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2017 (1) TMI 729 - ALLAHABAD HIGH COURT

2017 (1) TMI 729 - ALLAHABAD HIGH COURT - TMI - Amount paid towards "Technical know-how" and 'Royalty' - whether should be treated as "Revenue Expenditure" or "capital expenditure"? - Held that:- As find from record that at the time of entering into "Technical Know-how" agreement, HMCL had only 60% of share holding in HSCIL/Assessee but only in AY 2004-2005, it increased its share holding to 99% and above and thus got virtually entire control and ownership over the alleged joint venture. A.O. ha .....

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eating ownership of "Technical Know-how" fee by parent company and limited tenure etc. without appreciating various clauses of agreement in entirety and thus has erred in law. - A.O and CIT(A) were justified in recording their finding and reasons to treat payment of "Technical Know-how" fee and 'Royalty' as "Capital Expenditure" and not "Revenue Expenditure". Reasonings given by the said two authorities similar to what we have also noticed in addition to our discussion have our affirmance. .....

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le Dr.Kaushal Jayendra Thaker, JJ. For the Appellant : Dhananjay Awasthi, Manish Goel For the Respondent : R.S. Agarwal, Roopesh Nath ORDER ( Delivered by Hon. Dr.Justice K. J. Thaker ) 1. All these appeals have raised common substantial questions of law, therefore, have been heard together and are being decided by this common judgment. However, individual appeal relates to different assessment years and different dates of order of Tribunal, therefore, such details are given in the following cha .....

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and circumstances of case the ITAT was legally justified in holding that fee for technical service of 29,40,64, 000/- and royalty payment of 18,55,24,000/- as revenue expenditure inspite of the fact that they were of enduring nature. (2) Whether on the facts and circumstances of case, ITAT has erred in law by ignoring the fact that limited right to use know how that yields enduring benefits cannot be termed as revenue expenditure. (3) Whether on the facts and circumstances of case, the ITAT was .....

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ed in all the other matters and hence not reproduced. 4. Basic facts are not disputed and real dispute relates to the question, "whether amount paid towards "Technical know-how" and 'Royalty' should be treated as "Revenue Expenditure" or "capital expenditure". 5. M/s Honda Motor Company Ltd. Japan (hereinafter referred to as "HMCL, Japan") entered into a joint venture agreement dated 12.9.1995 with M/s Seil Ltd, (a company duly registered unde .....

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ment of India dated 27.12.1995 and 19.01.1996. 7. A joint venture Company was incorporated with the name of "M/s Honda Seil Cars India Private Ltd." (hereinafter referred to as 'HSCIL/Assessee'). 8. Total share capital of HSCIL/Assessee was 36 crores shares out of which 356399995 shares were held by HMCL, Japan while remaining 3600005 shares held by M/s Seil India. In other words, joint venture was almost owned by HMCL, Japan, having around 99% shares and Seil India (local Indi .....

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IL/Assessee was initially incorporated as a Private Limited Company i.e HSCIL but subsequently it became Public Limited Company. 11. Agreement was incorporated stating the facts that HMCL, Japan is engaged in the business of development, manufacture and sale of automobiles and their parts and through experience accumulated in such business, has acquired and possesses certain intellectual property rights, manufacturing information and know-how, quality standards and marketing methods relating to .....

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2, 3, 5, 6 and 7 of the agreement, which read as under: "1. The term "Products" shall mean the automobiles, the specific models and types of which are listed in Exhibit I attached hereto; 2. The terms "Parts" shall mean the component parts of the Products and shall include the parts for repair or rep0lacement of the Products. The LICENSOR may in consultation with licnesee, taking into consideration the Intellects. Property Rights, the Know-How and the Technical Informati .....

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hereinafter collectively referred to as the "Domestic Parts"). Such classification shall be deemed to be so effected from the date of issue Notice to this effect by the LICENSOR to the licnesee. In this regard, the parts which may be locally manufactured by licnesee hereunder as referred to in (b) (I) above shall particularly be hereinafter referred to as the "licenced Parts"; 3. The terms "Manufacturing Facilities" shall mean jigs, tools, dies, machinery and equipm .....

