Income Tax Appellate Tribunal - Ahmedabad
Urja Products Pvt. Ltd.,, Ahmedabad vs Assessee on 29 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH " D "
Before Shri MUKUL Kr. SHRAWAT, JUDICIAL MEMBER and
Shri D.C. AGRAWAL, ACCOUNTANT MEMBER
Date of hearing : 29/12/2010 Drafted on: 29/12/2010
1. ITA No.3578/AHD/2007 - A.Y. 2004-05
2. ITA No.784/AHD/2010 - A.Y. 2004-05
Urja Products Pvt.Ltd. Vs. The DCIT
423-425, GIDC Circle-8
Opp.Telephone Ahmedabad
Exchange
Odhav
Ahmedbad
PAN/GIR No. : AAACU 3413 E
(APPELLANT) .. (RESPONDENT)
Appellant by : Ms. Urvashi Shodhan, A.R.
Respondent by: Shri S.S. Shukla, D.R.
ORDER
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
For Assessment Year 2004-05, these appeals are filed by the Assessee arising from the separate orders of CIT(A)-XIV Ahmedabad, dated 25/05/2007 (ITA No.3578/Ahd/2007) and dated 28/01/2010 (ITA No.784/Ahd/2010). For the sake of convenience, these two appeals are consolidated and hereby decided by this common order.
(A). ITA No.3578/Ahd/2007
2. Ground No.1 reads as under:
I. (a) The learned CIT(A) has erred in confirming disallowance of Technology licence fees paid by the appellant of `3,56,453/- holding it as capital expenditure.ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010
M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -2-
2. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) of the I.T. Act, 1961 dated 30/11/2006 were that the assessee is in the business of manufacturing of PTFE Cloth, High Silica Cloth & Fiber Glass/Cotton/Polyester Cloth. It was noticed by the Assessing Officer that under the head "Technology Licence Fees" a sum of 3,56,453/- was claimed as an expenditure. It was found that the amount was paid to a foreign party, namely M/s.Senior Operations. In support of the claim, copies of the agreements between the assessee and the said foreign concern were furnished. There were two types of agreement; one was in respect of payment for services and the other was in respect of the technical fees. On perusal of the terms of the agreement, it was noticed that the technology fees was to be paid in installments and for the year under consideration first 1/3rd installment was of U.S. $ 6600 was stated to have been paid. Assessee has also furnished the details about the nature of agreement and relevant paragraph is reproduced below:-
'4.1. In regard to your requirement stated under para-4 of your letter for which we have to submit that the said 1/3 installment of US $ 6,600 was required to be paid on signing the above referred two agreements and filing with the Reserve Bank of India. Both the agreements were signed and executed on 25th June, 2003 and thereafter they were filed with RBI and accordingly, the first installment as stipulated and agreed upon was due to be paid which was fully paid. It may further be noted that on the basis of such Technical support agreement executed by us so that we could get registered with Govt. and quasi Govt. establishments to meet with the pre-conditions laid down by those establishments to meet ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -3- with the pre-conditions laid down by those establishments. After our company got registered, enquiries floated by those establishments were responded by the company and later on, the company could get orders which took its own time in executing delivery of final product in the form of Expansion Joints. To support our submission, we furnish herewith a copy of order received from BHEL for which vetting was carried out by Senior Operations and accordingly, the services has stipulated in the agreement were performed by Senior Operations Inc. USA"
2.1. However, the Assessing Officer was not convinced and in his opinion, the lump-sum payment was a capital expenditure in nature. In his opinion, the assessee has not furnished any evidence to show that what technical know-how was supplied by the assessee. A.O.'s one more allegation was that the description of the product as stated in the agreement had not tallied with the product mentioned in the invoices.
From the side of the assessee an argument was that a TDS was deducted on the said payment, therefore, the payment was Revenue in nature, however, it was commented that mere factum of deduction of tax do not turn the nature of payment into Revenue payment if it is capital in nature. Finally, the Assessing Officer has disallowed the claim of payment of Rs.3,56,453/-. The matter was carried before the first appellate authority.
3. Before Learned CIT(Appeals) again the facts were reiterated, however, he was not convinced and upheld the disallowance of payment vide following paragraph:-
ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -4- "2.3. I have considered the facts of the case and the submissions as advanced by the appellant. I am not inclined to agree with the views of the appellant. The case laws relied upon by the appellant are on different facts. In the case of IAEC (Pumps) Ltd., supra, the assessee was granted licence to use its patents and designs exclusively in India. In the case of Sayaji Industries, supra, the payment was made for using the know how for the purpose of its running business for a limited period. In the case of Goodyear India Ltd., the payment was made under a technical agreement for the use of technical knowhow for a limited period for manufacturing an improved kind of tyres, without any transfer of ownership of technical data, plans, designs etc. In the case of Asstt.CIT Vs. Amtrex Appliances Ltd. (2005) 94 TTJ 396, the payment was made for using technical knowhow for improvisation of product. Here, in the appellant's case, the facts are entirely different. The appellant was to pay lumpsum fees of $ 20,000 to M/s.Senior Operations in three equal instalments in the following manner:-
i) First one third instalment to be paid on filing this Agreement with the Reserve Bank of India;
ii) Second one-third to be paid on delivery to URJA of the Manufacturing Technology: and
iii) Final one-third instalment to be paid within 6 months of commencement of commercial production of the Products using the Manufacturing Technology provided by Senior Operations to URJA or four years after the date of filing this Agreement with the Reserve Bank of India, whichever is earlier.
