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2006 DIGILAW 2218 (PNJ)

Commissioner Of Income Tax v. Swaraj Engines Ltd.

2006-05-18

ADARSH KUMAR GOEL, RAJESH BINDAL

body2006
Judgment 1. This appeal by the Revenue against the order dt. 3rd Dec, 2001 passed by the Tribunal, Chandigarh Bench A for the asst, yr. 1991-92 in ITA No. 1443/Chd/1994 reported as Dy. CIT v. Swaraj Engines Ltd. (2004) 91 TTJ (Chd) 671-Ed. was admitted for consideration of the following substantial question of law: (i) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the payments made by the assessee to M/s Kirloskar Oils Engines Ltd. under agreement dt. 19th Oct., 1989 do not fall within the ambit of Section 35AB of the IT Act, 1961. 2. We have heard Shri Yogesh Putney, advocate for the Revenue and Shri P.C. Jain, advocate for the respondent and with their assistance have gone through the orders on record. 3. The assessee filed return of income for the assessment year in question on 30th Dec, 1991 declaring a total income of Rs. 6,07,103, wherein the assessee claimed deduction for an amount of Rs. 26,65,340 paid by it to M/s Kirloskar Oil Engine Ltd. as royalty on the basis of agreement dt. 19th Oct., 1989, for the purposes of acquiring technical know-how for the manufacture of diesel engines. The AO was of the view that the expenditure on account of acquisition of technical know-how was covered under Section 35AB of the IT Act, 1961 (hereinafter as the Act) and the same could not be treated as a revenue expenditure. On a show-cause notice having been issued by the AO, the assessee in its reply dt. 21st Feb., 1994 submitted as under: Royalty paid to KOEL is calculated on the basis of sales and it varies from year to year depending on the value of sales. This has been ellaborately (sic-elaborately) explained in our earlier reply dt. 2nd Feb., 1994 under para 3. Payment of royalty is not covered under Section 35AB on IT Act, 1961. Section 35AB relates to expenditure on lump sum consideration for acquiring any know-how for use. As royalty paid every year is not a lump sum amount but is on the basis of percentage of sales as per cl. 10 of technical assistance agreement. To sum-up Section 35AB is not applicable but royalty expenditure is allowable as business expenditure under Section 28/37(1) of IT Act, 1961. As royalty paid every year is not a lump sum amount but is on the basis of percentage of sales as per cl. 10 of technical assistance agreement. To sum-up Section 35AB is not applicable but royalty expenditure is allowable as business expenditure under Section 28/37(1) of IT Act, 1961. Royalty at specified rate has been held as allowable in H. Dear and Co. (P) Ltd. v. CTT. Even excess royalty for increase in selling price rate is allowable as decided in Association Stone Industries (Kota) Ltd. v. CIT. Not only royalty paid but even the technical fees for new line of business has been held by the Bombay Tribunal as allowable revenue expenditure as decided in case of ITO v. Kakad Gas Service (1982) 2 ITD 508 (Bom). 4. After consideration of the reply filed by the assessee the AO came to the conclusion that the payment made by the assessee was covered under the ambit of Section 35AB of the Act and accordingly, only l/6th of the total amount was allowed as deduction during the year in question and the balance was disallowed. The claim of the assessee is that by way of agreement with M/s Kirloskar Oil Engine Ltd., the assessee had not become the owner of the technical know-how and no benefit of enduring nature has been received by the assessee. 5. Aggrieved against the order, the assessee went in appeal before the CIT(A) who vide her order dt. 27th Sept., 1994 came to the conclusion that the payment made by the assessee to M/s Kirloskar Oil Engine Ltd. cannot be deemed as a lump sum payment to bring that within the ambit of the provisions of Section 35AB of the Act. The calculation of the amount being paid by the assessee was on the basis of invoiced price of licensed products which naturally varied in terms of the quantum of production. As per cl. 10(a) of the agreement, the payment was to be made to licensor (M/s Kirloskar Oil Engine Ltd.) @ 3 per cent of the invoiced price of licensed products net of excise duty and sales-tax minus cost of parts supplied by the licensor. The amount of royalty calculated on the basis of the sales as per the formula provided above, was determined at Rs. 24,65,340. Relief to this extent was granted by the CIT(A) by treating this to be a revenue expenditure. The amount of royalty calculated on the basis of the sales as per the formula provided above, was determined at Rs. 24,65,340. Relief to this extent was granted by the CIT(A) by treating this to be a revenue expenditure. 6. Aggrieved against the order passed by the CIT(A), the Revenue went in appeal before the Tribunal. In appeal, before the Tribunal, besides relying upon the order passed by the CIT(A), the assessee further contended that the agreement dt. 19th Oct., 1989 was entered into with M/s Kirloskar Oil Engine Ltd. to achieve the desired level, of quality for the products already, being manufactured by the assessee and the same was not entered into for outrightly acquiring such technical know-how. Another argument raised by the assessee before the Tribunal was that the Department had already allowed claim of similar expenditure for the asst. yrs. 1989-90 and 1990-91 as revenue expenditure. Even for the year 1993-94 also similar payments by the assessee had been considered and allowed as revenue expenditure. During all these years also payments had been made in terms of same or similar agreement entered into with M/s Kirloskar Oil Engine Ltd. The