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and other intellectual property rights relating to the Manufacturing Facilities and the manufacture thereof) which LICENSOR owns at the time of execution of this Agreement or may own from time to time during the term of this Agreement or under which LICENSOR is entitled to grant a licence to LECENSEE; 6. The term "Know-How" shall mean any and all secret technical information (except for the Intellectual Property Right), whether in writing or not, including but not limited to drawings, .....

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, such as service materials and Japanese Industrial Standard (JIS), Whether in writing or not, which directly relates to the Products or the licenced Parts or is necessary for the manufacture of the Products or the licenced Parts and which LICENSOR owns at the time of execution of this Agreement or may own from time to time during the term of this Agreement or under which LICENSOR is entitled to grant a licence to licnesee, and the Technical Information shall include the "Technical Material .....

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sale or export any products and parts, to any place outside territory of India, prior consent of licensor would be required. 14. In view of aforesaid licence, a consideration/lump sum fee agreed between parties was 30.5 million U.S Dollar, payable in five continuous equal installments by licensee to licensor and payment thereof was to commence from third year after commencement of commercial production. Besides, licensee was also liable to pay royalty of 4%, both on internal and exports, subjec .....

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ount of each of which installments shall be six million one hundred thousand US dollars (USS6,100,000), beginning from the 3rd year after the commencement of Commercial Production. The lump sum fees shall be payable by licensee in currency of US dollars by bank transfer remittance to the bank account designated by LICENSOR, based on final government approval. 2. Royalty: The rate of royalty payable by the licensee to the LICENSOR shall be Four (4) percent; both on internal sales and exports, sub .....

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er exhibit II. 14.2 The total amount of royalty specified in the counter signed report and invoice under Article 13.1 hereof shall be payable by licensee in the currency of US Dollars by bank transfer remittance to the bank account designated by LICENSOR, so that such remittance shall reach LICENSOR not later than the 10th day of month next following the month in which such counter-signed report and invoice reach licensee. In the event the currency in which the amount of running royalty is calcu .....

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OR of any payment tendered hereunder shall not constitute LICENSOR'S acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by licensee to LICENSOR hereunder shall not be refundable to licensee, in any facts or circumstances whatsoever. If licensee fails to make any payment here under on the due date, licensee agrees to pay a late payment fee in the amount equivalent to LIBOR +TWO (X) percent per annum in the payment currency, calculated .....

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d the technical training of licensee's engineers) at a factory or factories of LICENSOR or any of its designers, including but not limited to technical guidance fees, per dien allowances, traveling expenses, staying or living expenses and other incidental expanses, shall be payable by licensee to LICENSOR in accordance with such"Memorandum on Exchange of Technicians", separate from and in addition to the payments under this Article 14, and that no amount of any such fees, costs, ex .....

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ing laws in India; provided, however, that this Agreement may be terminated by either party at the end of the initial period as mentioned above or at the end of any subsequent renewed period by written notice to that effect given to the other party at least three (3) months prior to the expiration of initial period or any subsequent renewed period. Not withstanding the foregoing, in the event of termination of the Joint Venture Agreement, this Agreement shall accordingly terminate forthwith.&quo .....

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therwise agreed upon by the parties hereto, 1. licensee shall, within 90 days, discontinue (I) the manufacture, sale and other disposition of the Products and the Parts, and (ii) the use of the Intellectual Property Rights, Technical Information licensed or furnished by LICENSOR under this Agreement. 2. licensee shall promptly return to LICENSOR all particular documents and tangible property supplied by LICENSOR in connection with this Agreement and belonging to LICENSOR and shall keep all Infor .....

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goodwill or other business of licensee, or on account of any other cause of thing whatsoever, except as provided in this Agreement; 4. Even after the expiration or termination of this Agreement for any reason whatsoever, the licensee permits LICENSOR or its agents to have access to licensee's factories and other facilities and to make the necessary inspection to confirm whether licensee is observing its obligations under this Article 21.1; 5. LICENSOR may at its option, but without obligati .....

