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2015 (5) TMI 8 - KARNATAKA HIGH COURT

2015 (5) TMI 8 - KARNATAKA HIGH COURT - [2015] 376 ITR 487 (Kar) - Technical know-how - whether be allowed as expenditure under Section 35AB or Section 37 - whether Tribunal erred in not holding that deduction contemplated under Section 35 AB is only in respect of a capital nature and the deduction of a revenue nature is allowable under Section 37(1)? - Held that:- The reading of Section 37 of the Act makes it more clear that any expenditure not being expenditure of the capital nature described .....

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sion that Section 35AB being a specific Provision for technical know, general Provision of Section 37 of the Act is not applicable, which is not sustainable, in view of the judgments discussed above and in terms of the contract. We are thus to allow this appeal for two reasons. Firstly, there is no 'acquisition' of technical know-how as contemplated under Section 35AB of the Act, and secondly, Section 35AB would not apply to a revenue expenditure.

As discussed earlier, judgment of the .....

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he course of business is a revenue expenditure falling u./s 37 of the Act and the provisions of Section 35 AB of the Act are not applicable to the present case. - Decided in favour of the assessee - ITA No. 1010 of 2008 - Dated:- 17-4-2015 - Vineet Saran And S. Sujatha,JJ. For the Appellants : Sri A Shankar & Sri M Lava, Advs. For the Respondent : Sri Jeevan J Neeralgi, Adv. JUDGMENT This appeal is filed by the assessee challenging the order passed by the Income Tax Appellate Tribunal (herei .....

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f a technology called "Colmonoy Sweat-on-Paste". In consideration of the transfer of technical know how, the appellant company agreed to pay WCL a sum of 50,000 pounds in three equal instalments. For the assessment years 1992-93 and 1993-94, the assessee claimed 100% deduction on amount expended towards procuring technical knowhow as revenue expenditure falling under Section 37 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act' for brevity). The Assessing Officer .....

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allowed the appeals filed by the revenue and remanded the matter back to the Tribunal to consider the grounds urged by both the parties and to pass an order in accordance with law. The Tribunal, in the light of the directions issued by this Court considered the matters afresh and after hearing the parties, allowed the appeals filed by the revenue. This common order passed for both the assessment years 1992-93 and 1993-94 is assailed by the assessee in this appeal. 3. We have heard Sri A Shankar .....

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hether the Tribunal erred in not holding that deduction contemplated under Section 35 AB is only in respect of a capital nature and the deduction of a revenue nature is allowable under Section 37(1) of the Income Tax Act?" 4. The relevant clauses of the agreement entered into between the appellant-company and the WCL are extracted and reproduced below: 2. Technical Know-how: 2.1 Subject to receipt by WCL of payment by DEPL of the sum specified in to Clause 3.2.1 and below WCL shall supply t .....

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39;s production personnel for not more than an aggregate of five days 3. Payment by DEPL: 3.5 Without prejudice to any breach by DEPL of any of its obligations hereunder this Agreement shall be null and void if payment by DEPL under Clause 3.1 and 3.2 to WCL is not received. However, it is a condition precedent to the grant of permission by the Reserve Bank of India that the total payments made in accordance with the aforementioned clauses should not exceed 8% of the value of sales made by DEPL .....

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e handed back to WCL on determination of this Agreement 4.3 DEPL during the life of this Agreement and thereafter shall take all steps necessary to preserve the secrecy of Technical Know-how communicated to it or its representatives and shall not disclose the same to any third party (except those of its officers or employees whose duties cannot be fulfilled without such disclosure) for as long as the same are not freely available to the public 6. Chromium Monoborides 6.5. DEPL will enable repres .....

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ion strive to cause to DEPL no more inconvenience than is reasonably necessary to assure itself that the foregoing provisions of this Clause 6 are complied with by DEPL and as to the preservation of WCL's reputation in relation to the product. 7. Trade Marks: DEPL acknowledges and agrees that all trade marks and trade names and in particular (without limitation) "Colmonoy" and "Colmonoy Sweat-on-Paste" are and will remain the exclusive property of WCL and/or any Associate .....

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ther person firm or corporation in India should this be necessary to enable DEPL to comply with its requirements and obligations under this Agreement. The terms of such sub-licence shall however be subject to the agreement of WCL as well as the other parties concerned and shall be subject to the approval of the Government of India. 11. Termination: 11.2. Either party shall have the right to give notice of termination (to operate 30 days after being given) if the other party has committed a serio .....

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ent except so far as specific provision is made therein for such continuing effect. 5. Learned counsel appearing for the appellant, placing reliance on these clauses of the agreement, argued that at no point of time absolute transfer of rights over the know how was made by WCL Company to the assessee i.e., there was no absolute acquisition of the technical know how by the assessee, as it was only a transfer of right to use the technical know-how. The effective control of the know how always rema .....