In addition to the Lump sum fee, URJA shall pay Senior Operations a royalty equal to 5 percent (%) of the Net Selling Price for the products in respect of sales in the Territory".
In appellant's case, the fact is that the appellant has paid only 1/3rd instalment and other instalments were not paid during the year, that means there was no delivery made to URJA and commercial production has not commenced by using the new ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -5- manufacturing technology being provided by Senior Operations. The appellant was to develop a new product which is not produced during this year. Hence, the amount paid during the year as first 1/3rd instalment is merely an advance amount for the new technology to be obtained to commence production of new product. Therefore, in my opinion, the action of AO in disallowing the payment made in this respect was quite justified and this ground is hereby rejected."
Being aggrieved, now the assessee is further in appeal before us.
4. From the side of the appellant, Ms. Urvashi Shodhan, Learned Authorised Representative and from the side of the Revenue Mr. S.S.Shukla, Learned Departmental Representative appeared. We have heard both the sides and perused the records available before us.
4.1. In the compilation, an agreement stated to be "Technology Licence" agreement dated 25th day of June-2003 is placed on record which was executed between M/s.Senior Operations Inc., Texas USA and the Assessee URJA products Pvt.Ltd., Ahmedabad. The product was "low pressure ducting metal rectangular and non-metallic expansion joints". In consideration of the licence granted by M/s.Senior Operations, USA, to assessee, there was a clause for lumpsum payment of us $ 20,000. The payment was to be made in three equal installments. In addition to the above lumpsum payment, the assessee was also required to pay royalty equal to 5% of the net selling price of the said product. There was a clause of confidentiality that the assessee shall keep the knowledge confidentially and to be treated as proprietary of ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -6- M/s. Senior Operations. Further, in one of the clauses, it has also been mentioned that M/s. Senior Operations,USA, should retain "Intellectual Property Rights". Our attention has also been drawn on the invoices issued in respect of the said product. This Licence was said to be for a period of 10 years. The Learned Authorised Representative has also demonstrated that the product in question was already manufactured by the assessee in the past and in support she has brought to our notice certain old invoices. Through all these documents and evidences, it was demonstrated that the product which was under the said agreement was earlier manufactured by the assessee. The technology which was received by the assessee was only to augment the process. It has been vehemently argued that no new product was produced after attaining the said technology. Further, it was also distinguished that the lump-sum consideration was paid as a "Technology Fees" which is in the nature of "License-Fees" only and it was not at all for acquiring any technical know-how. It was clarified that since no technical know-how was acquired, therefore, the lump-sum payment was not towards acquisition of any capital asset. Further, it has also been pointed out that the assessee has treated the payment as Revenue in nature and, therefore, deducted the tax at source u/s.195 of the I.T.Act. In the light of the above facts, we have examined a decision of Hon'ble Delhi High Court pronounced in the case of CIT vs. J.K. Syntehtics Ltd. reported at [2009]176 Taxman 355 (Delhi), wherein it was held that since under the agreement the assessee had obtained a technical assistance and acquired some technical information which was a know-how related to process of manufacture, then it was not a transfer of the ownership of the know-how ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -7- and to be treated as a Revenue expenditure. The Hon'ble Court has concluded mere acquisition of know-how during the year under consideration being in respect of a business already in existence, then such an expenditure is required to be treated as an expenditure on Revenue account. There is one more decision as cited before us of Hon'ble High Court of Madhya Pradesh (Indore Bench) in the case of CIT vs. Eicher Motors Ltd. reported at [2007] 163 Taxman 556 (M.P.), wherein as per the agreement the technical know-how was procured for assistance of manufacturing of commercial vehicles and in lieu there was a clause for periodic payment of royalty. The assessee has claimed the royalty payment as Revenue expenditure. The Hon'ble Court has held that the royalty payment was with regard to an outlay for earning profit in normal course of business, rather than an expenditure with the object of acquiring an advantage of enduring nature for benefit of trade, therefore, allowable as Revenue expenditure. An another decision of Hon'ble Bombay High Court pronounced in the case of CIT vs. Essel Propack Ltd. reported at [2010] 191 Taxman 244 (Bom.) has been cited wherein the assessee had entered into an agreement with a foreign company under which assessee was granted a non-exclusive licence for a period of five years restricted to a territory. Under the agreement, sole proprietary rights in the said patent were vested with the licensor and not with the assessee. The assessee was to pay a royalty at certain percentage. The assessee was also required to pay in addition to the royalty a lumpsum amount over a period of five years. On those facts, the Hon'ble Court has held that the said technical know-how fees was allowable as a Revenue expenditure. Few more decisions have also ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -8- been cited before us but in our considered opinion, the decision of the Hon'ble Bombay High Court is very close to the facts of the present appeal, therefore, in the light of the foregoing discussion and considering the totality of the facts and circumstances of the case as well as on appreciation of the evidences placed on record, we are of the conscientious view that the impugned payment is allowable as a Revenue expenditure. With the result, this ground is hereby allowed.