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account to licensee for any part of the proceeds of such sale or any other sums whatsoever; 7. If LICENSOR does not exercise its option referred to in Paragraph (6) above within a reasonable period of time after the expiration or termination of this Agreement, then licensee may, notwithstanding the provision set forth in Paragraph (1) above, sell on a non-exclusive basis, the Products and the Parts which licensee has on hand at the time of the expiration or termination of this Agreement within .....

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or any other termination of this Agreement here under shall be without prejudice to any right which shall have accrued to either party here under prior to such expiration or termination." (emphasis added) 17. Rights and duties in the agreement are not assignable, delegatable or transferable, directly or indirectly, by either party without prior written consent of other party but licensor, however, is conferred an authority to assign, delegate or transfer the agreement or any rights or duti .....

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ioner of Income Tax, Special Range 26, New Delhi for Assessment Year (hereinafter referred to as "AY") 1999-2000. Later on revised return was filed declaring loss of ₹ 14,61,10,910/- on 30.3.2001. Subsequently, jurisdiction was transferred to Assistant Commissioner, Income Tax, Circle Noida (hereinafter referred to as "ACIT)". Assessment was completed on 21.03.2002 under section 143(3) of Income Tax Act 1961 (hereinafter referred to as "Act 1961") at a net los .....

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the same as 'Revenue Expenditure'. In the opinion of Assessing Officer (hereinafter referred to as 'A.O'), aforesaid income has escaped assessment since, it was a capital expenditure. Ultimately assessment order was passed on 24.8.2006, making an addition of ₹ 7,96,02,000/-, treating it a 'Capital Expenditure' and not 'Revenue Expenditure'. 21. For AY 2001-2002 assessee filed return on 30.10.2001, declaring a net loss of ₹ 68,14,22,302/-. This case was .....

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R & D ₹ 57,44,102/- Total ₹ 25,91,34,101/- 22. For AY 2002-2003, Assessee filed return on 31.10.2002 showing net loss of ₹ 93,03,99,726/-. Thereafter a revised return was filed on 29.03.2004, disclosing a net loss of ₹ 92,19,99,489/-. Here also case was selected for scrutiny and notice under section 143(2)/142(1) dated 11.10.2004 was issued. In assessment order dated 29.03.2005 passed by ACIT, it treated payment made towards 'Technical know-how' and 'Roya .....

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ers, it treated the amount paid towards 'Technical know-how' and 'Royalty' as 'Capital Expenditure' and, hence, made additions thereof along with others. Payment towards 'Technical know-how' and 'Royalty' in the AY 2003-2004 were ₹ 29,40,64,000/- and 18,55,24,000/-, respectively. 24. The last case up for consideration relates to AY 2005-2006 wherein, Assessee filed return of income on 31.10.2005, showing income of ₹ 2,45,12,65,555/-. Since fore .....

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alty' were ₹ 26,62,04,000/- and ₹ 44,27,31,000/-, respectively. 25. In all the aforesaid matters, appeals preferred by assessee were disallowed by CIT(A), holding that payments made towards Technical know-how' and 'Royalty' cannot be treated Revenue expenditure. Said decision of Commissioner has been reversed by Tribunal in judgments and orders impugned in these appeals. Therefore, the sole question up for consideration in all these appeals, as noticed above, relates .....

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Goel, learned counsel appearing for appellant in support of his submissions placed reliance on judgments in Scientific Engineering House (Pvt.) Ltd. versus Commissioner of Income-Tax, Andhra Pradesh (1986) 157 ITR 86 (SC); Alembic Chemical Works Co.Ltd. Versus Commissioner of Income Tax, Gujarat (1989) 177 ITR 377 (SC); Jonas Woodhead and Sons (India) Ltd. versus Commissioner of Income Tax and (1997) 224 ITR 342 (SC). 27. Per contra, Sri Roopesh Nath, assisted by Sri R.S. Agarwal, Advocates, app .....

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Commissioner of Income Tax versus I.A.E.C(Pumps) Ltd. (1998)232 ITR 316; a full judgment of Andhra Pradesh High Court in Praga Tools Ltd. Versus Commissioner of Income Tax (1980) 123 ITR 773; a Bombay High Court judgment in Commissioner of Income Tax versus Tata Engineering & Locomotive Co.Pvt.Ltd.(1980) 123 ITR 538 (Bombay), a Calcutta High Court judgment in Commissioner of Income Tax versus Hindustan Motors Ltd.(1991) 192 ITR 619 (Cal.) and two judgments of Delhi High Court in Shriram Ref .....

