9911796707
TMI Blog2019 (11) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... a company engaged in manufacturing high quality cement. It filed its return of income on 30.11.2011 declaring the total income of Rs. 50,95,00,880/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee has claimed additional depreciation to the tune of Rs. 3,03,91,277/-. From the various details filed by the assessee, the Assessing Officer noted that there are several items on which additional depreciation has been claimed that are not required for manufacturing activity or are mere replacements of plant & machinery earlier in use. He, therefore, asked the assessee to justify the same and to explain as to why the claim of additional depreciation on the various items as per para 1.1 of his order be not disallowed. The assessee, in response to the said notice submitted that all the items as pointed out by the Assessing Officer are integral part of the Plant & machinery which are essential for the smooth operations of the plant & machinery. It was explained that such items are not capable of being used in isolation since the application of such items is essentially based on the functionality of the plant & machinery. Therefore, they form an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of current repairs u/s 31(1) of the Act. Referring to the decision of the Hon'ble Supreme Court in the case of CIT vs. Mir Mohammad Ali, reported in 56 ITR 165, he submitted that where the assessee, a transport operator replaced petrol engines in two of his buses by new diesel engines, the Hon'ble Supreme Court held that the assessee was entitled to extra depreciation under the provisions of section 10(2)(via) of 1922 Act in respect of engines so replaced. He accordingly submitted that the assessee is entitled to additional depreciation and, therefore, the CIT(A) was not justified in rejecting the claim of the assessee. 8. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that if the expenses of repair and maintenance of the existing machinery are permitted, then, even the repair expenditure would be entitled to additional depreciation. She accordingly submitted that the order of the ld.CIT(A) being in accordance with law should be upheld. 9. We have considered the rival arguments advanced by both the sides and perused the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than Residential', eligible for depreciation at 10%, which were originally classified by the Appellant as 'Plant and Machinery', eligible for depreciation at 15%. 2.1. The Ld. CIT(A)/ Ld. AO has erred on facts and in law by not considering the detailed nature and use of the assets, while holding this disallowance." 10. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has charged higher rate of depreciation on coal sheds and new GI sheets and, therefore, he disallowed an amount of Rs. 8,75,709/- on account of excess depreciation claimed. Before the CIT(A), it was argued that the coal sheds are integral part of the manufacturing process and similarly the GI sheets upon the factory building cannot be treated as a building because it is a part of the plant. However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee and rejected the ground by observing as under:- "5.2 I have given careful perusal of the facts of the case. The claim of the applicant that the coal shed is part of plant and machinery is not acceptable because in a business operation of manufacturing each and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of 25% of Technical Know-how Fee incurred by the Appellant in the subject year, on the ground that such expenses have resulted in benefits of enduring nature to the Appellant and thereby constitutes a capital asset. 3.1 The Ld. CIT(A)/Ld.AO have erred on facts and in law in not appreciating that the Technical Know-how has been utilized for smooth running of the business of the Appellant and has not lead to acquisition of any new capital asset." 16. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings noted that the assessee has claimed expenses of technical know-how fee during the year to the tune of Rs. 14,09,84,000/-. This fee was paid to a foreign company M/s Heidelberg Cement Asia Pte Ltd. (HCA) in lieu of technical knowhow assistance from them. The assessee has debited the above amount as revenue expenditure. According to the Assessing Officer, this gives rise to benefit/advantage which is enduring in nature. He, therefore, asked the assessee to explain as to why the claim should not be allowed as a capital expenditure and not as a revenue expenditure. It was explained by the assessee that the expenditure was incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire business of the assessee. Relying on various decisions, the Assessing Officer held that 25% of the total technical know-how expenses of Rs. 14,09,84,000/- which comes to Rs. 3,52,46,000/- has to be treated as capital expenditure being spent towards acquisition of capital asset as it gives rise to enduring benefit which can be enjoyed by the assessee over a number of years. He, therefore, allowed depreciation on the above amounting to Rs. 88,11,500/- and made addition of Rs. 2,64,34,500/- to the total income of the assessee. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer. 19. Aggrieved with such order of the CIT(A), the assessee is in appeal. 20. The ld. counsel for the assessee strongly challenged the order of the CIT(A) upholding the order of the Assessing Officer. He submitted that the assessee was not a subsidiary of foreign company nor it is a case of diversion of any profit. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Hero Honda Motors Ltd., 55 taxmann.com 230 (Delhi), he submitted that the Hon'ble High Court in the said decision has held that where the assessee is engaged in manufacturing and sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer by treating 25% of such payment as capital in nature and thereby allowing only depreciation on the same. 21. