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TMI Blog2015 (9) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... cranes and spare parts, had filed its return for impugned assessment year declaring income of Rs. 4,83,41,12,190/-. During the course of assessment proceedings it was noted by the AO that a sum of Rs. 91,02,00,000/- was shown as capital work-in-progress. Assessee had during the relevant previous year claimed interest expenditure of Rs. 4,98,17,000/-. As per the AO, if assessee had sufficient surplus for funding its capital work-in-progress, then it would not have incurred such heavy interest expenditure. When put on notice assessee replied that it had not incurred any interest expenditure on the funds used for capital work-in-progress. AO however did not accept this contention. According to him assessee had availability of surplus funds, but it had outflow of Rs. 56,08,80,810/- for acquisition of fixed assets alone. Thus as per the AO assessee could not establish that interest-free funds were available with it for utilisation in the capital work-in-progress. Relying on the judgment of Hon'ble Delhi High Court in the case of CIT v. Tin Box Co [(2003) 260 ITR 637], AO made interest disallowance of Rs. 4,98,00,000/-. Actual disallowance as per the AO ought to have been Rs. 11,60,50,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were no loans what-so-ever raised by the assessee during the relevant previous year. Hence in our opinion interest disallowance was only presumptive without any basis. Ld. CIT (A) was justified in deleting it. No interference is called for. Ground.2 is dismissed. 09. Ground.3 is reproduced below : "On the facts and in the circumstances of the case the decision of learned CIT (A) on the issue of provision of warranty is not acceptable. The Ld. CIT (A) has not analysed the issue for holding that the ratio laid down by the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd reported in 314 ITR 062, Karnataka High Court decision in Motor Industries Co. Ltd in concluding that post sale warranty expenses form part of the sale proceed fixed by the company and held that the additions made by the AO cannot be sustained and the same is deleted." 10. Facts apropos are that assessee had charged a sum of Rs. 38 lakhs towards warranty in its profit and loss account. AO on verification of the records it was found that an opening warranty provision of Rs. 27,21,000/- and there was a current debit of Rs. 23,26,000/-. However, as per the AO assessee had incurred only Rs. 19,38,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a P. Ltd (supra). 14. We have perused the orders and heard the rival contentions. There cannot be any dispute that the type of equipment assessee was selling would have necessarily carried with it a warranty. Therefore the view of the AO that assessee could not have incurred any warranty expenditure and ought not have made any warranty provisioning prima-facie appears to be incorrect. What we find from the assessment order is that assessee was unable to provide any details as to the actual warranty expenditure of Rs. 19.38 lakhs incurred during the relevant previous year nor the basis on which provision amount of Rs. 23.36 lakhs was arrived at. Judgment of Hon'ble Apex Court in the case of Rotork Controls India P. Ltd (supra) cannot be cited as a precedent for claiming any amount as provisioning at the sweet will of an assessee. Hon'ble Apex Court has set out certain clear criteria for allowance of such claims. After considering various judgments on the issue, Hon'ble Apex Court held that there should be facts which would establish existence of defects in items manufactured and sold and the historical trend should indicate expenditure being incurred for warranty. Or in other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that no lumpsum technical knowhow fees was to be paid by the assessee to HCCL, but a royalty had to be paid by the assessee calculated at the rate of 1% of the net ex-factory selling price of the units sold. Such royalty was payable for a period of seven years from the date of commencement of commercial production or ten years from the execution of agreement, whichever expired earlier. From these conditions set out in the agreement, AO came to a conclusion that assessee was not liable to make any payment to HCCL after the period of seven years or ten years, as the case may be. As per the AO once this period was over assessee could use the technical know how obtained for itself and continue manufacturing the Hitachi Licensed products on its own without making any payment to HCCL. Reliance was placed by the AO on the annual report of the assessee company wherein it was mentioned that design team of the assessee was developing attachments / aggregates and features for hydraulic excavators, which was one among the many products for which royalty was paid by the assessee. Thus as per the AO, intellectual property embedded in these items for which royalty was being paid by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) submitted that the technical licence agreement dt.01.09.2006 placed at paper book pages 78 to 93A clearly indicated that assessee had no right to transfer the technical know how made available by HCCL. Assessee could sell products only under the brand name of Tata Hitachi. Agreement only gave a right for using the trade mark for a specified number of years. As per the Ld. AR assessee did not get any enduring benefit. Period of agreement was only for seven years and therefore the payment effected by the assessee at the rate of 1% of sale value was nothing but revenue out go. Reliance was once again placed on the judgments of Hon'ble Delhi High Court in the case of EKL Equipment Appliances (supra) and Hon'ble Gujarat High Court judgments in the cases of Ashoka Mills Ltd (supra) and Raipur Manufacturing Co. (Supra). Specific reliance was also placed on Chennai bench decision of the Tribunal in the case of Nippo Batteries Co. Ltd v. ACIT [(2011) 48 ITR (Trib) 184]. 