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Technical Collaboration Agreement dated 21.5.1996. According to it, acquisition of 'Technical know-how' and licence are crucial for setting up business of Assessee. It is not something which has been obtained subsequently in an already running business but 'Technical know-how' and licence was foundation of the business in question and for setting up of industrial establishment of Assessee. Shri Goel urged that apparently, agreement was signed in 1996 and at that time, Assessee wa .....

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also indicates that it covers a time which Assessee would take for its establishment and to run business, so as to make payment smoothly. Even earlier activities of company of Assessee, i.e incorporation of joint venture, approval from Government of India and foreign collaboration is for manufacture of motor car on proposed location. All these would show that firstly plant and manufacturing faculties were to be set up, and technical collaboration was foundation for this purpose. Apparently it wa .....

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Hence, it is only a tactical foreign collaboration but for all practical purposes, it is an establishment by a foreign company itself in India and there is virtually no difference in two entities. Hence, it cannot be said that there is payment by one entity to another but, in fact, entire payment is for the benefit of same entity; and agreements etc. are only to wriggle out tax liability on payments under title 'Technical know-how' and 'Royalty'. 30. On the contrary, defence of A .....

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with HMCL, Japan and Assessee would thereafter not be entitled to use the same for its purpose. Assessee is not authorised to transfer to any other person 'Technical know-how' etc. on its own but here also it is absolutely controlled by HMCL, Japan, (licensor). Thus, Assessee had only limited right to use 'know-how'. Assessee cannot be said to be owner of said 'Technical information/know-how' and it did not acquire any intellectual property right therein."Technical .....

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with respect to supply of manufacturing facilities as well as for obtaining services of technical experts for installation of those facilities. 'Technical know-how' supplied by HMCL, Japan was nothing to do with business or manufacturing by Assessee. It has nothing to do with business plants and machinery, which were capitalized under the relevant Assets heads and depreciation was provided therefor. No such depreciation is permissible in respect of 'Technical know-how' fee and &# .....

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Capital Expenditure', it would be taxable. 32. The term 'Revenue Expenditure' as such is not defined in the Act, 1961. Thus term 'Revenue Expenditure' was explained in Assam Bengal Cement Co. Ltd. Versus Commissioner of Income Tax , AIR 1955 SC 89 (at page 96) as under: "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 e .....

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t 1922. Ciba of India Limited was originally floated in the name of 'Ciba Pharma Limited' and subsequently became "Ciba of India Limited", an Indian subsidiary of "Ciba Limited, Basle", (the Swiss Company), and is engaged in the development, manufacture and sale of medical and pharmaceutical preparation. Swiss company originally carried on business in India of selling its products through a subsidiary called "Ciba (India) Ltd". After incorporation of Assesse .....

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of Indian patents and or trade marks" to communicate the results of its research work, in so far as they relate to the products which were already manufactured or processed or sold by Assessee. Court held that 'Royalty' payment made by Assessee were revenue expenditure and, for this purpose, it held that secret processes were not sold by Swiss company to Assessee. Further, the reasons that prevailed with the Court to hold 'Royalty' payment as 'Revenue Expenditure', a .....

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any; (e) there was no transfer of fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to Assessee and (f) stipulated payment was recurrent dependent upon the sales, and only for the period of agreement. Court stressed upon the fact that Assessee acquired under the agreement merely right to access to technical knowledge and experience for the purpose of carrying its business and was merely a licensee for a limited peri .....

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a sugar factory engaged in manufacture and sale of crystal sugar at Pilibhit, State of U.P. In 1952-53, a dam was to be constructed by State of U.P at a place called Deoni. A road, Deoni Dam-Majhala was constructed connecting Deoni Dam with Majhala. Collector requested Assessee to make some contribution towards construction of Deoni Dam and Deoni Dam-Majhala Road pursuant whereto Assessee contributed certain amount. Assessee also contributed some amount towards meeting the cost of construction o .....