facts in these years being identical, principles of res judicata will certainly be applicable. To buttress the arguments, the assessee relied upon judgment of Hon ble the Supreme Court in Radhasoami Satsang v. CIT. 7. The appeal filed by the Revenue against the order of CIT(A) was rejected by the Tribunal by recording the following findings in para 20 of the order: 20. We find that in this case, the assessees business is of manufacturing engines which was started on 1st Jan., 1989. The assessee obtained assistance and technical know-how services from M/s Kirloskar Oil Engines Ltd. simply to maximise its production and improve quality of product which were being manufactured by the assessee. The assessee has not acquired ownership of the said technical know-how or the assistance obtained from M/s Kirloskar Oil Engine Ltd. which is clear from the restrictive clauses appearing in the said agreement, i.e., Clause Nos. 1(a), 1(b), 1(c), 2, 3, 4 and 5. Also cl. 13 of the agreement was executed for a limited period of 5 years and was renewed thereafter. Further as per cl. 1(a), 1(b), 1(c), 2, 3, 4 and 5. Also cl. 13 of the agreement was executed for a limited period of 5 years and was renewed thereafter. Further as per cl. 6 of the agreement, the total payment was to be made on account of said technical assistance @ 3 per cent of the total sales which means that technical know-how or the assistance given by M/s Kirloskar Oil Engines Ltd. as per terms of the agreement was only relatable to production, It further means that the assistance or technical know-how obtained by the assessee under the agreement pertained to the products already manufactured by the assessee and not for new products and this agreement further indicated that what was stipulated in the agreement was an improvement in the operation of the existing business and its efficiency and productability. We are further of the opinion that since the agreement was for better conduct and improvement of the existing business of the products already being manufactured by the assessee, so, in these facts, the impugned royalty amount paid by the assessee and allowed by the CIT(A) was in the nature of revenue expenditure and so, was allowable as deduction in computing business profits of the assessee, as has been held in the various citations relied upon by both the parties. We have also considered other arguments advanced by the learned Authorised Representative for the assessee that such expenditure claimed by the assessee had been allowed by the Department in the asst. yrs. 1989-90 and 1990-91 and also subsequently in the asst. yr. 1993-94 but has only been disallowed in the asst. yrs. 1991-92 and 1992-93 under consideration, so, as per principles of res judicata, the same should have been allowed by the Department even in the assessment years under consideration, as has been held by the apex Court in the citations supra, referred to by the learned Authorised Representative for the assessee. On going through the case law referred to by the learned Authorised Representative for the assessee, we are in agreement with the contention of the learned Authorised Representative for the assessee because we are also of the opinion that it was not open to Revenue to disallow the expenditure of similar nature for the assessment years under consideration when the same had been allowed in the past as well as in the subsequent assessment years by the Department. 8. 8. Relevant portion of Section 35AB is extracted below: 35AB. Expenditure on know-how.- (1) Subject to the provisions of Sub-section (2), where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. (2) xxxxx (3) xxxxx. The effort of the Revenue to bring the expenditure within the domain of Section 35AB of the Act is totally misplaced since the pre-requisite for application of Section 35AB of the Act is that the payment has to be as lump sum consideration for acquiring any know-how. This precondition is totally missing in (the) case in hand as the payment being made to M/s Kirloskar Oil Engines Ltd. is not lump sum payment for acquiring of know-how rather the same was payable periodically on the basis of percentage of invoiced price depending upon the number of engines manufactured. It is not a case of outright sale of technical know-how. So, in our view it will not fall within the domain of Section 35AB of the Act. 9. View which we are taking above is fully supported by the judgment of Hon ble the Supreme Court in CIT v. Wavin (India) Ltd. , where the appeal filed by the Revenue against the order of the High Court was dismissed holding that such type of expenditure to be revenue and not capital in nature. The same is extracted below: We have perused the order of the Tribunal and the High Court. We are in agreement with the reasons given by the High Court for holding the expenditure to be of revenue nature. The expenditures were incurred to obtain benefit of research and development made by the foreign company. The technical information given to the Indian company was non-exclusive and non-transferable. In other words, this is not an out and out sale of technical know-how. The assessee was merely given a non-exclusive and non-transferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all. The appeals are, therefore, dismissed with no order as to costs. 10. In other words, this is not an out and out sale of technical know-how. The assessee was merely given a non-exclusive and non-transferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all. The appeals are, therefore, dismissed with no order as to costs. 10. Accordingly, the substantial question referred to above is answered against the Revenue and in favour of the assessee.