a period of 10 years, but, it could be terminated forthwith . The agreement was limited to India. Though the data, drawings, documents and dyes, etc. were to be treated as absolute property of the Indian assessee, yet the copyright continued and remained vested with the foreign party, meaning thereby that it was a case of grant of licence for use. The Indian assessee was to observe complete confidentiality with regard to the knowhow and could not assign the agreement, without written consent. Aforesaid clauses, manifested that the right was only a limited licence for use and not a case of absolute transfer of property. Importantly, in this age of fast technological developments and scientific research, it was held that technical knowhow and information become obsolete and useless unless updated. 10. The aforesaid ratio and reasoning has been followed by the Delhi High Court in Addl. Commissioner of Income Tax vs. Shama Engine Valves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was granted was a mere licence, as the assessee was obliged to observe complete confidentiality as to knowhow and could not have disclosed information or assigned the agreement without prior consent. In this case, there was no provision for returning the drawings or documents. The said factum, it was observed would not be relevant in the rapidly evolving world of science and technology. Decision in Scientific Engg. House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC) was distinguished, as in the said case the issue was whether the drawings and designs could be treated as books or plant under Section 43(3) of the Act and hence depreciable. Thus, Scientific Engg. House (P) Ltd (supra) dealt with the issue, whether depreciation should be allowed on intangible property like knowhow etc. The Supreme Court in Scientific Engg (supra) had not answered the question whether the expenditure was capital or revenue in nature. 11. A detailed discussion on the said aspect is to be found in the decision of this Court in CIT vs. J.K. Synthetics Ltd. (2009) 176 Taxman 355 (Del), wherein the principles to distinguish capital and revenue expenditure stand set out in paragraph 38. We would only like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to use in limited sense was granted. It was not material whether assessee could use the knowhow even after the end of the agreement on the ground that this aspect was wholly immaterial. (We express no opinion on other grounds/reasoning recorded in the said decision.) 12. Recently the Delhi High Court in ITA No. 1450/2010 titled CIT vs. Modi Revlon Pvt. Ltd., decided on 29th August, 2012, observed that when royalty was paid for a limited purpose, i.e. for use of know-how, it would be revenue in nature as the entire benefit of know-how was meant for manufacture of products. It was not a matter where assessee had chosen to undertake the manufacture through a contractor. In the said case, the ownership of the brand, remained property of the foreign party and a licence to operate in a defined territory was granted. Expenditure was allowed under section 37(1) of the Act. This was inspite of the fact that the original licence was for indefinite period and the supplementary agreement did not indicate a terminus quo. It was, however, observed that the agreement could be terminated and upon such expiration or termination, the Indian assessee would have no right to exploit or use the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence and technical assistance agreement dated 2nd June, 1995 for the territory of India. The term intellectual property right stood defined to mean those patents, utility models, design patents and other intellectual property rights relating directly to the products or the licensed parts thereof or to manufacturing of the products and their licensed parts, but excluded trademarks, patents, utility models, design patents and intellectual property rights relating to the manufacturing facilities and the manufacture thereof. The term know-how was defined as any or all secret, technical information except for intellectual property rights, whether in writing or not, including but not limited to drawings, standards, specifications, material list, process manuals and direction maps etc. directly related to products or licensed parts thereof, or necessary for manufacture of the same. The term technical information was to mean know-how and any technical information not included in know-how which related to the product or licensed part or was necessary for manufacture of product or licensed parts which the Honda owned at the time of execution of the agreement or would own from tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in shareholding ownership. (4) Upon expiration of the term of the agreement, i.e. after 10 years, or termination due to default of performance of obligations, the respondent assessee could continue to manufacture, assemble, sell or deliver services but subject to due performance of their obligations, including payment of royalty. (5) In the event of pre-mature termination, i.e. within 10 years, except due to default of performance of obligations, the respondent assessee was to promptly discontinue manufacturing activities, sale and other dispositions of the products and the parts, as well as the use of intellectual property right and technical information. (6) Further in the event of expiration or termination, the respondent was to promptly return all documents and tangible properties in connection with the agreement including copies and translations and all information received under the secret and confidentiality clauses. (7) Honda had right to access the respondent s factories and other facilities for inspections to check and confirm whether conditions/obligations imposed were being complied with. (8) Knowhow, technical information and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of consideration payable, Article 25 of the Agreement provided for fees under two heads namely, (1) Model Fee; and, (2) Running Royalty. a. Model fee was payable on model change under the new model agreement. It was non-refundable and non-creditable against other payments. The agreement in addition stipulated the amount of model fee payable in respect of the product, C-100 of US$ 10,00,000/- was payable in three equal instalments; i.e., (i) within first 60 days of the agreement being taken on record by the Government authorities in India; (ii) within 60 days of Honda delivering to the respondent the technical information necessary for manufacture and assembly; and, (iii) within 60 days after the parties confirmed in writing that the manufacture of the model had commenced on commercial basis, or 4 years after the agreement, whichever was earlier. b. Royalty was running and periodical payment as specified in Exhibit 1 or the amounts calculated by multiplying the rate specified in Exhibit 1 with reference to the ex-factory/ex-warehouse sales price. 16. Reading the aforesaid terms and conditions and applying the tests expounded, it has to be hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use of technical knowhow and intellectual property right, would possibly be taxed in India in terms of the Double Taxation Avoidance Agreement between India and Japan. But the said payment might not be taxable in India if it is held that there was absolute and complete transfer of ownership in the intellectual property right by Honda to the Indian assessee in absence of a Permanent Establishment (See Articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Japan). 18. In the appeal for the assessment year 2000-01, Revenue has also challenged the tax treatment of ₹ 33.07 lakhs paid as technical guidance fee. Copy of the agreement on the basis of which the said fee was paid has not been placed on record by the appellant Revenue. In the absence of any document and even details as to the nature and character of the said fee, we cannot adjudicate and decide this issue in favour of the Revenue. The tax treatment given by the Tribunal is, therefore, not interfered. 19. The respondent assessee during the course of hearing had drawn our attention that the question whether model fee paid was revenue or capital in nature had arisen for the first time ..... X X X X Extracts X X X X X X X X Extracts X X X X
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