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venue Expenditure" another "Capital Expenditure". The matter was referred to a third Member who instead of going into the question whether expenditure could be treated as "Capital Expenditure" or "Revenue Expenditure" took a third view that contribution was made by Assessee as a good citizen and cannot be said to be in relation to business of Assessee and for that reason it disallowed payments as deductible expenditure under section 10(2)(xv). Assessee, therefo .....

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ct to another item, which Assessee paid under Sugarcane Development Scheme, Court followed the test laid down in British Insulated and Helsby Cables Ltd. Vs. Atherton 10 TC 155 where learned Law Lord Cave L.C. stated "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating s .....

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hat in all cases securing a benefit for the business, would be prima facie capital expenditure so long as the benefit is not so transitory as to have no endurance at all. Court relied on its earlier decision in Empire Jute Company Ltd. Versus Commissioner of Income Tax (1980) 124 ITR 1 (SC) 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. Court further s .....

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he assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though advantage may endure for an indefinite future." 35. It was therefore, held that the expenditure incurred in the scheme was on revenue account and not capital. Hence, it was allowable as deduction under section 10(2)(xv). 36. Praga Tools Vs. Commissioner of Income Tax (Supra), a decision of Full Bench of Andhra Pra .....

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igns, drawings, Technical know-how and assistance. It also agreed to assist Assessee in the production of main castings of machine and also to sell all relative jigs, fixtures, tools, gauges, raw materials and special parts as ordered at their normal commercial retail value. The agreement also required foreign collaborator to furnish all technical information with the latest modifications and standards, for this Assessee was to pay certain amount to foreign collaborator on signing of agreement a .....

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ances which would help in arriving at a particular inference. It referred to an extract from a Full Bench judgment of Lahore High Court in Benarsidas Jagannath, In re (1947) 15 ITR 185, which was approved in Assam Bengal Cement Co.Ltd. Vs. CIT (Supra) which reads as under: "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 expenditure. If o .....

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he aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence." 37. It also referred to the decision of Supreme Court in Gotan Lime Syndicate versus Commissioner of Income Tax (1966) 59 ITR 718, wherein it was held that expenditure incurred to secure an enduring advantage must not invariably be treated as capital expenditure and royalt .....

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"Where the expenditure has a direct nexus, connection or relation to the carrying on of or conducting the business of the assessee, it must be regarded as an integral part of the profit-making process. In such a case, it must be held to be a revenue expenditure. Where the purpose and object of the expenditure is to acquire an asset or right of an enduring nature or permanent character, it is a capital expenditure." 38. In Scientific Engineering House (Pvt.) Ltd. versus Commissioner of .....

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pparatus like dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements dated 15.3.1961 and 31.3.1961 with M/s Metrimpex Hungarian Trading Company, Budapest for manufacture of microscopes and theodolites. Foreign Company agreed to supply Indian company all 'Technical know-how' required for manufacture of two instruments namely microscopes and theodolites. The object was to enable Assessee to manufacture said instruments of certain sp .....

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ook the view that what Assessee had done was to make an outright purchase of certain specimen drawings, charts, plans, etc, on special papers and these documents collected together, constituted a book on which depreciation would be allowable. In further appeal, Tribunal observed that some of the services of Foreign Collaborator do qualify for 'Revenue' account and therefore, to the extent, services qualified for 'Revenue' account, may be allowed to be deducted and rest may be add .....

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s no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business." 39. Court also referred and approved decision in Commissioner of Income tax Vs. Elecon Engineering Company Ltd., (1974) 96 ITR 672 (Guj) wherein it was held that drawings .....

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ted with M/s. Meiji Seika Kaishna Limited ("Meiji" for short), a reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to Assessee, requisite 'Technical-know-how' so as to achieve substantially higher levels of performance or production of more than 10,000 units of penicillin, per millilitre, of 'cultured-broth'-with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by f .....

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ifications of the main equipment in such pilot plant, arrange for the visits to and training at Assessee's expense, of technical representatives of the Assessee, Meiji's plant at Japan and to advise Assessee in the large scale manufacture of penicillin for a period, limited to 2 years from the effective date of the agreement. It was also stipulated that technical know-how supplied by Meiji was to be kept confidential and secret by Assessee. It was prohibited from parting with technical k .....

