TMI Blog2013 (2) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... ee non exclusive license to use the licensed technology. 2. On the facts and circumstances of the case the Ld. CIT(A) erred in allowing the claim of depreciation of ₹ 1,07,905/- of the Assessee considering the peripheral to be part and parcel and inclusive in the term computer, thereby allowing 60% depreciation as against 25% available under the Act. 3.1 The first issue is in respect of the royalty payment of ₹ 1,38,23,945/- paid by the assessee to the Carraro Spa, Italy which was treated by the A.O. as a capital expenditure and disallowed the same. The facts which reveal from the record are as under. The assessee company is in the manufacturing and trading of Tractor Transmission aggregates and Front Axles. The assessee is a joint venture company of Carraro Spa, Italy and Escorts Ltd. of India. Carraro Spa, Italy along with the Simest Spa holds 51% of the equity of the assessee and Escorts Ltd. holds the balance 49%. The A.O. has observed that the assessee had paid an amount of ₹ 1,84,31,927/- to Carraro Spa, Italy as a royalty paid for technical knowhow and which was claimed as the revenue expenditure. The A.O. sought the explanation of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards the goods sold in domestic market during the year in terms of the technical collaboration agreement and hence, the amount of royalty is directly linked with the sales revenue and it is only on account of the revenue expenditure. The Ld. CIT(A) accepted the plea of the assessee that the royalty payment by the assessee to Carraro Spa, Italy as per the terms of the agreement was with regard to the non-transfer of the ownership of the technology being used by the assessee company and the royalty payment was based on the annual sales made by the assessee. The Ld. CIT(A) concluded that the assessee has been granted non-transferable license to knowhow and that technology to produce supplied by Carraro Spa, Italy could remain exclusive property of the licensor and the ownership right is not transferred to assessee company. The Ld. CIT(A) also observed that the expenditure is linked to a small percentage of sale of products in Indian market and therefore explanation (3) to section 32 is not applicable here. The Ld. CIT(A) also observed that the A.O. should read the whole agreement of technical knowhow and apply the terms of Agreement in the proper spirit. He also followed the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause no.13 and he said that till the expiration of the agreement, assessee having contractual obligation to pay the royalty. The Ld. Counsel referred to clause no.13.2 of the Agreement where the consequences on the expirations of Agreement are explained. He put his emphasis on the said clause and argues that after the expiration of the period of the agreement, the assessee cannot use the licensed trade mark. He therefore, submitted that when the period is mentioned in the agreement that clearly suggest that there is no exclusive right to the assessee to use the Licensed Technology. He further argues that for understanding the contractual nature between the assessee and the Carraro Spa, Italy, the entire agreement as such is to be understood. He also made his submissions on the decisions relied on by the Ld. D.R. more particularly in the case of Liquor Firm 190 ITR 197 (Ker.) as well as the different decisions relied on by the A.O. He submits that the decision in the case of Southern Switchgear Ltd. vs. CIT 232 ITR 359 (SC) relied on by the Ld. CIT(DR) is rendered on the different contractual terms as in that case there was an exclusive right to the assessee to use the technical kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are also explained in the agreement but as all are not relevant for us, hence only important and relevant terms of their Agreement are reproduced here in under. 6.1 The expression Licensed Technology has been defined in clause no.1.5, which reads as under: Licensed Technology The technical information, drawings, know how data, techniques, plans and materials specifications on manufacturing, equipment, methods, process and formulas and the improvements thereof owned by or licensed to Carraro or its subsidiaries and followed and used by same in the manufacture of the Licensed Products out excluding technology the transfer or license of which to Carraro India would be prohibited, either generally or specifically, by any statutory or regulatory requirements, competent authority or contractual obligations to which Carraro or its subsidiaries are a party. 6.2 Clause no. 2.1 is also relevant which reads as under:- Grant and Scope of the License. Carraro hereby grants to Carraro India the exclusive right, without the right to sub-license: (a) to manufacture, solely I the Territory, the Licensed products under the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigns shall have no rights whatsoever over it. (b) At the expiration of this Agreement pursuant to Article 13 and subject to the complete payment of the Royalty. Carraro India shall be deemed to have acquired a perpetual and royalty free non exclusive licence to use the Licensed Technology. 6.5 Clause 7 and 8 are in respect of manufacture of the licensed product and use of the licensed trade mark and which are relevant to the same are reproduced as under: MANUFACTURE OF THE LICENSED PRODUCTS 7.1 General, Carraro India shall throughout the term of this Agreement manufacture the Licensed Products strictly in accordance with the Licensed Technology and any statutory or regulatory requirement applicable thereto at any relevant time in the Territory. 7.2 Quality Controls; Carraro India shall maintain adequate quality standards and specifications for the Licensed Products to assure that the good name ad reputation of Carraro are not adversely affected. Carraro India s manufacturing and assembly process, facility, equipment, inventory as well as purchased components and raw material may be audited annually, at agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard Formats which it deems fit for use in the Territory, provided, however, that Carraro India shall not in any way implement any such proposed formats unless the same has been previously approved in writing by Carraro. 