TMI Blog2022 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... terest income that were made by the A.O on an accrual basis qua the ICD s in question whose recovery had become doubtful. At this stage, we may herein observe, that as stated by the ld. AR, the aforesaid view taken by the CIT(A) in the abovementioned years i.e. A.Y 2006-07 and A.Y 2013-14 had not been assailed any further in appeal by the department, and thus, had attained finality. In the backdrop of the aforesaid facts, we are of the considered view, that now when the department itself had accepted that no addition qua the interest income on accrual basis with respect to the ICD s in question could be made, therefore, we have no hesitation in vacating the addition made by the AO. Addition of Excise Duty Refund - claim of the assessee that as the refund of excise duty was received by it subject to furnishing of bank guarantee for the said sum from a nationalized bank, which was to be kept alive and in full force till the main appeal before the Hon ble Apex Court was finally disposed off, therefore, the receipt of the said refund would not fall within the domain of section 41(1) of the Act, and thus, would not be exigible to tax during the year under consideration - HELD THAT: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the technical know-how services provided by the latter for facilitating carrying out the ongoing/existing business of manufacturing of refrigeration products by the assessee in a more technically viable and profitable manner, therefore, the same was rightly claimed by the assessee as a revenue expenditure for computing its income for the year under consideration and had wrongly been dubbed as a capital expenditure by the lower authorities. Our aforesaid view i.e where an assessee who is engaged in the business of manufacturing and selling certain products had made a payment to a foreign company for merely acquiring a right to use technical know-how, whereas the ownership and intellectual property rights in the said know-how remained with the foreign company, then, the payment in question would be in the nature of a revenue expenditure, is supported by in the case of CIT Vs. Hero Honda Motors Ltd., [ 2015 (2) TMI 368 - DELHI HIGH COURT] - We, thus, in the backdrop of our aforesaid observations not finding favour with the view taken by the lower authorities wherein they had rejected the assessee s claim for deduction of the payment made for the technical know-how to M/s Vilt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration which was correctly proposed by him as per notice u/s 251(2) of the Act dt. 2-1- 2008. 2. That on the facts and circumstances of the case and in law the CIT(A) erred in confirming the disallowance made by the Assessing Officer of the sum of ₹ 82,73,814/- paid to M/s Vilter Manufacturing Corporation USA as fee for user of knowhow by treating it as capital expenditure. 2.1 That the CIT(A) erred in not dealing with ground No.3.1, which was taken without prejudice, to the effect that the Assessing Officer erred in not allowing depreciation on the entire amount of consideration payable under the agreement. 2.2 That on the facts and circumstances of the case and in law the CIT(A) erred in holding that 25% of the assumed royalty is to be taken to the capital account without appreciating that no royalty was payable or paid and claimed as deduction, that no disallowance as such was made in respect thereof by the AO. 3. That on the facts and circumstances of the case and in law the CIT(A) erred in upholding the addition of ₹ 35,76,000/- (correct amount being ₹ 34,67,000) on account of alleged interest on Inter Corporate Deposits 4. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed by the A.O at ₹ 30,97,000/-. 3. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We shall hereinafter deal with the issues qua the additions/ disallowances made by the A.O, as well as the enhancements carried out by the CIT(A), as under: (A). Re; disallowance u/s 14A of the Act : 3.1 As is discernible from the records, the assessee company had during the year under consideration earned an exempt income from various streams amounting to ₹ 1,23,67,853/- and had claimed the same as exempt u/s 10(34)/10(35) of the Act. On a perusal of the records, it was observed by the AO that the assessee had disallowed only an amount of ₹ 100/- u/s 14A of the Act. On being queried, it was submitted by the assessee that it had not incurred any indirect expenditure on earning of the exempt income in question. However, the AO did not find favour with the aforesaid claim of the assessee, and was of the view that the expenses aggregating to ₹ 784.34 lakhs could be allocated towards earning of exempt income by the assessee. Backed by his aforesaid conviction, the AO, on a po-rata basis i.e. by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, had restored the matter to the file of the AO for deciding the issue afresh after giving the assessee a reasonable opportunity of being heard. 