TMI Blog1997 (2) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... re treated as rejected. 3. [This para is not reproduce here as it involves minor issue.] 4. The second issue relates to ₹ 3,00,000 received from M/s. Pioma Industries (hereinafter referred to as Pioma ) on surrender of a trade mark Rasna . The claim of the assessee before the authorities below was that the trade mark was a self-generated asset for which the assessee had not to incur any expenditure for acquisition and, therefore, when the said self-generated asset was sold or surrendered in favour of Pioma, the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 gets attracted. The Assessing Officer rejected the same. The CIT(Appeals) in para 4.1 of his order had noted that the assessee had a marketing arrangement with Pioma, who were manufacturing various soft drink concentrates and essence under the brand name Rasna . The CIT(Appeals) concluded that the amount that was received by the assessee from Pioma was for discontinuation of the marketing arrangement and that such discontinuation was in the nature of revenue only. The Senior Advocate, Mr. Dinesh Vyas, before us referred to the agreement between the assessee and Pioma dated 2-3-1979 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inbelow, Pioma may at its option, without prejudice to its other rights, if any, under this Agreement, market such products and in respect of such products, Pioma shall be entitled, notwithstanding anything to the contrary contained in this Agreement, to use the said mark. Provided that Pioma shall pay to Voltas a fee calculated at 2.5% of the net sales of such products by Pioma. The reading of the above clauses clearly shows that the trade mark was the joint property of the assessee and Pioma. It were not so, then the assessee would not be in a position to get the products manufactured from another party and market the same in the same name. It also makes it clear that in the event of the assessee failing to lift the products from Pioma, Pioma would be entitled to market the products on its own. On 27-1-1983, a settlement was reached between the assessee and Pioma, wherein it has been stated that the agreement stood cancelled with effect from 12-6-1982 and on that basis Pioma was to pay to the assessee ₹ 28.5 lakhs on instalments. ₹ 10 lakhs were to be paid on the execution of the settlement and ₹ 3 lakhs and ₹ 2 lakhs were to be paid by 28th of F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow . The Assessing Officer had noted that there was a collaboration agreement with Carrier International Corporation dated 14-5-1982 requiring the non-resident company to supply technical know-how for manufacture of semi-hermetic compressor and package units/air cooled condensers. Another collaboration agreement was entered into with Harnischfeger International Corporation, U.S.A. for supply of technical know-how for manufacture of hydraulic rough terrain cranes and hydraulic truck cranes. Based on the fact that the technical know-how was received during the year, the amount payable on receipt of the technical know-how was provided in the accounts and claimed as technical know-how fees. The Assessing Officer noted in para 7.1 of his order that in respect of Carrier International Corporation, two instalments only were paid and in respect of the other corporation for rough terrain cranes the second and third instalments were paid during the year. The Assessing Officer further had noted that the first instalment in respect of supply of technical know-how for various cranes was paid in the accounting year relevant to the assessment year 1983-84 soon after the Government of India had ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years from the date on which the agreement was taken on record whichever ends earlier. It was noted that the technical collaboration with the second concern was for manufacture of hydraulic rough terrain cranes for a consideration of US $1,50,000 and the terms of payment were similar to the other contract. The CIT(Appeals) noted that the amount provided as technical know-how fees was the amount that was payable by the assessee as agreed to between the parties, i.e., on receipt of technical know- how documentation. The CIT(Appeals) noted that the claim of the assessee was based on the fact that (a) the speed with which the scientific developments change, technical know-how and changes, that are to keep with the changes, could not be treated as a capital asset and (b) what was acquired was only use of knowledge. For this proposition, the assessee had relied on certain decisions. It had also raised an alternative plea that if the technical know-how fees was to be treated as capital, it should be treated as a plant that is entitled to investment allowance, depreciation, etc. For this alternative proposition too, the assessee had relied on certain decisions. The CIT(Appeals) reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant-company which would eventually swell the profits of the company in the coming years. It is also clear that there are no restrictive clauses and that the technical know-how of the product has been passed on for all times. The observation, thus, made also apply to the collaboration agreement with Harnischfeger International Corporation, USA. The appellant received a technical know-how in respect of different types of cranes and there are no restrictive clauses for the use of the technical know-how after the expiration of the period of agreement. In view of the High Court s decision relied upon by the IAC, I am of the view that the expend-iture in question is definitely of a capital nature and it has given an enduring benefit to the appellant-company. As regards the appellant s contention that in case the expenditure on technical know-how is treated as of capital nature then the same should be treated as plant entitled for investment allowance and depreciation. It is held that such part of the expenditure as is specifically attributable to the erection of buildings, plant or machinery should be held as part of the cost of such assets and the benefit of depreciation, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lower authorities as also on the decision in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) and CIT v. Rajkumar Mills Ltd. [1971] 80 ITR 244 (Bom.). 