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TMI Blog2021 (12) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... company engaged in the business of manufacture and sale of cars. The return of income for the assessment year 2000-01 was filed by the assessee on 30.11.2000 declaring a loss of Rs. 3,77,62,19,433/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-8, Pune ('the Assessing Officer') vide order dated 27.03.2003 passed u/s 143(3) of the Income Tax Act, 1961 ('the Act') at a total loss of Rs. 4,43,26,060/-. While doing so, the Assessing Officer denied the claim of deduction u/s 35AB of the Act being 1/6th of Technical Know-how fees of Rs. 16,72,05,320/- by holding that the consideration for acquisition of Technical Know-how had not been paid placing reliance on the order of The Commissioner of Income Tax-II, Pune passed u/s 263 of the Act dated 16.10.2000. The factual background of said claim made u/s 35AB of the Act is as under : The appellant company is formed as a Joint Venture Company between Daimler Benz AG, Mercedez Benz AG and TELCO in December, 1994. There was also an agreement for transfer of Technical Know-how which was valid for 10 years. There was also a Contribution Agreement dated 17th June, 1994 between Daiml ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Objection Certificate issued by the AO and TDS certificates) 1.5 The second instalment of the lump sum consideration for the technical know-how acquired was booked as payable in MB India's books in FY 1995-96 (i.e. AY 1996-97) as per the agreement (ie this was expenditure that MB India incurred on technical know-how in FY 1995-96). In accordance with the above JV and Contribution agreements, DBAG opted to contribute this payable by MB India to MBAG as its capital contribution and accordingly, was allotted 4,23,00,000 equity shares on 16 March 1996 (A Y 1996-97) after obtaining No Objection Certificate from the AO and also after deducting applicable taxes at source. TDS certificate was issued in the name of MBAG, being the entity from whom the technical know-how was acquired (refer page 104 and 109 of Paper Book for No Objection Certificate issued by the AO and TDS certificates). 1.6 The Assessee claimed a deduction in respect of the above technical know-how fees (after inclusion of TDS paid of Rs. 15,88,22,400 over and above such fees and the R&D cess of Rs. 4,89,81,520) under section 35AB of the Act (1/6th in every year) amounting to Rs. 16,72,05,320 for AY 1999-00 in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicating on admissibility of said claim. Even in the consequential order passed to the Tribunal's order, the Assessing Officer disallowed the claim for deduction u/s 35AB on the ground that the same was confirmed by the ld. CIT(A) in earlier year, on further appeal before the Tribunal in second round of litigation, the matter was remanded to the Assessing Officer after admitting the additional evidence. It is stated that even in the consequential order passed to the Tribunal's order in the second round of appeal, the Assessing Officer disallowed the claim. 10. In the assessment year 2000-01, the claim with which we are concerned, the appellant company made a claim for deduction of Rs. 16,72,05,320/- u/s 35AB of the Act. Out of which a sum of Rs. 13,25,71,334/- represents Technical Know-how contributed by Daimler Benz AG as contribution to the share capital, in lieu of allotment of shares. The balance amount of Rs. 3,46,33,986/- represents tax deducted and paid in cash on the said consideration of Rs. 13,25,71,334/-. The Assessing Officer placing reliance on the order of revision passed by the Commissioner of Income Tax-II, Pune passed u/s 263 vide order dated 16.10.2000 for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer of not granting deduction under section 35AB of the Act in the year under consideration. Ground No. 2: Disallowance of part of the royalty expenditure Erred in upholding the disallowance of royalty expenditure to the extent of Rs. 97,24,022 by considering the same to be capital in nature. The Appellant prays leave to add, alter, vary, omit, amend or delete grounds of appeal at any time before, or at the time of, hearing of the appeal, so as to enable the Hon'ble Tribunal to decide this appeal, according to the law." 16. The first ground of appeal relates to the disallowance of claim for deduction u/s 35AB of the Act. It is submitted before us that the Assessing Officer reiterated the addition based on the orders passed in the earlier assessment years. It is submitted before us that for the assessment year 1998-99, during the course of proceedings before the Tribunal, the appellant could not demonstrate the reasons for the issue of shares to Daimler Benz AG when the Technical Know-how was provided by the Mercedez Benz AG. Accordingly, in an attempt to demonstrate the reasons for allotment of shares in favour of the Daimler Benz AG the additional evidence in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company or the demerged company, as the case may be, had such amalgamation or demerger not taken place. Explanation.