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on the acquisition of patent rights or copyrights and under section 35AB in respect of expenditure on know-how have been withdrawn with effect from the assessment year 1999-2000." 6. Learned counsel further contended that the provisions of Section 35AB are applicable only in the cases of capital expenditure and if it is revenue expenditure, then the provisions of Section 37 shall apply. In support of his contentions, reliance was placed on: (1) CIT vs SWARAJ ENGINES LIMITED - [309 ITR 443 ( .....

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rilcos (India) Pvt. Ltd v. Commissioner of Income-Tax [(2012) 348 ITR 382 (SC)]. 8. Section 35AB(i) of the Act reads thus: "35AB(i) Subject to the provisions of subsection (2), where the assessee has paid in any previous year (relevant to the assessment year commencing on or before the 1st day of April, 1998) any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of .....

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its and gains of the business for that previous years, and the balance amount shall be amortized for the next five succeeding years in equal instalments. 10. This provision was inserted by Finance Act 1985 with effect from 1.4.1986 and was in the Statute Book upto 31st March 1999. 11. Section 37(i) of the Act reads thus: "37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of .....

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fect from 1.4.1986 the relevant paragraph of which is produced herewith: "With a view to providing further encouragement for indigenous scientific research, I propose to provide that lump sum consideration received by scientists for the know-how developed by them would be spread over a period of three years and charged to tax accordingly. I also propose to provide that industry may write off the lump sum consideration paid for acquiring know-how in six annual instalments. In cases where the .....

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ow-how for use for the purposes of his business will be allowed as deduction by spreading it equally over six years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the know-how is developed in a laboratory, university or institution referred to in subsection (2B) of section 32A, the consideration shall be spread equally over three years. 45. For the purposes of this section, 'knowhow' means any industrial information or techn .....

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ure incurred on the acquisition of patent rights or copyrights and under section 35AB in respect of expenditure on know-how have been withdrawn with effect from the assessment year 1999-2000." 16. In the case of CIT Vs. Swaraj Engines (supra), the Apex Court has held that "if the expenditure is found to be revenue in nature then Section 35A B may not apply. However, if it is found to be capital in nature then the question of amortization and spread over as contemplated, under Section 3 .....

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e assessee was entitled to use the technical know-how for a period of five years or for a lesser period, in case the agreement was terminated before that. The assessee did not have a free hand to sublicence the technical know-how and that was possible only with the prior written permission from Riken. For all other matters, the assessee was liable to treat as confidential all inventions, drawings, documents, specifications etc. furnished by Riken to the assessee. Even thought the assessee was en .....

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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." 18. In the case of Deputy Commissioner of Income Tax Vs. Sayaji Industries Ltd., (Guj), it is held at para-23 as under: "23. To our mind, therefore, the provisions of s.35AB of the Act can apply only in case of capital expenditure and of co .....

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taking such an expenditure out of s.37(1) of the act, would not arise". 19. In the case of Drilcos (India) Pvt. Ltd., Madras High Court relied on the judgment of CIT v. Tamil Nadu Chemical Products Ltd., case rendered prior to the judgment of the Apex Court in Swaraj Engines Ltd., (Supra) and has observed that Section 35AB of the Act are applicable in the context of the case where no know-how was made available to the assessee in the manner required. 20. The said judgment of the Madras High .....

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f the business of the assessee. In the present case, the technical assistance agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once section 35AB of the Act comes into play, then section 37 of the Act has no application." This was a case, where the main focus of the court was with respect to certain dispute as regards the full payment of consideration not being paid by the assessee .....

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know-how procured from WCL and there was no absolute acquisition of the technical know-how by the assessee. The technical know-how supplied by the WCL to the assessee-Company is an adequate knowledge of the technical know-how, practiced by the WCL at the date of the agreement for production of the produce with certain conditions, which establishes that the control was with the WCL. The consideration paid is for imparting the knowledge of 'know-how' to the assessee's personnel. 23. I .....

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stipulates that either party shall have right to give notice of termination (to operate 30 days after being given) if the other party has committed a serious breach of its obligations under this agreement and in the "exclusion" clause, it is specified that no rights or licences are granted by WCL under or by virtue of the agreement except those which are specifically set out therein, and no such rights or licences shall continue to have effect after the termination of the agreement exc .....

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e of revenue and not capital. 24. Section 35AB of the Act is applicable if the expenses incurred are held to be capital in nature. As we have noticed, the terms and conditions of the agreement entered into between the parties demonstrates that the amount expended are revenue in nature and does fall under Section 37 of the Act as held by the Apex Court in the case of Swaraj Engine Ltd (Supra). 25. Another aspect of the matter is that to attract the provisions of Section 35AB of the Act, the three .....

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and Section 35AB of the Act is not attracted. The arguments advanced by the Revenue that irrespective of the expenditure, whether revenue or capital, if it is technical know Section 35AB of the Act are attracted, cannot be accepted in view of the law laid down by the Apex Court in the case of Swaraj Engines Ltd (Supra). 26. The Budget speech of the Finance Minister, memo explaining the provisions in Finance Bill and the CBDT Circular dated 12.6.1985 fortifies that Section 35AB is an enabling pro .....

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