7. The above rival contentions have been very carefully considered. The various submissions in this connection have also been closely scrutinized. The submission of the assessee that the technical know-how has been only obtained for purchase of no new plant and is only to modernize its already existing production process is a reasonable argument. There may not be any necessity of a new plant being purchased along with every technical know-how. The technical know-how may be for refining the already existing one or may be a totally new process in its own right. If the newer process is only to bring about improvement in the products manufactured based on prevailing techniques, it may be a revenue expenditure. If, in addition to improving the existing product, it also manufactures a few more items, in that event too it may be a revenue expenditure. But, the newer process, if brings out totally new products and the existing pro-ducts continue to be manufactured with the help of prevailing techniques, the technical know-how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms of warranty. None of these factors can be predicted with accuracy whatsoever scientific method may be applied. In fact in the case of the assessee, it is seen that provision has been made by fixing ad hoc amount and multiplying it with number of pieces sold. Provision, thus, made in the accounts can at the best, be described as a contingent expenditure and, accordingly, the provision so made, cannot be allowed as an item of expenditure and repairs/replacement done in pursuance of the warranty obligations would be eligible for deduction as and when the same is carried out. In fact, what would constitute an item of expenditure has been laid down in the case of Indian Molasses Co. Pvt. Ltd., 37 ITR 66 , as under : Expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure which is deductible for income-tax purposes, is one which is either actually paid or, if the accounts are on mercantile basis, provided for towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. Thus, mere liability to satisfy any obligation is not an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 is being disallowed. 9. The CIT(Appeals) in para 25.1 considered the basis of provision and these are- (a) in respect of standard products like air-conditioners, water coolers, etc., provision is made at a fixed rate per unit, and (b) in respect of non-standard products, namely, works contracts for central air-conditioners and electrical contracts, etc., provision is made as percentage of contract value. The CIT(Appeals) noted that the guarantees normally were provided between 1 to 1 % of the annual turnover in regard to general products. It was submitted before the CIT(Appeals) that the variety of machineries and equipments that were manufactured and sold by the assessee being such that they had to take some kind of a formula based on which they had provided. The CIT(Appeals) noted that the expenses incurred by the assessee were pertained to the sale that were effected in the earlier years and he also noted from the order of the Assessing Officer that there was a gap between the provision and the actual expenditure. He referred to the various decisions as were relied upon by the Assessing Officer. In paras 25.3 to 25.6, the CIT(Appeals) gave his conclusions, which are re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m set apart against the contingencies of the workmen taking leave in a subsequent year and becoming entitled to leave and holiday wages cannot be deducted in anticipation. Thus, it is clear that where the obligations under a contract remained still to be performed, it is not permissible to claim deduction on the basis of notional expenditure, year after year, to meet the obligation, when in fact, no such expenditure has been incurred. 25.6 In view of the above, the expenditure on repairs actually disbursed in a year should be deducted in that year, instead of the provision made by the appellant. The I.A.C. s stand of taking cognizance of the current year s sales and the expenditure incurred on repairs arising out of the same, is acceptable as it is based on taking the account year as a complete unit in itself and, on taking cognizance only the liabilities in praesenti. The I.A.C. s reliance in this respect on the Supreme Court s decision in the case of Indian Molasses Co. Pvt. Ltd. reported in 37 ITR 66 appears to be well-founded as the term expenditure which has not been defined anywhere in the Act has been very well defined by the Supreme Court as under :- Expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Auto Ltd. [1993] 204 ITR 14 (Chd.) (AT), and (3)CIT v. Development Trust (P.) Ltd. [1991] 189 ITR 504 (All.). The Departmental Representative, on the other hand, heavily relied on the orders of the lower authorities. He has also relied on ITO v. Emco Transformers Ltd. [1990] 32 ITD 260 and Rajkumar Mills Ltd. s case (supra). 11. The rival contentions in regard to the above have been very carefully considered. There is considerable force in the arguments advanced by the assessee that the actual expenditure on warranty could at no time be related to the provision that is made in the accounts because the expenditure might be required to be incurred at any time before the expiry of the warranty period. As had been noted by the Assessing Officer in his order, excess provision to tune of ₹ 45.53 lakhs had been written back and the assessee had made a provision of ₹ 137.28 lakhs only. It also shows that the expenses incurred were to the tune of ₹ 131.23 lakhs. This shows that the expenses and the provision keep on fluctuating and can never be uniform to one year to another. The guarantee that is made part of the sale contract gives rise to a situation whereby t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that in situations where the provisions are inadequate, the actual expenses got adjusted against the provision and in the year in which the provision was required, the provision was made accordingly. As was noted by the Assessing Officer though the provision required for the assessment year was little over ₹ 182 lakhs, the excess provision for earlier years to the tune of little over ₹ 45 lakhs was adjusted and a net provision of ₹ 137 lakhs only was made. Therefore, the provision that is made in the accounts, the claim for which is made, is more or less had a consistent basis that adjusts excess provision, inadequate provision, etc. For the above reasons, we are of the view that the assessee was justified in making the claim and we, accordingly, uphold the same. The three decisions relied upon by the assessee that had been filed as part of the paperbook, are all on similar lines. In Wanson (India) Ltd. s case (supra), similar provision was allowed. 12 and 13. [These paras are not reproduce here as they involve minor issues]. 14. The next issue is in regard to the additional depreciation in respect of certain equipments installed at the manufacturing pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Precision Industries ₹ 64,587 (d)Narendra Motta ₹ 29,680 (e)Andhra Pradesh State Electricity Board ₹ 1,00,000 The CIT(Appeals) had discussed the various items in paras 23.1 to 23.6 of his order. The rival contentions in regard to the above have been very carefully considered. In regard to the first two items of ₹ 3,00,000 each, the facts as noted were that these represented the amounts advanced to parties for supply of certain products on principal to principal basis. The parties did supply the products, which were found defective and, accordingly, the products were returned back. The supplier companies were prepared to rectify the defects, but the assessee refused to compromise the desired quality standard and, accordingly, demanded the advances that were paid earlier. In the case of the second item of ₹ 3,00,000 it remains a principal even now and there has been increase in the turnover of their products and the arrangement continued. With a view not to agitate the issue any further, the amounts were written off. The last item was the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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