TMI Blog2015 (4) TMI 1114X X X X Extracts X X X X X X X X Extracts X X X X ..... for units established prior to 01.04.1998. Following the same parity of reasoning, we hold that provisions of section 35AB of the Act are to be applied to the lump sum consideration paid for acquisition of technical know-how by the assessee. Non-deduction of tax at source on the balance two installments, which were paid in the succeeding assessment years, in view of the provisions of section 40(a)(i) - Held that:- The Ahmedabad Bench of the Tribunal in APS-Star Industries Ltd. Vs. DCIT (2002 (3) TMI 202 - ITAT AHMEDABAD-B ) had also held that what is material for section 35AB of the Act is not the actual amount paid during the year but the amount in respect of which liability had been incurred for acquiring technical know-how. We hold so. The CIT(A) after holding the assessee to be eligible for deduction under section 35AB of the Act on the full amount, had not allowed the claim of the assessee in view of non-deduction of tax at source on the balance two installments, which were paid in the succeeding assessment years, in view of the provisions of section 40(a)(i) of the Act. Admittedly, the assessee had deducted tax at source on the installment paid during the financial year an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96, no deduction under section 80M of the Act would be available to the assessee. Following the same parity of reasoning, we uphold the order of CIT(A) - ITA No.525/PN/2003 - - - Dated:- 10-4-2015 - MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER For the Appellant: Shri Jehangir D Mistri For the Respondent: Smt. M.S. Verma, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of CIT(A)-III, Pune, dated 28.03.2003 relating to assessment year 1997-98 against order passed under section 143(3) of the Income Tax Act, 1961. 2. The assessee has raised the following grounds of appeal:- 1. Deduction under Section 37(1) of the Income-tax Act, 1961 ( the Act ) in respect of lump sum know how fees of ₹ 8,82,46,665/- 1.1 The learned Commissioner of Income-tax (Appeals)-III, Pune [ the CIT(A) ] erred in law and on facts in disallowing Sandvik Asia Ltd.'s ( the Appellant ') claim for deduction of lump sum know how fees of ₹ 8,82,46,665/- paid under the collaboration agreement entered into with Sandvik AB and AB, Sandvik Coromant for access to use technical kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in rejecting the Appellant's claim that interest of ₹ 81,90,000/- (comprising of interest on inter-corporate deposits of ₹ 71,93,000/- bank interest of ₹ 2,54,000/- NSC interest of ₹ 35,000/- and interest received on income-tax refunds of ₹ 7,08,000/-) should be considered as Profits and Gains of Business or Profession for the purposes of Section 80HHC. The Appellant prays that the aforesaid interest be considered as Profits of Business while computing deduction under Section 80HHC of the Act. 2.2. The CIT(A) erred in rejecting the Appellant's claim that no adjustment on account of training course fees of ₹ 5,66,000/- should be made under Explanation (baa) to Section 80HHC of the Act while computing Profits and Gains of Business or Profession . The Appellant prays that no such adjustment should be made on account of the training course fees. 3. Addition of interest income of ₹ 7,43,523/- paid on Income-tax The CIT(A) erred in holding that gross interest of ₹ 10,82,787/- paid on income-tax by the Appellant should be disallowed instead of the net amount of ₹ 3,39,264 disallowed by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed under section 37 of the Act, as per letter dated 01.02.2000. The Assessing Officer observed that the said claim of the assessee could not be entertained as allowance or disallowance of such claims were governed by provisions of section 35AB of the Act as the assessee would get enduring benefit from the technical know-how so received. Thus, the claim of the assessee for allowance of entire expenditure of ₹ 8,82,46,665/- was rejected by the Assessing Officer. However, the claim made by the assessee in the return of income was allowed in the hands of the assessee. 5. In appeal, the CIT(A) noted that as per collaboration agreement dated 18.01.1997 between the assessee and AB Sandvik Coromant, Sweden, sum of ₹ 8,82,46,665/- being equivalent of lump sum know-how fees of US$ 2 million remitted in the subject year and in the subsequent years, was claimed as deduction by the assessee. Without prejudice to the same, further deduction of ₹ 2,86,80,014/- being the actual payment made for the use of know-how under the said agreement was claimed as allowable under section 37(1) of the Act. Further plea of the assessee without prejudice to the above, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997, the assessee had commenced production of special tool design in CAD / CAM and intimation about the said production to the RBI was made, as required under the collaboration agreement and the Exchange Control Regulations Rules. It was further explained that the entire expenditure was not debited to the Profit Loss Account ending 31st March, 1997 as the accounting year of the assessee was calendar year and only for tax purpose, it had drawn the accounts for the financial year. The learned Authorized Representative for the assessee claimed that liability for payment of the technical know-how of the whole of lump sum amount accrued in this assessment year since it had made the payment of first installment as per the agreement and had started receiving the technical knowhow and had also commenced production of certain items. 