-For the purposes of this section, "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). 19. On mere reading of the above extracted provisions of section 35AB of the Act, it is clear that the above section provides that any lump-sum consideration paid by the assessee for acquiring any Technical Know-how for the purpose of use of business will be allowed as deduction by spreading it over a period of 6 years, namely, the year in which the lump-sum consideration is paid and five immediately succeeding years from the assessment years 1986-87 to 1998-99. The provisions of section 35AB had been rendered inoperative from the assessment year 1999-2000 in consequence of allowing the depreciation on Technical Know-how treating as intangible asset u/s 32(1) of the Act. Admittedly, in the case on hand, the lump-sum consideration was not paid duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -01 stands partly allowed for statistical purposes. ITA No.484/PUN/2015, A.Y. 2000-01 - By Revenue : 23. Now, we shall take up the Revenue's appeal in ITA No.484/PUN/2015 for the assessment year 2000-01. 24. The Revenue raised the following grounds of appeal :- "Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in restricting the disallowance of royalty expenses when the AO during the course of assessment proceedings, carried out proper verification against the claim and found that there was an element of enduring benefit and the said expenses was capital in nature..? The appellant craves leave to add, amend or alter any of the above grounds of appeal." 25. The Revenue challenges the decision of the ld. CIT(A) holding that incremental running royalty expenditure of 2.25% is capital in nature. The factual background of the said claim is as under :- In terms of Technical Know-how agreement entered into between the appellant and Mercedez Benz AG on 12.12.1994, the appellant was to pay lump-sum royalty of four instalments and running royalty at the rate of 2.25%. However, subsequently, considering the marketing conditions, it was decided to amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty is also on account of the fact that the appellant could not have claimed deduction u/s. 35AB of Income-tax Act as payment was not made by the appellant till A.Y. 1998-99 as required by the statute. Accordingly, on the facts and circumstances of the case, it is held that the amount of Rs. 97,24,022/- is to be disallowed being Capital Expenditure. The appellant will be however entitled for depreciation on the same." 29. From the terms of the agreement, it is clear that the royalty is paid in the case of running business and in terms of number of vehicles sold there is no increase in the capacity and existing productivity. Therefore, royalty paid is to the extent of 2.75% of number of vehicle sold is a revenue expenditure. The relevant findings of the ld. CIT(A) is hereby upheld. 30. It is trite law as held by Hon'ble Gujarat High Court in the case of CIT vs. Gujarat Carbon Ltd., 254 ITR 294 (Gujarat) and CIT vs. Power Build Ltd., 244 ITR 19 (Gujarat) and the Hon'ble Delhi High Court in the case of Climate Systems India Ltd. vs. CIT, 319 ITR 113 (Delhi) and the Hon'ble Karnataka High Court in the case of Diffusion Engineers Ltd. vs. DCIT, 376 ITR 487 that where the royalty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etic Ltd. 309 ITR 371, after elaborately discussing the entire case law on the subject, the Court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principle enumerated therein reads as under:- '(v) expenditure incurred for grant of licence which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the licence, (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licensor, (d) whether the licence transfer the "fruits of research" of the licensor, "once for all", (e) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's own case for the assessment year 1999-2000. As regards to the relocation of expenses of Rs. 8,06,901/-, the same was held to be allowable following the order of the Tribunal in assessee's own case for the assessment year 1999-2000. As regards to the Travelling & Conveyance Expenses and Telephone