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2015 (10) TMI 2313 - ANDHRA PRADESH HIGH COURT

2015 (10) TMI 2313 - ANDHRA PRADESH HIGH COURT - TMI - Payment of technical know-how fee - revenue expenditure or capital in nature - Held that:- in terms of Article 5.1(d) of the Agreement. These clauses viewed in the context of the intention of the parties would certainly point out that both the parties intended to benefit for a considerable period of time out of the relationship emanating from the agreement. Even though in the Bio-technology field changes are likely to happen in fast phase, t .....

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xpenditure in the nature of a capital expenditure by the CIT Appeals cannot be termed as erroneous. This single distinguishing factor is sufficient to answer the Question in favour of the revenue and against the assessee.

Expenditure on account of payment of royalty - revenue v/s capital expenditure - Held that:- It is agreed to be paid by the assessee and the same needs to be treated as revenue expenditure particularly considering the fact that the same is linked to the percentage of .....

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he order dated 21.02.2003, passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad, in I.T.A.No.37/Hyd/99, for the assessment year 1995-96, raising the following substantial questions of law for consideration of this Court: i) "Whether on the facts and in circumstances of the case the Tribunal was correct in law in holding that the payment of technical know-how fee was revenue expenditure and not capital in nature. ii) Whether on the facts and in the circumstance .....

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towards technical know-how fee and the assessee had also paid an amount of ₹ 47,34,306/- towards royalty and claimed the said payments as revenue expenditure. It is further stated that the Assessing Officer observed that the expenditure incurred by the assessee towards technical know-how fee falls within the ambit of Section 35AB of the Act and allowed 1/6th of the amount so claimed as deduction. The Assessing Officer had also treated 1/4th of royalty paid as capital expenditure. On appea .....

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Tribunal in I.T.A.No.37/Hyd/1999 and the Department being aggrieved by the order of the C.I.T (Appeals) in treating only 25% of technical know-how fees as capital in nature, filed an appeal in I.T.A.No.109/Hyd/1999 before the Tribunal. The Tribunal clubbed both the appeals filed by the assessee and the department and disposed of the same by a common order dated 21.02.2003, partly allowing I.T.A.No.37/Hyd/1999 and dismissed the I.T.A.No.109/Hyd/1999. Aggrieved the order dated 21.02.2003, passed .....

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ture or a part of it is to be capitalized as a capital expenditure". It is well recognized by various judicial pronouncements that a particular expenditure is revenue or capital in nature is a vexed question and the same would have to be determined in each case on appreciation of the facts of the particular case. The question as to whether the amount paid for acquiring Germplasm and Technical know-how needs to be determined with particular reference to the terms of the contract and agreemen .....

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l and by placing reliance on the judgment of the Madras High Court in the case of Commissioner of Income Tax, Tamil Nadu vs. Southern Switchgear Limited 148 ITR 272 as confirmed by the Supreme Court in Southern Switchgear Limited vs. Commissioner of Income Tax, Tamil Nadu 232 ITR 359, had disallowed 1/4th of the expenditure paid as consideration for the agreement dated 01.10.1994. Both the revenue and the assessee filed appeals separately against the C.I.T Appeal's common order. The Tribunal .....

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sm and Technical know-how were acquired by the assessee after commencement of the business by the assessee. By applying the six tests laid down in the case of Jonas Woodhead & Sons (India) Limited vs. CIT 1997) 224 ITR 342, the Tribunal came to conclusion that there was no new business which was started on the basis of Technical know-how received from the foreign firm. With regard to Test No.2, though the Article 18 of the agreement gives exclusive rights to the assessee company, the assesse .....

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the technical know-how. With regard to 4th test, it was found that the assessee has to return the Germplasm, but continue to use the technical know-how. However, the technical information can be continued to be used by them. Further, it was found that there is a mutual obligations to exchange the developments and improvements that may result on account of constant research on the part of the licensee and licensor and it is provided distinctly as to how the improved property could be shared base .....

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f the revenue, it was emphatically canvassed that the assessee had acquired Germplasm which itself is an asset and further the technical know-how for use to exploit the same for the purpose of the assessee's business. The technical know-how and the Germplasm is an asset of capable of giving an enduring benefit to the assessee and further considering the facts on record had rightly apportioned the expenditure in the ratio 1/4th as capital in nature and 2/3rd in the nature of revenue by applyi .....

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148 ITR 272 (Mad). iv) CIT vs. Shriram Bearings Ltd (2001) 251 ITR 155 (Cal) v) Jyothi Electric Motors Ltd. Vs. CIT (1999) 237 ITR 280 (Guj) vi) Fenner Woodroffe & Co. Ltd. Vs. CIT, Madras (1976) 102 ITR 665 (Mad. vii) Ram Kumar Pharmaceutical Works vs. CIT (1979) 119 ITR 33 (All.) apart from making submissions with regard to inapplicability of the judgments cited on behalf of the respondent/assessee. Likewise, learned senior counsel Sri Parsi Pardivala, on behalf of the assessee, had also p .....

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ITR 316 (SC) ix) CIT vs. J.K Synthetics Ltd (2009) 309 ITR 371 (Delhi) x) CIT vs. Hero Honda Motors Ltd (2015) 372 ITR 481 (Del) We have heard the elaborate arguments on both sides and perused the record apart from going through the various judgments relied upon by both the counsel. Having given our anxious thought to the matter in issue we do not find it necessary to extract or deal with a large number of case law which has been cited before us by various Courts except making a reference to the .....

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, we may note that the CIT Appeals itself did not agree with the views of the assessing officer in entirety and however found that only a small portion of the expenditure could be treated as capital in nature by applying the principles laid down in the case of Southern Switchgear Limited (2 supra) whereas the assessee had relied on the judgment reported in a case of CIT vs. I.A.E.C (Pumps) Ltd (1998) 232 ITR 316 (SC) as more appropriate. All the cases ultimately emphasis as a rule, the analysis .....

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considered and answered on the facts as found and recorded by the Tribunal. On the analyses of the agreement, we find that 1) it is termed as a licensing agreement and the parties contemplated the same to be as a licensing agreement. 2) Under the agreement, the assessee (licensee) to get a right and license to use the technical information and the Licensor Germplasm to research and develop, produce and sell products within the India. 3) The assessee gets immunity from legal proceedings with resp .....

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icense to its affiliates.) One of the conclusions arrived at by the Tribunal is with regard to whether there is any enduring benefit likely to accrue in favour of the assessee on account of the agreement. This question was answered in the negative by the Tribunal by reference to the fast changing development in the filed of biotechnology. Reliance was also placed on the judgment of the Supreme Court in the case of Alembic Chemicals Works Company vs. CIT 1989) 177 ITR 377 (SC) apart from the judg .....

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e of the breach of the agreement as set out therein. In other words, the Germplasm which has been supplied to the assessee and the relevant material on multiplication of the same is available for the assessee's use even after the currency of the agreement. A close reading of the agreement in the present case would disclose that the consideration is paid for acquiring a living organism Germplasm and also for technical know-how. C.I.T (Appeals) had apportioned the same, 1/4th as on capital acc .....

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ue earning apparatus. The technical knowledge which has been acquired in the process of implementation particularly in the bio-technology filed would certainly benefit the assessee even after the expiry of the agreement period and there is no embargo on the assessee for using the expertise and knowledge acquired. Further, by clearly defining 'Licensee Germplasm' and 'Licensor Germplasm' and setting out a right to access the 'Licensor's' improvements during the currenc .....

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