7. The CIT(A) referred to clauses in the agreement and observed that the assessee had the right to use Sandvik know-how and advise provided by Sandvik for designing or manufacturing of the products in India. As per the agreement, assessee was granted right and license to use the Sandvik knowhow for the manufacturing in India of the products and for the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that even presuming that the assessee had made a proper claim under section 35AB of the Act, but the said deduction was subject to overriding provisions of section 40(a)(i) of the Act and on this ground, the claim of the assessee in respect of second and third installments cannot be allowed in this assessment year. Thus, the CIT(A) held the claim under section 35AB of the Act was to be allowed only in respect of 1/6th on ₹ 2,86,80,014/-, which was originally claimed by the assessee and allowed by the Assessing Officer. Hence, the grounds of appeal raised by the assessee were dismissed. 8. The assessee is in appeal against the said order of CIT(A). 9. The learned Authorized Representative for the assessee after taking us through the orders of Assessing Officer and CIT(A) and factual aspects of the case, pointed out that the acquisition of technical know-how was the right to use the technology and no right was assigned to the assessee in the technical knowhow. Reliance was placed on the ratio laid down by the Hon ble Supreme Court in Alembic Chemical Works Co Ltd Vs CIT [1989] 177 ITR 377 (SC). It was further pointed out by the learned Authorized Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, which we will refer to in the paras hereinafter. The learned Authorized Representative for the assessee further pointed out that the right to use and the non-transferable right to use the benefit was revenue in nature as held by the Hon ble Supreme Court in CIT Vs. Wavin India Ltd. (1999) 236 ITR 314 (SC). As far as the application of section 35AB of the Act was held to be applicable only to capital payments and where the expenditure has been incurred for update of know-how, then it was revenue in nature. The learned Authorized Representative for the assessee thereafter, referred to the various clauses of the agreement and pointed out that the said expenditure was allowable in whole in the hands of the assessee. 10. The learned Departmental Representative for the Revenue referring to the order of CIT(A) pointed out that the assessee had commenced the production of special tools designed in CAD which is computer aided design and CAM which is computed aided manufacturing. It was further pointed out by the learned Departmental Representative for the Revenue that process was different as there was shifting of tools aided by computers and the new technology acquired by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs CIT [1980] 124 ITR 1 (SC). Another issue raised by the learned Authorized Representative for the assessee was that all exports were not to its principal and out of total sales of ₹ 150.45 crores, the total FOB value of exports was only ₹ 4.60 crores. The learned Authorized Representative for the assessee further explained that the provisions of section 35AB of the Act were intended for expenditure which were otherwise capital in nature and in case of every transfer of know-how, the same could not be said to have been passed on. In the case of assessee, the transfer was for a period of 7 years and thereafter, Sandvik was to give ancillary help only. It was further clarified by the learned Authorized Representative for the assessee that whether the expenditure was capital or revenue in nature, the decisions of Tribunal in Saroj Kumar Poddar Vs. JCIT (2001) 77 ITD 327, Wellman Incandescent India Ltd. Vs. DCIT (1995) 55 ITD 338, Sayaji Industries Ltd. Vs. DCIT (2000) 68 TTJ (Ahd) 851 apply. Further, the distinction was drawn on the ratio referred to by learned Departmental Representative for the Revenue and it was pointed out that factually, they were at variance. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all mean all specifications, drawings, procedures, processes, performance and procurement standards, and all other related information necessary for or useful for the manufacture according to Article 2 and being specified in Appendix B attached hereto. 