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lier judgments, Court culled out certain principles laid down therein to determine, whether expenditure of Assessee was 'Capital Expenditure' or 'Revenue Expenditure' and said : "(i) When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an e .....

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s or working it with a view to produce the profits, it is a revenue expenditure. (iii) The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." 41. Court in Alembic Chemical Works Co.Ltd.(Supra) held that three aspects should be considered, (a) the character of the advantage sought, and in this, its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, .....

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rict application of any single legal principle. 43. Referring to B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) AC 224 (PC), Court in Alembic Chemical Works Co.Ltd.(Supra) observed that solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances, some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates oth .....

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e flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability, appropriate to the context. It was clarified that the phrase 'enduring benefit' in British Insulated and Helsby Cables Ltd. v. Atherton, 1926 A.C. 205,213 (HL), was not thinking of advantages that are permanent. There is a difference between the lasting and everlasting. Th .....

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existing manufacturing operations for the commercial production of penicillin in the Assessee's existing plant had become obsolete or inappropriate in relation to exploitation of the new sub-cultures of the high yielding strains of penicillin. It cannot be said that mere introduction of new bio-synthetic source required erection and commissioning of a totally new and different type of plant and machinery. Adding the fact that agreement placed limitations on the right of assessee in dealing w .....

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into an agreement with M/s. Jonas Woodhead and Sons Ltd. of United Kingdom for manufacture of all types of springs and suspension for road and rail vehicles. The foreign company was to provide Assessee, technical information and know-how, relating to and suitable for manufacture of the products as well as the technical know-how relating to setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other dat .....

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as Tribunal in appeal and also in High Court and therefore, in last, matter came to Supreme Court. The questions considered by Court, were (i) whether a particular payment made by an Assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether Assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the tech .....

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the collaboration of the foreign firm; (iv) what is the cumulative effect on a construction of the various terms and conditions of the agreement and (v) whether Assessee derived benefits coming to its capital for which the payment was made. 45. Relying on tests laid down in the earlier authorities including Alembic Chemical Works Co. Ltd, vs Commissioner Of Income Tax (supra), Court decided the issue against Assessee observing that under the agreement with foreign firm Assessee had to set up a n .....

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venue Expenditure'. 46. In Commissioner of Income Tax, Hyderabad versus Warner Hindustan Ltd. 1998 (9) SCC 533, Court did not examine this aspect in detail since the amount involved in dispute was small. Hence, it is not an authority on the question whether technical fee paid to a foreign company would be a ''Capital Expenditure' or ''Revenue Expenditure'. 47. In Commissioner of Income Tax Vs. I.A.E.C. (Pumps) Ltd. (supra) again this question arose whether amount paid .....

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ner of Income Tax Vs. Prem Heavy Engineering Works Pvt. Ltd. (2006) 282 ITR 11 (All) also had an occasion to consider a similar question. Assesee entered into an agreement on 11.04.1984 with the West German Company who was specialized in manufacture of machinery and equipment for Cane Sugar Industry. Assessee itself was a company engaged in the business of manufacture and sale of Sugar Machinery parts. Assessee was interested in acquiring 'Technical know-how' from foreign company on Cane .....

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ing plan, operation and maintenance instructions, information on the storage of spare parts etc. The agreement allowed to make use of the 'Technical know-how' to manufacture the mill at its workshops in India, to sell the mill within India without any limitation and also to export the mill to Countries other than certain Counties mentioned in the agreement. Assessee was entitled to use know-how for the purpose of performing under agreement only and keep such documentation confidential ev .....

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it was not of enduring nature and a ''Revenue Expenditure' and not ''Capital Expenditure'. This decision evidently makes it clear that therein agreement and parting of Technical know-how was not for establishment of plant and machinery but for manufacture of equipment and machinery of Cane Sugar Plant which was a distinguishing feature. 49. The other judgments relied on behalf of Assessee, of different High Courts, basically have examined the issues in the light of Supre .....