Expenses, the same was allowed following this Tribunal's order in assesse's own case for the assessment year 1999-2000. As regards to the royalty expenditure, the ld. CIT(A) held that the incremental royalty of 2.25% worked out to Rs. 1,09,77,372/- to be capital for the reasons assigned by him in the preceding years and the balance of royalty was held to be revenue expenditure. The ld. CIT(A) had also allowed the ground of appeal relating to disallowance of prior period expenses of Rs. 29,18,115/- considering the evidence on record that the expenditure for the quarter ending January to March, 2000 was included in the invoice dated 04.10.2000 which pertained to the expenditure of quarter July to September, 2000. The ld. CIT(A) also allowed the sales tax credit written off of Rs. 18,29,222/- taking into account the fact that the sales tax authorities had denied credit to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide this appeal according to the law." 39. The first ground of appeal relates to the disallowance of deduction u/s 35AB of the Act of Rs. 7,04,99,997/-. In the identical facts in assessee's own case for the assessment year 2000-01 in ITA No.378/PUN/2015 we remanded the matter to the file of the Assessing Officer with a direction to allow the claim for deduction u/s 35AB of the Act, once the claim of the assessee was allowed in the initial year of claim made. In this case also for the reasons stated by us in the forgoing paragraphs, we remand this issue under similar lines to the file of the Assessing Officer. Thus, the first ground of appeal raised by the assessee stands partly allowed for statistical purposes. 40. The ground of appeal no.2 challenges the decision of the ld. CIT(A) holding the incremental royalty paid in terms of modified agreement to be capital expenditure. During the course of hearing of the appeal, this ground of appeal no.2 was not pressed by the ld. AR for the assessee. Hence, this ground of appeal no.2 is dismissed as not pressed. 41. The ground of appeal no.3 relates to the disallowance of miscellaneous expenditure of Rs. 2,50,000/-. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.485/PUN/2015 for the assessment year 2001-02. 48. The Revenue raised the following grounds of appeal :- "1. Whether on the facts and circumstances of the case, the Hon'ble CIT(A) was justified in deleting disallowance of travelling expenses of Rs. 21,62,700/- when the assessee failed to substantiate its claim with supporting evidences to prove that these expenses are directly related to business activity of the company ? 2. Whether on the facts and circumstances of the case, the Hon'ble CIT(A) was justified in deleting disallowance of telephone expenses of Rs. 5,47,627/- when the assessee could not discharge its onus to prove that these expenses are wholly and exclusively relating to business with supporting evidences ? 3. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in restricting the disallowance of royalty expenses when the AO during the course of assessment proceedings, carried out proper verification against the claim and found that there was an element of enduring benefit and the said expenses was capital in nature ? 4. Whether on the facts and circumstances of the case, the Hon'ble CIT(A) was justified in deleting disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer had resorted disallowance of 10% of the travelling expenditure solely on the ground that the vouchers are self-made and there is no allegation by the Assessing Officer that the expenditure is bogus in nature. Therefore, we do not find any infirmity in the order of the ld. CIT(A). Thus, this ground of appeal no.1 filed by the Revenue is dismissed. 54. The ground of appeal no.2 challenges the decision of the ld. CIT(A) directing the Assessing Officer to delete the disallowance of 10% of telephone expenses of Rs. 5,47,627/-. The finding given by us in relation to the ground of appeal no.1 raised by the Revenue in ITA No.485/PUN/2015 for the assessment year 2001-02 holds good in respect of this ground of appeal no.2. Thus, we do not find any infirmity in the order of the ld. CIT(A) in directing the Assessing Officer to delete 10% of telephone expenses. Accordingly, this ground of appeal no.2 raised by the Revenue stands dismissed. 55. The ground of appeal no.3 challenges the decision of the ld. CIT(A) holding royalty expenditure at the rate of 2.75% of sales is revenue expenditure. In an identical facts in assessee's own case for the assessment year 2000-01 in ITA No.378/PUN/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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