15. As per clause 2.1 to the agreement, Sandvik shall make available to the assessee the Sandvik know-how and the advice and assistance of its experts also. Further, as per clause 2.2 of the agreement, the assessee shall have the right to use the Sandvik know-how and advice provided for the purpose of designing and or manufacturing the products in India. Further, as per clause 2.3 of the agreement, it was agreed upon that Sandvik know-how and the advice and assistance to be provided by the Sandvik shall be given to the extent required by the assessee to be able to manufacture the products with quality corresponding to the quality reached in Sandvik own production of the products. Under clause 2.4 of the agreement, it is enlisted the nature of advice and assistance to be provided by Sandvik to assessee in the field of manufacturing, raw material and packaging. Further, under clause 2.6 of the agreement, it was agreed that Sandv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shall be essential to disclose the same and SAL shall take all reasonable measures to prevent such employees from disclosing the same, to others. The foregoing shall not relate to any information which SAL can show by written record to have been in its possession at the time of its disclosure by Sandvik or which is or becomes public knowledge through no fault of SAL's part. The Sandvik know-how may be used by SAL for the purpose of the design, manufacturing, marketing and sale of the Products only. 17. Under clause 6.1 of the agreement, it was agreed that the assessee shall pay Sandvik the lump sum as stated in Article 6.5 and also royalty. As per clause 6.2, royalty was fixed at 5% of NPS for sales by the assessee of products within India and 8% of NPS for sales by the assessee outside India. As per clause 6.5, it is provided that the assessee has to pay to Sandvik in Sweden a lump sum corresponding to US$ 2 million. The said lump sum was to be paid in three installments i.e. 1/3rd at the date of approval by the authorities, 1/3rd at the delivery of Sandvik know-how and 1/3rd at the commencement of production, but not later than four years from the receipt of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee shall have the right subject to the compliance with the obligations, to continue without any time limit and without any charge the use of un-patented Sandvik know-how made available to it under the agreement, vide clause 8.1 of the agreement. Under clause 8.2, the termination of the agreement pursuant to Article 7.2 i.e. the term of agreement for a period of 7 years, the assessee shall further have the right to continue to use the Sandvik know-how and the innovations being the object of Sandvik patent rights. Notwithstanding the termination of the agreement, the royalty shall be payable with regard to all products manufactured during the period of 7 years from the commencement of commercial production of the products. After the expiry of said period, the assessee shall have the right to use Sandvik know-how in all the countries free of charge and to use in India also free of charge. Further, the termination of agreement also could not affect the assessee s secrecy obligation to Sandvik. The claim of the assessee before us is that the expenditure incurred on the acquisition of technical know-how was for the right to use the technology and under the said agreement, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure for obtaining licence to operate telecommunication services.] 20. The section provides that within the stipulated period, where any lump sum consideration is paid for acquiring any know-how for use or for the purpose of business, then 1/6th of the amount so paid shall be deducted in computing profits and gains of the business for that year. The year under appeal, in which the assessee has claimed the said deduction falls within the stipulated period as provided under section 35AB of the Act. 21. The first issue which has to be addressed is whether the assessee is entitled to the claim of deduction in entirety, for which reliance was placed by the learned Authorized Representative for the assessee on the ratio laid down by the Hon ble Supreme Court in Alembic Chemical Works Co Ltd Vs CIT (supra). The plea of the assessee in this regard, was that the expenditure incurred by the assessee over a period of seven years even if was an expenditure of enduring benefit and applying the ratio laid down by the Hon ble Supreme Court in Empire Jute Co Ltd Vs CIT (supra) and also Alembic Chemical Works Co Ltd Vs CIT (supra), such expenditure is to be allowed as deduction und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture. The Tribunal in that case held that the provisions of section 35AB would be applicable to the consideration paid for acquiring technical know-how, which would otherwise be disallowable as being on capital account. Further reliance was placed on the ratio laid down by the Kolkata Bench of the Tribunal in Wellman Incandescent India Ltd. Vs. DCIT (1995) 55 ITD 338. However, the facts of present case are different, where the assessee had acquired the technical know-how for production of new items and hence the ratio of above decision was not applicable. 