3.5 Per contra, the learned Senior Departmental Representative ( Ld. Sr. DR , for short) relied on the orders of the lower authorities. 3.6 We have heard the Ld. Authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record qua the aforesaid issue in question. Admittedly, it is a matter of fact borne from the record that the tribunal had vide its order passed in ITA No. 4106/Del/2004, dated 31.01.2007 r.w its order passed while disposing of M.A. No. 23/Del/2008, dated 14.03.2008 had directed that the disallowance u/s 14A be sustained to the extent of 10% of the amount of the dividend income earned by the assessee company. Also, we find that the aforesaid order of the tribunal had thereafter been followed by it while disposing off the assessee s appeal for A.Y. 2005-06 in ITA No. 4902/Del/2010 and 4662/D/2010, dated 03.02.2012, wherein the tribunal after taking cognizance of the fact that the CIT(A) had restricted the disallowance to 10% of the amount of divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was followed by it. Accordingly, the AO backed by his aforesaid conviction therein worked out an addition of ₹ 35,76,000/- towards interest income i.e. @ 21% of the impugned deposits in question. 4.1 On appeal, the Ld. CIT(A) finding no infirmity in the view taken by the AO, therein upheld the aforesaid addition. 4.2 We have heard the Ld. Authorized Representatives for both the parties qua the aforesaid issue i.e. addition of interest on ICD s which were doubtful of recovery. Admittedly, it is a matter of fact borne from the record that ICD s aggregating to ₹ 1,49,00,000/- had been rendered as doubtful of recovery, as a result whereof the assessee company was compelled to initiate legal proceedings against the aforementioned defaulting parties. Controversy qua the issue in question lies in a narrow compass i.e. now when the ICD s made by the assessee with the aforementioned three companies in itself had been rendered as doubtful of recovery, then, would it be obligatory on the part of the assessee company that was following the mercantile system of accounting to account for the interest income on the said deposits on an accrual basis in its books of accounts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that of Goyal M.G. Gases P. Ltd.(Supra), as seen from the following observations made by the Delhi H.C. in the later case : That both the Commissioner (Appeals) as well as the Tribunal had come to the conclusion that there was no real accrual of interest. It had been noted that the interest had not even recorded by the assessee in its books of account Die assessee had also issued a notice to the parties under section 138 of the Negotiable Instrument Act, 1881 for dishonor of cheques issued by all (except one of the debtor) followed by initiation of appropriate proceedings, The debts were written off as bad debts and were also allowed by the AO in the subsequent years Therefore realization of even the principal amount was in jeopardy and .therefore there could not be said to be any real accrual of income by way of interest. In view of the aforesaid, I hold that the AO was not justified in bringing to tax interest income on accrual basis in the facts of the case. The addition of ₹ 17,37,000/- is accordingly directed to be deleted. As observed by us hereinabove, the CIT(A), thereafter, had consistently while disposing off the appeals in the case of the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the case of Polyflex (India) Pvt. Ltd. vs. CIT (2002)257 ITR 343 (SC) . Accordingly, the AO backed by his aforesaid conviction made an addition of ₹ 1 crore in the hands of the assessee company. 5.1 On appeal, the CIT(A) finding no infirmity of the view taken by the AO, upheld the same. 5.2 Before us, the ld. AR fairly admitted that the issue in question was covered against the assessee by the judgment of Hon ble High Court of Delhi in the case of CIT vs Bharatpur Nutritional Products Ltd 356 ITR 285 (Del.) it was submitted by the Ld. AR, that the Hon ble High Court, had observed, that the furnishing of bank guarantee when payment has been received, will not make any difference as the language of Section 41(1) is clear that the amount should have been received either in cash or in any other manner. At the same time, it was submitted by the ld. AR that the assessee had acted in a bonafide manner on the written opinion that was obtained from M/s S.R. Dinodia Co., Chartered Accountants, New Delhi, wherein they had opined that the refund of the excise duty of ₹ 1 crore that received by the assessee company was not exigible to Income-Tax during theyea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectfully following the aforesaid view of the Hon ble High Court, therein uphold the order of the CIT(A), who had rightly concluded that the refund of the excise duty of ₹ 1 crore was liable to tax during the year under consideration. The G round of appeal no. 4 is dismissed. 