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Perma Pipe India Pvt. Ltd. Versus Dy. Commissioner of Income Tax

Disallowance of claim of royalty payment - Revenue or capital expenditure - payment made by the assessee in pursuance of the agreement entered by the assessee with “PPME” - Held that:- In the instant case, the duration of the agreement was utmost for two years only. The assessee does not become owner of the technical knowhow. It had to return back all data, information etc. on completion of the agreement. It has to maintain strict confidentiality about the technology. Further, the assessee itsel .....

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- S/Shri B.R.Baskaran And Vivek Varma JJ. For the Appellant : Shri F V Irani For the Respondent : Shri Pavan Kumar Beerla ORDER Per B.R.BASKARAN, Accountant Member: The assessee has filed this appeal challenging the assessment order dated 12.3.2013 passed by the assessing officer u/s 143(3) r.w.s. 144C(1) of the Act in conformity with the directions issued by the Dispute Resolution Panel (DRP). The assessee is aggrieved by the decision of the AO/DRP in holding that the royalty paid by the assess .....

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or acquiring necessary technology. As per the agreement, the assessee was required to pay a lump sum for technology transfer and further a royalty of 5% of the gross revenue received from the contract. The assessee capitalised the technology transfer fee, but claimed the royalty amount as revenue expenditure. However, both the AO as well as Ld DRP took the view that the royalty payment represents payment made for transfer of marketing and commercial support, experience and skill by PPME to the a .....

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of Hon ble Madras High Court in the case of CIT Vs. Southern Switchgear Ltd (1984)(148 ITR 272). Accordingly, the AO/DRP disallowed the claim of royalty payment. Aggrieved, the assessee has filed this appeal before us. 3. We heard the parties and perused the record. The dispute before us revolves around the payment made by the assessee in pursuance of the agreement entered by the assessee with PPME . Hence, we feel it pertinent to extract below the relevant clauses of the agreement. COPY from A .....

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t ). 3. The Licensee requires the technology along with the latest improvements for the insulation of pipes in connection with the project and has obtained and is desirous of obtaining the benefits of the Licensor s technology, knowledge, technical processes and experience for the insulation of such pipes which the Licensee proproses to undertake while executing the projects in the Contractor s factory at Jindal Saw Ltd, Village-Samaghogha, Mandvi, Paragpur Road, Taluke-Mundra, District -Kutch, .....

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w: a) 12.50% on the last day of the month in which the midpoint of the project is achieved b) 87.50% on the last day of the month in which the three quarter point of the project is achieved The royalty payments for supply of technical know-how during the course of the project shall be computed at the rate of 5% of domestic revenue invoiced, based on the guidelines prescribed by the Ministry of Commerce and Industry, Government of India, Such royalty relating to the project shall be computed on t .....

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ICLE 9: ARBITRATION All disputes, controversies, or differences arising out of or in relation to or in connection with this agreement, which cannot be settled by discussion and mutual accord shall be finally settled by Arbitration, The arbitration shall be held in India in accordance with The Indian Arbitration and Conciliation Act, 1996. The seat of the arbitration shall be in Mumbai. The Arbitration proceedings shall be conducted in English language. Demand for arbitration shall be made in wri .....

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nsee and unless the breach is remedied by the Licensee within the said period, this agreement will stand terminated on the expiration of the said period. If the Licensor commits breach of any term of this agreement, the Licensee will be entitled to terminate this agreement by giving fifteen days notice in writing to the Licensor and unless the breach is remedied by the Licensor within the said period, this agreement will stand terminated on the expiration of the said period. ARTICLE 11: OWNERSHI .....

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ENDIX-A DETAILS OF TECHNICAL KNOWHOW GRANTED 1. FACILITY SET UP Design Preparation of the technical design, engineering drawings and technical specification for the following process areas: • Machinery Layout • Material Flow Layout • Mechanical/Machine design • Chemical Plumbing Design • HVAC Design • Electrical Panels Design • Controls and Automation Design • Electrical Distribution System Design • Determination of Electrical Load Requirements • .....

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roviding technical parameters to quality equipment and manufactures Testing • Review and evaluation of the training procedures to train and test the responsibility of PIPL personnel • Provide off-site support of technical assistance and routing assistance for machinery testing • Review and evaluation of acceptance tests run at manufacturing facilities of the third party machinery supplier outside India prior to shipment. Commissioning • Providing off-site analysis support of .....

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dia and to provide the results of such tests. • Utilize PPME QA Lab to conduct all required tests to ensure that process are fully conformed to specified standards. • Identify third party test agencies capable of doing special testing for insulated piping systems and co-ordinate with test agencies to obtain third party certification as required by PPIL. • To provide the result of any changes in the technical formation process for insulation of papers • To provide the results .....

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ation of the Quality assurance Plan and providing necessary technical updates whenever required • HSE-Providing assistance with preparation of the Health, Safety, and Environment Plan for the employee of PPIL • PQT-Providing assistance in devising the Pre-Qualification Test (PQT) Plant and providing necessary technical updates whenever required Operating Procedures • Providing on call technical assistance will all process operating procedures at and when required by PPIL. Training .....

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rial 4. Adverting our attention to the above said clauses, the Ld A.R submitted that the entire agreement is only for a short period only, i.e., for the period from 1.7.2008 to 31.12.2009 and the same is extendable by another six months, meaning thereby, the agreement is valid at the maximum for a period of two years only. He further submitted that the ownership of technology remained with Licensor, i.e., PPME and not with the assessee. Further as per Article 5, the assessee is required to maint .....

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d procedures development and the same is intended to ensure quality, i.e., it is for providing operational and commercial support. Accordingly he submitted the royalty payment is in the nature of plant maintenance after the installation of the technology and hence the same partakes the character of revenue expenditure. 5. On the contrary, the Ld D.R placed strong reliance on the order of the AO/DRP and also the decision rendered in the case of Southern Switchgear Ltd (supra). 6. We heard the riv .....

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uring information, licenses, rights for anyone of the scheduled products. Thus, it was seen that the assessee therein was having exclusive right on the manufacture of the scheduled products and hence, under these set of facts, it was held that the amount paid for technical knowhow was capital expenditure. 7. In the instant case, the duration of the agreement was utmost for two years only. The assessee does not become owner of the technical knowhow. It had to return back all data, information etc .....

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