24. The learned Departmental Representative for the Revenue in reply had pointed out that the issue has now been settled by the Hon ble Supreme Court in Drilcos (India) (P.) Ltd. Vs. CIT (2012) 25 taxmann.com 228 (SC), wherein it has been held that where the assessee had entered into an agreement for acquiring know-how, which in turn was to be used in the business of the assessee, section 35AB of the Act would come into play and section 37(1) of the Act would have no application. The learned Departmental Representative for the Revenue further placed reliance on the decision of Hon ble Madhya Pradesh High Court Indore Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co Ltd Vs CIT (supra) while deciding the issue of allowability of expenditure on acquisition of know-how, for which lump sum payment was made held that idea of once for all payment and enduring benefit are to be treated as something akin statutory conditions; nor are the notions of capital or revenue, a judicial fetish. It was further held that there was no single definitive criterion which by itself is determinative whether a particular outlay is capital or revenue. Another reliance was placed by the learned Authorized Representative for the assessee on the ratio laid down by Hon ble Apex Court in Empire Jute Co Ltd Vs CIT (supra) for the proposition of test of enduring benefit. The Hon ble Apex Court while applying the test for determining whether the expenditure was capital or revenue in nature, observed that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. The Hon ble Apex Court further propounded that what was material to be considered was the nature of advantage in commercial strengths and only when the advantage was in the capital field, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct says that the expenditure should have been incurred for the purposes of 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. 28. A bare reading of section 35AB of the Act brings out the intent of the legislature in inserting the said section. Section 35AB of the Act inserted by Finance Act, 1985 lays down that where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purpose of its business 1/6th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal installments for each of the five immediately succeeding previous years. Explanation, appended below the section, defines know-how and reads as under:- For the purpose of this section, know-how means any industrial information of technique likely to assist in the manufacture or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Lid. I1996) 218 ITR 337 wherein the Supreme Court held that since the Indian Company was not entitled to use the Technical knowhow after the termination of the agreement, it could not be said that Indian Company had incurred the expenditure for the purposes of bringing into existence an asset or advantage of an enduring nature. A similar test based on the fact whether the Technical knowhow could be used after the termination of the agreement has been approved by the Hon'ble Supreme Court in the case of CIT v. IAEC (Pumps) Ltd [1998] 232 ITR 316 for determining whether the expenditure is capital or revenue in nature. Applying the ratio of the aforementioned decisions of the Apex Court in the instant case, since the assessee is entitled to use the technical information for the manufacture of the products even after the termination of the agreement and the documentation, drawings are not to be returned back on expiry of the agreement after 10 years, the expenditure is dearly capital in nature and outside the purview of section 37(1). 20. There is no disputing the facts that acquisition of the technical knowhow by the assessee company for manufacture of new textile machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35AB of the Act are attracted and the expenditure is not allowable under section 37(1) of the Act, which is general provision and specifically excludes expenditure covered under sections 30 to 36 of the Act. Consequently, the said expenditure is to be amortized under section 35AB of the Act and cannot be allowed as a deduction in the year in which the liability to pay the said amount accrues. The Hon ble Supreme Court in Drilcos (India) (P.) Ltd. Vs. CIT (supra) had held that after insertion of section 35AB of the Act, where the expenditure is to be used in business of assessee, section 35AB of the Act would come into play and the provisions of section 37(1) of the Act are not applicable for units established prior to 01.04.1998. Following the same parity of reasoning, we hold that provisions of section 35AB of the Act are to be applied to the lump sum consideration paid for acquisition of technical know-how by the assessee. 