8.4 No Other Trademark; Carraro India shall not affix to or otherwise identify the Licensed Products by any trademark, sign, logo, label, tag, or other identification other than the Licensed Trademark or any label or indication which might be imposed to be affixed thereto by any statutory or regulatory provision in force in the Territory. 6.6 Clause No.11 lays down the terms of the payment of the fees/royalty which are as under: 11. FEES AND REIMBURSEMENT 11.1 Fees Carraro India will pay to Carraro, until expiration of this Agreement, as consideration for the License and for the rendering of the Technical Assistance pursuant to this Agreement a royalty (hereinafter the Royalty ) to be paid every six (6) months (hereinafter the Given Period ) which will be equal for each Given Period to 2% (two percent) of the Net Sale Price at the end of the relevant Given Period. 11.2 Sales Reports Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o shall hold (whether directly or through any Admitted Desinee of Carraro, as defined and pursuant to the Shareholders Agreement) not less than fifty-one (51%) percent of the paid up capital of Carraro India, Carraro India shall have the right to continue using the corporate name of Carraro India but provided further more that in the event of Carraro shareholding should fall below the said fifty-one percent (51%) then, in such event, Carraro India shall forthwith and take all necessary steps in order to promptly change its corporate name to another name not including the word Carraro or any other word confusingly similar thereto; (b) Carraro shall have the right to exercise the option right set forth under Clause 14.4. 6.8. The termination clause of agreement is as under:- TERMINATION 14.1 Either party Termination Either party shall have the right to terminate this Agreement, before the expiry, at any time upon written notice given to the other party under any of the following circumstances; (a) In the event the other Party commits a material breach of this Agreement and such breach is not cured, fully and effectively, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to manufacture the first steering axle and its optional accessories which are intended for use in 35 HP 55 HP agricultural tractors. The specifications are also given those are not much more important for us. Prima facie it appears that the assessee has been conferred with the absolute License to manufacture and sell with the brand name of the Carraro Spa, Italy the Licensed Products mentioned in the schedule. As rightly argued by the Ld. Counsel, now we have to see the terms of the Agreement between assessee and the Carraro Spa, Italy, whether in fact the absolute right is confirmed on the assessee to use the technology for the purpose of manufactured Axles to sale save in specified territory. There is no dispute about the fact that only few parts are manufactured by the assessee. An agreement is also approved by the RBI. Clause 2.1 is important to understand the limits on the rights of the assessee to use the license. The use of the license or right given to the assessee is confined to himself and there is no right to sub-license the technology which has been supplied by the Carraro Spa, Italy, to the assessee. Clause no.2.4 make the further clarifications that assessee should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Though in the said case the agreement was stated to be in force for the period of 10 years, there was no prohibition for the use of the technical data by the assessee after the period of the 10 years nor there was any clause requiring the said assessee to return the technical data in respect of the benefit under the said agreement. But it is not the case of the assessee. We have also considered the decisions relied on by the Ld. CIT (DR) in the case of CIT Vs. Naya Sahitya 84 ITR 567 (Del) and to Visakhapatnam Sugar and Refinery Ltd. Vs. CIT 47 ITR 139 (AP) and in our opinion, both the decisions are not helpful to the revenue as the facts are totally different. In our opinion, the Ld. CIT(A) has rightly allowed the expenditure of the royalty as a revenue expenditure and we find no reason to interfere with the findings of the Ld. CIT(A) on the above reasoning. 9. In the result, the ground taken by the revenue is dismissed. 10. The next issue is the percentage at which the depreciation is to be allowed in the peripheral of the computer. The A.O. has observed that the assessee has claimed depreciation @ 60% on the computer accessories and peripherals like printer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. We have already adjudicated the identical issue in the A.Y. 2003- 04 confirming the order of the Ld. CIT(A) following reasoning given in the said year on this issue. In this year also, we confirm the order of the Ld. CIT(A) and ground no.1 is dismissed. 13. So far as ground no.2 is concerned, it is in respect of the percentage of the depreciation on the computer peripherals and accessories. We have also decided the identical issue in assessee s own case in the A.Y. 2003-04 following our reasoning in the said year, we confirm the order of the Ld. CIT(A) in this year also. Accordingly, ground no.2 is dismissed. 14. Ground no.3 is in respect of the disallowance of ₹ 1,40,915/- on account of exchange fluctuation loss. The A.O. has observed that the assessee has claimed the loss of ₹ 1,40,915/- has foreign exchange fluctuation loss. As observed by the A.O., as per the assessee s submission dated 11.12.2006, the loss claimed pertains to the unrealized portion on account of reinstatement of creditors, debtors and loans availed. In view of the A.O., the reinstatement of liability is in the nature of the provision and it provides for change to the avai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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