6. We shall now take up the grievance of the assessee that the CIT(A) had grossly erred in law by traversing beyond the scope of his jurisdiction and enhancing the income of the assessee company by an amount of ₹ 1,38,131/- u/s 94(7) of the Act. Shorn of unnecessary details, the CIT(A) while disposing off the appeal had observed, that the assessee had shown income under the head Capital Gains totaling to ₹ 58,807/- which was arrived at after deducting a loss of (₹ 1,38,131/-) arising from short term capital assets from an amount of ₹ 1,96,938/- relating to short term capital gains. Backed by the aforesaid facts, the CIT(A) called upon the assessee to explain as to why the short term capital loss of (₹ 1,38,131/-) should not be disallowed in view of the provisions of section 94(7) of the Act. Accordingly, the CIT(A) after validily putting the assessee to show cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT 348 ITR 170 (Del). In the said order, it was observed by the Hon ble High Court that the CIT(A) has a power of enhancement in respect of such itemS or items of income which has been dealt with in the body of the order of the assessment, and arose for his consideration as per the grounds of appeal raised before him, being the subject matter of appeal. In sum and substance, it was therein observed that the power of the CIT(A) to enhance the income of the assessee could be validly exerciseD only qua such item or items of income which had been dealt with by the A.O while framing the assessment and arose for the consideration of the first appellate authority as per the grounds of appeal raised before him. For the sake of clarity the relevant observation of the Hon ble High Court are culled out as under:- 19. We have considered the submissions of both the parties. There is no doubt about the fact that while framing the assessment even under section 143(3) of the Act, the Assessing Officer may omit to make certain additions of income or omit to disallow certain claims which are not admissible under the provisions of the Act thereby leading to escapement of income. The Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome which has escaped assessment or had remained to be taxed. There can be situations where an item has been dealt with in the body of the order of assessment and the assessee being aggrieved from the addition or disallowances so made, had preferred an appeal before the Commissioner of Income-tax (Appeals) against the said addition and disallowance, the said disallowance and addition being the subject- matter of appeal before the Commissioner of Income-tax (Appeals) in such cases, the Commissioner of Incometax (Appeals) has been empowered under section 25l(l)(a) of the Act to enhance such an income where the Assessing Officer had proceeded to make addition or disallowance by dealing with the same in the body of order of assessment by under assessing the same as the same was the subject- matter of the appeal as per the grounds of the appeal raised before him. In other words, the Commissioner of Income-tax (Appeals) has a power of enhancement in respect of such item or items of income which has been dealt with in the body of the order of the assessment, and arose for his consideration as per the grounds of appeal raised before him, being the subject-matter of appeal. 6.4 Also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vacate the same. The Ground of appeal no. 5 is allowed in terms of our aforesaid observations. 7. We shall now deal with the grievance of the assessee that the CIT(A) had erred in confirming the disallowance of ₹ 82,73,814/- that was made by the A.O of the amount paid by the assessee to M/s Vilter Manufacturing Corporation, USA as fee for user of know-how by treating it as a capital expenditure. 7.1. Briefly stated, the assessee company had entered into an agreement , dated 13.12.2002 with M/s Vilter Manufacturing Corporation, 5555, South Packard Avenue, Cudahy, Wisconsin, USA which thereafter was amended vide a Supplementary agreement, dated 05.11.2003. As per the agreement the assessee had paid a sum of ₹ 82,73,814/- towards part consideration for technical know-how fees to M/s Vilter Manufacturing Corporation (supra), and treating the same as a deferred revenue expenditure in its books of accounts had debited 1/8th of the total amount of consideration i.e ₹ 32,32,960/- in its profit loss a/c for the year under consideration. However, the assessee had in its computation of income added back the aforesaid amount of ₹ 32,32,960/- and claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. any right or legal title to the technical know-how or the improvement thereof. In sum and