32. Another plea raised by the assessee was that the assessee had only acquired the right to use the technical know-how. The reading of clauses of agreement with special reference to clause 8 i.e. effect of termination of agreement reflects that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now-how. We hold so. The CIT(A) after holding the assessee to be eligible for deduction under section 35AB of the Act on the full amount, had not allowed the claim of the assessee in view of non-deduction of tax at source on the balance two installments, which were paid in the succeeding assessment years, in view of the provisions of section 40(a)(i) of the Act. Admittedly, the assessee had deducted tax at source on the installment paid during the financial year and has paid tax at source on the balance installments in the succeeding years. In this regard, we find merit in the plea of learned Authorized Representative for the assessee that this was at best of the case of short deduction of tax and not non-deduction of tax at source and there was no merit in invoking the provisions of section 40(a)(i) of the Act. 33. The Pune Bench of the Tribunal in ITA No.758/PN/1999 CO No.58/PN/2005 and another, in assessee s own case had held as under:- 18. We have carefully considered the rival submissions. Looking at the conspectuous of facts as emerging from the orders of the authorities below, it appears that though the claim of the assessee is under head provision for doubtfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the I.T department. 22. The first Ground relates to an addition of ₹ 1,99,43,610/- made by the Assessing Officer on account of valuation of closing stock of finished goods due to Excise Duty payable. The Commissioner of Income-tax (Appeals) has deleted the addition by observing that similar issue was considered in assessee's own case for the assessment years 1992-93 and 1993-94 in favour of the assessee. 23. Before us, it was a common ground between the parties that for the assessment year 1992-93, similar issue has been adjudicated by the Tribunal vide its order in ITA No 119/PN/96 dated 13.9.2011 in favour of the assessee. In view of the precedent, copy of which has been placed on record, the decision of the Commissioner of Income-tax (Appeals) deleting the addition of ₹ 1,99,43,610/- on account of Excise Duty payable on finished goods not included in the valuation of closing stock is hereby affirmed. Thus, Revenue fails on this Ground. 24. The facts in relating to second Ground are that during the year, the assessee received interest of ₹ 25,63,992/- from the Income-tax Department and also paid interest of ₹ 10 lakhs to the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of appeal No.2.1 was decided against the assessee by the Tribunal in assessee s own case in ITA No.580/PN/2000, relating to assessment year 1996-97, order dated 02.02.2001. The Tribunal vide para 29 on page 20 had considered the said receipts and vide para 31 had held that the interest earned on deposits with MIDC, MSEB as well as interest on outstanding amount from the customers are assessable under the head profit gain of the business. However, the contention of assessee in respect of other items i.e. interest received from employees, bank interest, interest received on income tax, inter corporate deposits, had no nexus between income earned and the business activity of the assessee and the same are to be assessed as income from other sources. Following the same parity of reasoning, we hold that the items of income i.e. interest on inter-corporate deposits, bank interest, NSC interest and interest received on income-tax refunds are the items to be excluded while computing profits eligible for deduction under section 80HHC of the Act. The ground of appeal No.2.1 is thus, dismissed. 37. The issue vide ground of appeal No.2.2 is against computation of profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was made in the block for the later 6 months, but the depreciation was claimed by the assessee @ 100% and not @ 50%. The authorities below were of the view that the depreciation allowable for assets used for less than 180 days in any previous year had to be restricted to 50% of the amount calculated at prescribed percentage. 45. The assessee is aggrieved by the said disallowance. However, in view of the second proviso to section 32(1) of the Act, wherein asset is acquired and put to use for the purpose of business for less than 180 days in that previous year, then the deduction under section 32(1) of the Act in respect of such asset is to be restricted to 50% of the amount prescribed. The assessee was entitled to claim depreciation @ 100%. However, since the asset was acquired in use for less than 180 days, the depreciation had to be allowed at 50%, in view of the provisions of the Act. Thus, the ground of appeal No.4 raised by the assessee is dismissed. 46. The ground of appeal No.5 raised by the assessee is in relation to computation of deduction under section 80M of the Act. 47. The plea of the learned Authorized Representative for the assessee was that similar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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