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that the benefit received by the assessee on account of such payment amounts to enduring benefit beyond the terms of the agreement. Referring to the decision of the Hon'ble Supreme Court in the case of Southern Switch Gear Ltd., 232 ITR 359, she submitted that in that case the assessee has entered into a collaboration agreement for providing for technical know-how for setting up of a factory and operation thereof. The foreign company agreed not to manufacture products in India and given right to a third person to do the same. Referring to the clauses of the agreement, it was held that the technical know-how so acquired resulted in enduring advantage and benefit and that the same was available to the assessee for its manufacturing and industrial processes even after termination of the agreement. Since the factory and its operation would have been continued, though the duration of the agreement was five years, but, the assessee even after the expiry of the period, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. The agreement between the assessee and the HCA shows that the acquisition of technical know-how has brought in a complete and comprehensive overhauling of the entire business of the assessee. Therefore, the agreement clearly indicates that the technical knowledge the assessee obtained from this agreement with HCA secured to the assessee an enduring advantage and though benefit which was available to the assessee for its manufacturing and industrial process even after the termination of agreement ceases, but, when the agreement never terminates on account of revision/automatic renewal the benefit goes on and on. Further, continuous use of improved practices over several years leads to creation of institutional memory of advanced procedures and techniques. The Assessing Officer further noted that due to latent learning of systematic procedures and techniques through periodic training of personnel in the form of workshops and on the job trainings continues to reap benefits to the assessee way beyond periods confined with the agreement. According to him, the trained manpower continues to perform at higher levels of efficiency with better techniques even if the technical know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the MCL may reasonably require for the purposes of Agreement." 22.1 We find clause 5 of the agreement reads as under:- "Technical know-how fee in respect of each quarter of a year equal to 2% on the basis of the net ex-factory price of the produce exclusive of excise duties minus the cost of standard bought-out components and landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties and net of distribution costs (fright and forwarding) etc. and as shown in the unaudited/audited financial accounts of MCI." 22.2 Similarly, clause 13 of the agreement reads as under:- "13.1 Upon the expiration of the term or earlier termination of this Agreement, MCL shall: 13.1.1 at its own cost promptly return to HCA, or otherwise dispose of as HCA may instruct, all Technical Documentation and all other documentation and papers supplied by MCL by HCA and all copies thereof and notes and extracts taken there from by MCL, and 13.1.2 destroy all catalogues, advertising and promotional material, stationery and materials of any sort relating to the products...." 23. We find somewhat similar issue had come up before the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional models or types of two/three wheelers pursuant to 'model change' as specified in the model agreement. The term 'new models' was to mean new models developed by Honda at the request of the respondent assessee with new development code and subject to new model agreement. Similarly, the term 'model change' was defined as conduct through which a new model with new development code was made by a change in any part or entirety of the product, including but not limited to appearance, structure, characteristics or specifications and in each case was subject to a new model agreement. The agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated 24th January, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. 15. The other terms of the agreement were: (1) Rights and licenses granted by the licenso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to keep the said information secret and confidential and restrict its use strictly as per the first as well as the present agreement. The respondent assessee was to establish and maintain internal regulations and procedures for protection of secrecy. The information could be disclosed to employees, Directors or approved sub-contractors when it was reasonably necessary for the purpose of manufacture, assembly, repair and servicing, subject to obtaining a 'written promise' from the approved sub-contractors to treat all information as secret and confidential. (9) The aforesaid rights and obligations were to persist even on expiration or termination of the agreement. (10) The respondent assessee was not to use or cause or permit use by any third party, intellectual property right or technical information provided under the agreement. (11) The respondent assessee was not to claim any title or property right whatsoever during the existence of the agreement. Upon termination as a result of default of the respondent assessee, no such right, title, property or interest whatsoever could be claimed. (12) There were stipulations in case respondent assessee became aware or had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and compliances and the proprietorship and ownership right was never granted or transferred. The factum that after 10 years and after returning the tangible properties, the respondent assessee could still have continued to use technical knowhow and information would be a trivial and inconsequential factum as in the automobile industry, technology upgradation is constant and rapid. Gone are the days when one or two m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that whenever a payment is based on a percentage of turnover or profits, it necessarily has no relation to the capital value of the asset, because it cannot be known at the time of the agreement what the turnover or profits will be over a period of years. In another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124 Taxman 188, the Tribunal held, revenue payment is allowable as revenue expenditure, since it is related to sales and that it is paid for better conduct, efficiency and improvement of the existing business or product manufactured by the assessee. In the case of CIT Vs. Lumax Industries Ltd. (2008) 173 Taxman 290 (Delhi), this Court has also held that the payment of license fee on year to year basis for acquisition of technical knowledge would not amount to capital expenditure, but the revenue expenditure. 10. From the ratio of the above said cases, we are of the considered view that under the terms of the agreement as noted above, the ownership rights of the trade mark and knowhow throughout vested with G4F and on the expiration or termination of the agreement the assessee was to return all G4F knowhow obtained by it under the agreement. The payment of roya ..... X X X X Extracts X X X X X X X X Extracts X X X X
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