substance, it was the claim of the assessee that as the object of the agreement entered into by the assessee company with M/s Vilter Manufacturing Corporation, USA was to facilitate running of its existing business in a more profitable and a technically viable manner, therefore, the expenditure therein incurred being in the nature of a revenue expenditure was allowable as a deduction in its hands. Further, it was the claim of the assessee that the A.O had grossly misconstrued the scope and gamut of Clause (ii) to Sec. 32(1) of the Act, as was made available on the statute vide the Finance (No.2) Act, 1998 w.e.f 01.04.1998, and the same would not come into play in respect of every expenditure incurred by an assessee towards technical know-how, but was confined only to such expenditure of a capital nature that was, inter alia, incurred by the assessee on acquisition of know-how. It was, thus, the claim of the assessee that it was not the simpliciter incurring of the expenditure towards technical know-how, but the fact that the expenditure so incurred by the assessee was in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregating to the sum of US $ 460,500 and the fee shall be payable by way of one lump sum payment of US$ 110,000 on 31-12- 2002 payment of US$ 37, 750 no later than March 31, 2003 one payment of US$ 37, 750 no later than June 30, 2003, one payment of US$ 55,000 no later than December 31, 2003 and the remainder payable in semi-annual payment of US$ 27,500 each commencing June 30, 2004 until the total drawing and design fees have been paid in full. The agreement has also specifies the territory in which the appellant company can function. The duration of the agreement' is initially fixed for 10 years which can be extended further on mutual agreement and subject to the necessary approvals. Both the parties subsequently entered into a supplementary agreement dated 5-11-2003 as per which the clauses relating to consideration, delivery of technical know how, duration etc. have been substituted/amended. On going through the contents of above agreements, I am of considered opinion that the AO is right in rejecting the contention of the appellant for treating the Technical Know How Fee and the Royalty payment as revenue in nature. The payment made thereof has to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m in pursuance of the agreement; that the assessee company had acquired knowledge of an enduring nature; that apart from the technical know-how supplied by the foreign company, viz. M/s Vilter Manufacturing Corporation, USA, and the grant of IPR s, the said foreign company had also agreed not to manufacture in India any of the scheduled products or to grant or make available to any other person, firm or company any manufacturing information, licenses, rights for any one of the scheduled products in India, thus, conferring an exclusive benefit on the assessee company to manufacture and sell scheduled products in the territories specified as per the terms of the agreement . After referring to the aforesaid terms of the agreement , and specifically the one which as per the CIT(A) conferred the exclusive right on the assessee company to manufacture and sell the products in the specified territories in India, the CIT(A) after drawing support from certain judicial pronouncements observed, that conferment of the said exclusive right vide the agreement entered into by the assessee company with M/s Vilter Manufacturing Corporation, USA cannot be held as a part of a mere know-how agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Note No. 9 of their audit report, Page 25 of the Annual Report of the assessee company, which reads as under : Total amount of License fee for using Technical know-how, Trade mark and Intellectual Property Right to M/s Vilter Manufacturing Corporation, USA .. , no payment of royalty was made by the assessee company to M/s Vilter Manufacturing Corporation, USA during the year under consideration. On the basis of the aforesaid facts, we are of the considered view, that the observation of the CIT(A) that 25% of the amount of royalty paid to M/s Vilter Manufacturing Corporation, USA is to be taken to the capital account on which depreciation shall be allowed, being based on misconceived and incorrect facts cannot be sustained and is herein vacated. 