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Deputy Commissioner of Income-tax, Circle-6, Kolkata. Versus M/s. I.F.G.L Refractories Ltd.

2016 (1) TMI 178 - ITAT KOLKATA

Disallowance on account of write off of technical know- how - intangible asset was very much in existence as on 01.04.2004 - CIT(A) allowed the claim - Held that:- when an organization manufacturing a given product, incurs some expenditure on improvement of technology used in the manufacture of the said product, then, said expenditure shall constitute an expenditure incurred for better conduct of business and hence shall be revenue in nature. In the given case, the assessee was already engaged i .....

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e ORDER Per Shri Mahavir Singh, JM: This appeal by revenue is arising out of order of CIT(A)-VI, Kolkata in Appeal No.276/CIT(A)-VI/07-08/C-6 dated 24.07.2008. Assessment was framed by Addl. CIT, Range-6, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2005-06 vide its order dated 30.11.2007. 2. The only issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance made by AO on account of write off of technical know-how. Fo .....

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preciation over it for two consecutive assessment years. 3. Briefly stated facts are that the assessee claimed deduction of technical knowhow relating to sliding nozzle refractories obtained from M/s. Krosaki Harima Corporation, Japan amounting to ₹ 53,51,012/- as revenue expenditure. The AO on perusal of records and submission of the assessee observed that the assessee has acquired intangible asset during FY 2002-03 relevant to AY 2003-04 for a total consideration of ₹ 80,77,002/-. .....

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g total income. According to AO, this is not allowable deduction and he disallowed the same by observing as under: Under the above circumstances when the assessee disclosed the above know-how under the block intangible asset as on 31.03.2004 and the same was existent as on 01.04.2004, as discussed above, the writing off of the balance WDV/unamortized amount of ₹ 53,51,012/- is not allowed and depreciation at the prescribed rate of 25% is allowed (for less than 180 days) on the original val .....

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sion of A/R of the appellant and finding of A.O. It is very much clear from the facts of case that entire expenses incurred on account of technical knowhow became obsolete and thereby written off. The technical knowhow fees incurred by the appellant did not bring into existence any asset and were incurred for gaining technical knowledge against payment of fees. The aforesaid expenditure was of revenue in nature and hence deductible in its entirety as a revenue expenditure. The aforesaid expendit .....

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w the claim of ₹ 53,51,012/- on account of write off of technical knowhow fee and depreciation of ₹ 10,09,625/- allowed shall be withdrawn. Accordingly, ground no. 4 is al1owed. Aggrieved, now revenue is in appeal before us. 5. Before us Ld. Sr. DR argued that the assessee has purchased/acquired technical know-how and in AY 2003-04 it has capitalized the asset and claimed 1/6th of such expenditure as an amortization of expenses and subsequently claimed depreciation @ 25% on such asse .....

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A). 7. We have heard rival submissions and gone through facts and circumstances of the case. The assessee company is engaged in the manufacturing of Specialized Refractories and Operating Systems used by producers of Iron & Steel. The assessee in pursuance to the technological up-gradation, entered into a technical assistance agreement with Krosaki Harima Corporation (KHC), by virtue of which, the assessee was granted a license to use the technical knowhow of KHC in its manufacturing operati .....

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old by IFGL in overseas market. The assessee claimed to have realised in FY 2003-04, that Sec. 35AB of the Act was only applicable to assessment year commencing on or before 1.4.1998 and hence was not applicable to the assessee. Therefore, assessee erroneously claimed depreciation @ 25% on unamortized expenditure, which was shown under the head 'Fixed Assets' of the Balance Sheet. Finally in FY 2004-05 relevant to this AY 2005-06, the assessee wrote off the entire balance of the unamorti .....

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in nature. 8. We find from the facts of the case that initially company was of the view that the benefit, from such revenue expenditure incurred on account of such technology, would be available at least for three to five years and accordingly the assessee did not claim the entire expenditure in the same year and decided to claim 1/6th in the first year and defer the amortization of the rest to the succeeding years. However, in course of in-house appraisal of technologies, it was realized that .....

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hat the AO added back the entire sum written off by the assessee and allowed only 50% of depreciation @ 25% of the total lump sum payment i.e ₹ 80,77,002/-. He further held that since the production began on 1.2.2005, the assessee was not entitled to depreciation in AY 2003-04 & 2004-05 also. From the above facts, it is clear that the amount was not written off on 1.4.2004 but was written off on 3l.3.2005, which was subsequent to commencement of production. This is substantiated by the .....

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ed from the facts and circumstances of the case. Therefore let us now determine the true nature of the expenditure in the light of facts of the case and the legal position as argued by assessee. The first case law relied on by Ld. Counsel of the assessee is the judgment of the Supreme Court in case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) where the Hon'ble Court while drawing a line between capital and revenue expenditure had observed that "In cases where the expendi .....

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ess is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital .....

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s clear that an expenditure regardless of its source being capital or income, will be held to be on capital account if: (i) it is made for initial outlay or extension of business or a substantial replacement of the equipment or; (ii) it brings into existence an asset or advantage for the enduring benefit of the business We find that Hon ble Supreme Court held that if the expenditure does not bring into existence an asset or advantage for the enduring benefit of the business, the same shall be re .....

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t of SNR into the major steel mills in lower price .... . Therefore, it is clear that with the new technology, the assessee was not producing a new product, rather the assessee was producing the same product but with improved technology. Thus, from the above it is clear that the expenditure on account of know-how was not in pursuance of a new line of business. Further, the said expenditure was not account of an initial outlay or extension of business. Neither was the expenditure incurred to repl .....

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rticle 2 which reads as "KHC and its licensees can export or sell its products of SNR in India, upon the customer's request ". Further, even assessee as per Clause 1 to the Article 2 was entitled to non exclusively sell the products in the countries worldwide except Japan, Korea and Taiwan, like the other licensees were entitled to sell their products in India. The assessee did not have the right to sub-transfer the license, read clause 4 of Article 2 of the agreement. (ii) The ass .....

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hed by KHC. It was further required to hold the information in strictest secrecy and to take all reasonable precautions to prevent any disclosure of the technical information. (Clause 1 to Article 13) (v) The assessee was required to pay a royalty calculated as 3% of the Net Sales Price of the products sold by the assessee in domestic market and 3% of the Net Sales Prices of all export refractory products of SNR manufactured and sold by IFGL in overseas market. (Clause 2 of Article 8) From the a .....

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for mere use of know-how. Had the transaction been on capital account, the AO would not have allowed the running royalty, as the same would have constituted consideration towards acquisition of know-how. (ii) Secondly, the technical know was at no point in time transferred absolutely in favour of the assessee. All the rights attached to ownership were still with KHC and had not been passed on to the assessee which was only given the rights of a user. By disclosing the technical information KHC h .....

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the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The assessee was on that account a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade mark of that company. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss com .....

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out and out sale of technical know-how. The assessee was merely given a non-exclusive and nontransferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all." From the reading of the above two judgments, it is clear that expenditure on account of know-how can be capitalized only if the related know-how is transferred absolutely or exclusively in favour of the assessee. Mere access to the know-how for a considerati .....

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urther, by making the technology available, KHC did not part with any assets of its business, nor did the assessee acquire any asset or advantage of an enduring mature for the benefit of the business. Accordingly, by applying the principles laid out by Supreme Court in case of Ciba of India Ltd. supra & Wavin (India) Ltd. supra, we can safely infer that the expenditure incurred on account of technical know-how is revenue in nature and hence is deductible under the Act. 12. Thus in the light .....

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