20. We have perused the orders and heard the rival contentions. Issue before us is whether the payments effected by the assessee pursuant to an agreement dt.01.09.2006 to M/s. HCCL was a revenue out go or a capital out-g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to manufacture the Hitachi License Products upon prior consent of Hitachi's resident representative at Telcon. In such event, Telcon may disclose to the third party such of the Technical Know How licensed by Hitachi as may be required, subject to appropriate confidentiality undertakings by the sub-contractor concerned; Provided however, Telcon shall continue to be primarily responsible for ensuring compliance of its obligations hereunder. 2.4 Hitachi License Products manufactured by Telcon shall be sold only under the trade name/ brand name of "Tata-Hitachi" in India. Telcon shall not use "Hitachi" as part of the trade name/ brand name outside India, except with the prior written consent of Hitachi. Telcon shall, if required, enter into separate trade mark license agreements for the use by Telcon of the "Hitachi" and "Tata" trade! brand name and trade marks, upon terms and conditions (including payments, if any) acceptable to the respective owners thereof. 2.5 The rights and licenses granted hereunder shall be valid individually, for each Hitachi License Product. 2.6 Upon phase out by Telcon of the manufacture of any Hitachi License Product, Telcon shall immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months from the Effective Date and the remaining items shall be made available to Telcon no later than eight (8) months from the Effective Date. However, Hitachi shall make all efforts to make them available to Telcon at the earliest. 21. In our opinion it is clear that HCCL was to provide the assessee, technical know how for manufacture of Hitachi license products. It had also agreed to make available such know how in writing. Assessee was having the right to establish subsidiaries, branch office and market the Hitachi license products on non-exclusive basis as per the different category classification. At this juncture it is necessary to have a look at the consideration part of this agreement which is given in articles 15 & 16. These article are reproduced here under : 15.1 For the Hitachi Licensed Products listed in item 1 to 17 of Schedule II of the Shareholders' Agreement and subject to 4.11 of the Shareholders' Agreement, Telcon shall pay to Hitachi, a royalty on the sale of Hitachi License Product(s), which shall be calculated on the "net ex-factory selling price" of Telcon for the Hitachi License Products, at the rate of 1% (one percent) as-specified in S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived and HCCL had made available technical know how for manufacture of Hitachi license products. As argued by the Ld. DR just because the consideration was calculated as a percentage applied on net ex-factory selling price, we cannot say that it was a revenue outgo. Whether by this payment assessee got an enduring benefit can be gathered from article 24, which is reproduced here under : 24. 1 Unless terminated in the manner hereinafter provided, the term of this Agreement, for a Hitachi License Product, shall be the period commencing from the Effective Date and ending on expiry of eleven years from the date of commencement of commercial production thereof. Accordingly, notwithstanding the expiry of the Royalty Period, Telcon shall be entitled to continue the manufacture and sale of the Hitachi License Products for the aforesaid term of this Agreement. 24.2 For the Hitachi Licensed Products listed in item 1 to 17 of Schedule II of the Shareholders' Agreement, so long as the Shareholders Agreement continues to be in force and is effective, upon expiry by efflux of time, of this Agreement, Hitachi shall, upon the written request of Telcon, renew the same as so requested, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof against payment of royalty for such Products, in accordance with the provisions of this Agreement, with the use of the "Hitachi" brand name/ trade name and Hitachi shall be obliged to continue supplies of Components for such Products to Telcon in terms of this Agreement. Hitachi shall issue to Telcon a no-objection letter to enable it to source such Components from third parties after termination of this Agreement. (c) Hitachi shall be obliged to continue supplies of Spare Parts for such Products to Telcon in terms of this Agreement for a period of seven (7) years from such termination. 26.3 In the events of breach by Telcon specified under Article 25.2(i), 25.2(iii) or 25.3 above, the following provisions will apply: 26.3.1 With respect to Hitachi License Products not yet in commercial production by Telcon, Hitachi shall have the right to forthwith terminate this Agreement in which event all further rights and obligations of the Parties (other than those already accrued) shall cease immediately and Hitachi shall refund promptly to Telcon, all payments until then made by Telcon for such Products, whether by way of lump sum technical know how fees or otherwise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be obliged to continue supplies of Components for all such Products to Telcon in terms of this Agreement during such notice period and shall issue to Telcon a no-objection letter to enable it to source such Components from third parties thereafter and shall assist Telcon in doing so. (d) Hitachi shall be obliged to continue supplies of Spare Parts for all such Products to Telcon in terms of this Agreement for a period of seven (7) years from the end of the balance term of this Agreement. (e) During the notice period referred to above, Hitachi (but not Telcon) shall remain bound by the non-compete provisions of Article 18 of this Agreement. Provided that where the termination is on account of an event specified under Article 25.2(i) above, the aforesaid actions shall not prejudice any other rights and remedies available to Telcon. Article 27 General Provisions : 27. Subject to the provisions of Article 26 above, in the event of the termination of this Agreement, all rights and privileges of Telcon hereunder shall terminate and revert to Hitachi, and Telcon shall cease all use of the Technical Know how, including the intellectual property, and return to Hitachi al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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