7.4 We shall now deal with the observations of the CIT(A) that the A.O had rightly rejected the assessee s claim for deduction of the technical know-fees paid to M/s Vilter Manufacturing Corporation, USA as a revenue expenditure, and had correctly held the same as a capital expenditure on which depreciation was to be allowed u/s 32(1)(ii) of the Act. We have given a thoughtful consideration to the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing Corporation, USA as a revenue expenditure, and had correctly held the same as a capital expenditure on which depreciation was to be allowed u/s 32(1)(ii) of the Act. Insofar the reliance placed by the CIT(A) on the judgment of the Hon ble High Court of Madras in the case of CIT Vs. Southern Switchgear Ltd, 148 ITR 272 (which thereafter had been upheld by the Hon ble Supreme Court in CIT Vs. Southern Switchgear Ltd 232 ITR 359), which in turn had relied on its earlier judgment in the case of Transformer and Switchgear Ltd. Vs. CIT, 103 ITR 352, we find that the facts involved in the latter case are totally distinguishable as against those involved in the case of the assessee before us. Unlike the present case wherein the fees for technical know-how had been paid by the assessee company, viz. Frick India Limited to M/s Vilter Manufacturing Corporation, USA for running its ongoing business already in existence in a more technically viable manner and to facilitate improvements for yielding larger profits, the expenditure incurred towards technical fees in the case of Transformer and Switchgear Ltd. (supra) was towards establishment, starting of work and operating of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts involved in the case of the assessee are clearly distinguishable as against those relied upon by the CIT(A), as in all the said cases, as observed by us hereinabove, the technical know-how was received from the foreign companies for establishment, setting up of factory/business etc. Accordingly, the support drawn by the CIT(A) on the aforesaid case laws, in our considered view being clearly distinguishable on facts would by no means justify the adverse inferences drawn by him on the said count in the hands of the assessee. 7.6 Insofar the observations of the CIT(A) that as per the terms of the agreement the import of the drawings, technical equipments, components and raw materials by the assessee shall have to necessarily confirm to the import policy of the government of India are concerned, the same, as stated by the ld. A.R, and rightly so, is beyond our comprehension as to how the same would justify, much the less assist, the recharacterization of the payment of the technical know-how fees by the assessee company to M/s Vilter Manufacturing Corporation, USA as a capital expenditure? Be that as it may, the said observation of the CIT(A) not being in context and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k to which it was entitled during the subsistence of the agreement . As the aforesaid clause of the agreement makes it abundantly clear that M/s Vilter Manufacturing Corporation, USA had only made available a non-transferrable and non-exclusive technical know-how to the assessee for carrying out its ongoing business in a more technically viable and profitable manner, therefore, the aforesaid observations of the CIT(A) which had been arrived at by divorcing certain lines from the context in which they were used, and reading them in isolation, can by no means be acted upon. We, thus, in terms of our aforesaid observations vacate the adverse inferences drawn by the CIT(A) on the basis of his aforesaid misconceived, or in fact self-suiting misinterpretation of the terms of the agreement entered into by the assessee with M/s Vilter Manufacturing Corporation, USA. 7.6 We shall now deal with the observation of the CIT(A), that as per the terms of the agreement the foreign company, viz. M/s Vilter Manufacturing Corporation, USA had apart from supplying the technical know-how and IPR s to the assessee company, viz. Frick India Ltd., had also agreed not to manufacture in India any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure by the lower authorities. Our aforesaid view i.e where an assessee who is engaged in the business of manufacturing and selling certain products had made a payment to a foreign company for merely acquiring a right to use technical know-how, whereas the ownership and intellectual property rights in the said know-how remained with the foreign company, then, the payment in question would be in the nature of a revenue expenditure, is supported by the judgment of the Hon ble High Court of Delhi in the case of CIT Vs. Hero Honda Motors Ltd., (2015) 372 ITR 481 (Del). We, thus, in the backdrop of our aforesaid observations not finding favour with the view taken by the lower authorities wherein they had rejected the assessee s claim for deduction of the payment made for the technical know-how to M/s Vilter Manufacturing Corporation, USA as a revenue expenditure, and had dubbed the same as a capital expenditure, setaside the order of the CIT(A) and direct the A.O to allow the assessee s claim for deduction of the aforesaid amount of payment of ₹ 82,73,814/- as a revenue expenditure. The Grounds of appeal Nos. 2 to 2.2 are allowed in terms of our aforesaid observations. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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