5. Ground No.2 reads as under:
(b) The learned CIT(A) has further erred in confirming disallowance of Bad debt written off of Rs.9,60,314/- in respect of the debt due to M/s.Tirupati Enterprises.
5.1. The assessee has written off a bad debt of Rs.9,60,314/- related to M/s.Tirupati Enterprises. The assessee has sold the goods and the payments claimed to be in dispute was written off as "Bad Debt". The assessee has clarified that a notice was issued for non-payment but in the absence of any expenses, the amount was written off in the books of account. However, the Assessing Officer was of the view that since the part of the payments have been received by the assessee, therefore, rest of the payment was not a "bad debt", hence, wrongly written off in the books of account. When the matter had gone in appeal, the Learned CIT(Appeals) has confirmed the action of the Assessing Officer following the decision of Hon'ble Gujarat High Court in the case of Dhall Enterprises & Engineers Pvt. Ltd. vs. CIT reported as (2007)295 ITR 481(Guj.) :: (2007)207 CTR 729 (Guj.). Now before us, a latest ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010 M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05 -9- decision of the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT reported as [2010]323 ITR 397 (SC), wherein it was held as under:-
"This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off."
6. On the other hand, from the side of the Revenue, Mr.S.S. Shukla Learned Departmental Representative appeared and placed reliance on Industrial Cables (I) Ltd. vs. ACIT reported at [2005]97 ITD 267 (Chandigarh) for the proposition that once the assessee had not stopped the business with the said debtor agency and there was a reasonable expectation of recovery, then mere writing off of debt was not sufficient.
ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05
- 10 -
However, the facts of the present appeal do not match with this cited decision primarily because in the present appeal the assessee had claimed to have stopped the business activity and there was no likelihood or reasonable expectation of recovery of unrealized amount. Because of these reasons, the assessee had decided to write -off the amount as a "bad debt". Thus, the totality of the circumstances of the case, warrants to follow the decision of Hon'ble Supreme Court as cited (supra). With the result, this ground is hereby allowed.
7. In the result, appeal of the assessee, i.e. ITA No.3578/Ahd/2007 is allowed.
B. ITA No.784/Ahd/2010 for Assessment Year 2004-05
8. In this appeal, the assessee has raised the ground against the confirmation of levy of penalty us/.271(1) of Rs.4,72,390/-.
8.1. The facts in brief as emerged from the penalty order passed u/s.271(1)(c) of the I.T.Act dated 27/03/2009 and the corresponding assessment order passed u/s.143(3) of the I.T.Act dated 30/11/2006 were that the penalty was levied in respect of disallowance of "Technology Licece Fees" of rs.3,56,453/- and another disallowance of "Bad Debt"
written off of Rs.9,60,314/-. Since the first appellate authority has confirmed the addition, therefore, consequent thereupon the Assessing Officer has imposed a minimum penalty of Rs.4,72,390/-.ITA No.3578/Ahd/2007 & ITA No.784/Ahd/2010
M/s.Urja Products Pvt.Ltd. vs. The DCIT Asst.Year -2004-05
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9. Heard both the sides. Records of the case perused. As is evident from the above discussion, while deciding the appeal in respect of the impugned quantum additions, we have quashed both the additions. Once the impugned additions which were the basis of the levy of the concealment penalty have been quashed by us as per the above order, therefore, the concealment penalty do not survive any more. With the result, we hereby direct to drop the penalty. Resultantly appeal is allowed.
10. In the result, both the appeals of the Assessee are allowed.
Order signed, dated and pronounced in the Court on 7/ 1 /2011.
Sd/- Sd/-
( D.C. AGRAWAL) ( MUKUL Kr. SHRAWAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 7 / 01 /2011
T.C. NAIR, Sr. PS
Copy of the Order forwarded to :
1. The Assessee.
2. The Department.
3. The CIT Concerned
4. The ld. CIT(Appeals)-XIV, Ahmedabad
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स×याǒपत ूित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad
ITA No.3578/Ahd/2007 &
ITA No.784/Ahd/2010
M/s.Urja Products Pvt.Ltd. vs. The DCIT
Asst.Year -2004-05
- 12 -
1. Date of dictation....................... 29/12/2010
2. Date on which the typed draft is placed before the Dictating Member 29/12/2010.................. Other Member.....................
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which the fair order comes back to the Sr.P.S./P.S......7.1.11
6. Date on which the file goes to the Bench Clerk.................. 7.1.11
7. Date on which the file goes to the Head Clerk..................................
8. The date on which the file goes to the Assistant Registrar for signature on the order..........................
9. Date of Despatch of the Order..................