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of appeals in question, we find that there was no existing business for improvising whereof "Technical Know-how Agreement" was executed between HMCL, Japan and HSCIL (Assessee). In fact no company for such production existed. A joint venture company, with aim and objective to establish a unit for manufacture of automobiles and parts thereof was brought into existence by HMCL, Japan and Seil India in the form of HSCIL. As already noticed, HMCL, Japan (Foreign Company) held about 99% sha .....

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for establishment of plant, machinery etc. so as to bring into existence manufacturing unit for the Products. The agreement also provided for continuous assistance at every stage. 51. Thus one of the test laid down in M/s Jonas Woodhead & Sons Ltd. Vs. The Commissioner of Income-Tax (Supra) that, a completely new plan with a complete new process with new technology for manufacture of product was brought into existence is satisfied. Technical know-how was not made for betterment of existing p .....

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t be any further continuance of manufacture of product with technical know-how of foreign collaboration. Virtually, life of manufacture of product in the plant and machinery, established with assistance of foreign company is co-extensive and there is no distinction whatsoever. The agreement admittedly is framed in a manner so as to give a colour of licence for a limited period having no enduring nature but a close scrutiny of agreement shows otherwise. Various tests laid down in judicial precede .....

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e option of licensor. In other words, licensee in such contingency would hand over unsold product and parts to licensor for sale by him. In case licensor does not exercise such option and product is allowed to be sold by licensee, thereupon licensee would continue to pay royalty as per rates agreed under the agreement. Clauses 19 and 21, in our view, make the agreement in question, i.e., establishment of plant, machinery and manufacture of product with the help of technical know-how, co-extensiv .....

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bring into existence an asset or advantage of an enduring benefit of trade, it would be Capital and not Revenue. In the present case technical know-how is also used to bring into existence manufacturing unit which obviously is of enduring in nature. 54. The term "Revenue Expenditure" is explained in case of Assam Bengal Cement Co. Ltd. Versus Commissioner of Income Tax(Supra) and applying the same to the contents of agreement up for consideration in this case, we find here at that expe .....

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ital Expenditure" and not "Revenue Expenditure". We are also fortified in taking the above view in the light of judgment in Commissioner of Income Tax vs. Ciba of India Limited (Supra). The agreement was crucial for setting up plant and machinery for manufacturing the project and major stockholder was foreign company i.e. HMCL Japan. Without said agreement, the business in question could not have been started or run or continue to run and with the end of the agreement business wil .....

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as affirmed findings of A.O. with regard to "Technical Know-how" fee so as to be treated as 'Capital Expenditure' holding as under: "Beyond doubt, it is established that but for the technical know how provided, the plant would have neither come into existence nor could have started manufacture of vehicles. The technical know how provided enabled the setting up of the manufacturing activity/plant. The A.O. has rightly observed that the technical collaboration agreement was .....

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ical know how provided are for setting up of the plant and manufacture of vehicles. As such the repeated pleas of the appellant that the appellant acquired only limited rights on the technical know how and is not free to transfer, assign or convey the know-how/technical information to any third party, has no substance. The technical know how was passed to it not to be sold to another entity but for the purpose of manufacture of vehicles and the appellant being in possession of this technical kno .....

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roved by the Government of India has no relevance as the Income Tax Act provisions are applicable to it. It is pertinent to mention here that the appellant company entered into an agreement with the Associate enterprise in Japan and copies of the TCA were submitted to the Government of India/relevant Ministries as per the provisions necessitating submission of copies of agreements. As such the TCA has not been "approved" by the Government of India so as to imply that the technical know .....

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time expenditure of capital nature, the payment of which has been staggered over 5 years because, as per company's own projection, the company being in loss, was to pick up its car sale business and generate profit. It is for this reason that is was decided to make the payment of technical know how fees in 5 equal installments. As such this was an act of convenience for a one-time capital expenditure. The appellant's plea that the know-how related to manufacturing process is usually an .....

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holding to 99% and above and thus got virtually entire control and ownership over the alleged joint venture. A.O. has found this exercise as diversion of profit. Assessee explained it to be in accordance with Government policy. Even if the same aspect is ignored, as a relevant consideration for deciding the questions up for consideration before us, yet we find that reasons given in the light of various clauses of the agreement so as to treat "Technical Know-how" fee as "Capital Ex .....

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