TMI Blog2001 (3) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting held on 26th October, 1995, as communicated vide Circular dated 1st November, 1995 is as under:-- "Item No. 5.--Permission to pursue appeal in ITAT by Indian Petrochemicals Corporation Limited regarding payment of know-how and Technical Fees for increasing production capacities and products range, involving an amount of Rs.464 lakhs and 1053 lakhs for assessment years 1984-85 and 1985-86 respectively. (Note No. Nil dated 16-5-1995 circulated by the Department of Indian Petrochemicals Corporation Limited) The committee, having regard to the fact that the amount involved in the dispute was substantial and question of law involved in the dispute, permitted Indian Petrochemicals Corporation Limited to pursue the appeal in ITAT." 4. Shri J.P. Shah, learned Senior Advocate submitted that the assessee claimed deduction of Rs.4,78,49,147 on account of know-how and technical fees paid during the year of account under review. This claim was made by the assessee by filing a revised return along with letter dated 4-6-1986. It was stated in the said letter that the revision of income has been done by the company due to the crystallization of legal position on admissibility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65495.94 Providing Engg. infor- mation design LAB UOP, USA Process 1417830.28 Grant of Expan- Engg. fees Licence and sion furnishing Engg. -------------- Total 47849146.84 design" --------------------------------------------------------------------- Shri Shah also drew our attention to the various clauses of the agreements executed with M/s. Technomont, Italy and with Du Pont, USA. He submitted that PP Co-Polymer Project for which know-how was obtained vide agreement executed with M/s. Technomont was an extension of the same business. The backward integration and forward integration and also expansion of the existing business with the rapid change in technology is a part and parcel of the same business. Likewise the other agreement executed with Du Pont, USA is also a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment allowance allowed thereon in the year under consideration as well as in subsequent years will have to be withdrawn. He submitted that the assessee has no objection if the deduction by way of depreciation, investment allowance granted to the assessee in the year under consideration as well as in subsequent years on the aforesaid amount of lump sum payment made for technical know-how, is simultaneously withdrawn in all the relevant years. The assessee will not raise any objection against such withdrawal of depreciation and investment allowance in the year under consideration as well as in subsequent years. 5. The learned Senior Departmental Representative submitted that the lump sum payment made for acquiring technical know-how in respect of which deduction as revenue expenditure is claimed relate to the projects which are still under erection and implementation and those projects did not commence during the previous year relevant to the assessment year under consideration. He also submitted that the projects for which technical know-how was acquired were totally new projects and it cannot be treated as a part of the expansion of the old business. He relied upon the jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under the aforesaid agreement dated 11-7-1983. Technomont granted a licence for an exclusive right to employ the technology in the design, construction and operation of the plant, expansion of the plant and also to grant sub-licence during the term of the said agreement for the use of the technology in India at reasonable terms and conditions to be agreed upon, which terms and conditions shall not be less favourable than those granted to the other licensees of licensor. There are clauses relating to confidentiality (Article-9), termination by Licensor (Article 18.1), Termination by IPCL (Article 18.2) and relating to assignment (Article-19). Article-19 of this agreement clearly provides that agreement shall not be assignable by either party without prior written consent. The confidentiality clause contained in Article-9 requires that IPCL agreed for a period of 15 years to keep the technical know-how confidential and not to disclose to any third party any information received under the said agreement at any time from Licensor, except as allowed in the said agreement. 8. Shri J.P. Shah also invited our attention to certain technical data with a view to provide a ready compariso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CO towards consideration for supply of technical know-how. The Income-tax Officer treated that amount as a capital expenditure and allowed 1/14th of the said amount as allowable expenditure under section 35A of the Act. The appellant challenged that order before the Appellate Assistant Commissioner on the ground that the whole expenditure ought to have been allowed as revenue expenditure. While so, the Commissioner of Income-tax in exercise of his power under section 263(1) of the Act revised the said order of the Income-tax Officer dated March 25, 1970, holding that the amount in question could not be treated as expenditure and that granting 1/14th of the said amount as capital expenditure under section 35A was erroneous and prejudicial to the interests of the Revenue and thus set aside the same. Thereafter, the Appellate Assistant Commissioner dismissed the appeal and directed that 1/14th amount be added back as income of the assessee. Against both the orders, the appellant filed appeals before the Income-tax Appellate Tribunal. The Tribunal on December, 12, 1975, allowed the appeals of the appellant taking the view that the said amount was revenue expenditure of the appellant. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- "Held, that the purpose of production of cyanuric chloride was found by the Tribunal, to be the manufacture of raw material for production of Tinopal, that is to say, the purpose was in the area of existing business of the assessee for carrying on the existing business with more profitability and was not for the purpose of entering into a new adventure for operating in a new area of business. Even applying the test of 'acquisition of assets' it could be said that under the agreement the assessee did not acquire the capital asset itself, namely, the technical know-how as a proprietor thereof. What it acquired under the agreement was the right to use technical knowledge. The expenditure incurred was on revenue account." 14. The Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 held that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business. The circumstance that the agreement pertained to a product already in the line of the appellant's established business not to a new product indicated that whatever stipulated was an improvement in the operations of the existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was only revenue expenditure." It is not necessary to make a detailed reference to all the judgments cited by the learned counsel. However, after a careful reading of all the judgments relied upon by the learned counsel, we are of the considered opinion that the lump sum payment made by the assessee for acquiring technical know-how for improving its existing products and for extending the range of its existing business and/or for expanding the said business is clearly allowable as revenue expenditure. We, therefore, direct the Assessing Officer to allow deduction of Rs.4,64,31,317 incurred by the assessee in respect of payments on account of know-how and technical fees to M/s. Technomont, Italy and M/s Du Pont, U.S.A. as a revenue expenditure. The Assessing Officer is however directed to simultaneously withdraw the amount of investment allowance and depreciation granted to the assessee in respect of the said amount of Rs.4,64,31,317 in the year under consideration as well as in the subsequent years. The learned counsel appearing on behalf of the assessee has agreed that the assessee will have no objection to such withdrawal of deduction already granted by way of investment allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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