Income Tax Appellate Tribunal - Chandigarh
Dy. Cit vs Swaraj Engine Ltd. on 3 December, 2001
Equivalent citations: (2004)91TTJ(CHD)671
ORDER
D.R. Singh J.M.:
With this common order, we propose to dispose of both the appeals filed by the revenue, together, because most of the issues involved therein are identical, for the sake of convenience.
2. In ITA No. 1443/Chd/1994, the revenue has taken the following effective grounds :
1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 7,47,227 on account of Modvat. The assessing officer valued the closing stock of the assessee by including the amount of Modvat against the valuation shown by the assessee after excluding the amount of Modvat.
2. The learned Commissioner (Appeals) has further erred in allowing relief of Rs. 20,54,450 out of addition of Rs. 22,21,116 made by the assessing officer on account of payment of royalty as that of technical know-how treating the payment under section 35AB.
3. The learned Commissioner (Appeals) has also erred in deleting the disallowance of Rs. 45,527 made by the assessing officer under section 37(4) on account of guest house maintenance expenditure.
3. In ITA No. 1444/Chd/1994, the revenue has taken the following effective grounds :
1. On the facts and in the circumstances of the caise, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 13,07,318 made by the assessing officer on account of MODVAT. The assessing officer made the valuation of closing stock by including the amount of MODVAT as against the valuation made by the assessee after excluding the amount of MODVAT from the closing stock.
2. The learned Commissioner (Appeals) has further erred in allowing relief of Rs. 27,20,440 out of addition of Rs. 32,28,529 made by the assessing officer on account of payment of royalty as that of technical know-ho treating the payment under section 35AB.
4. First, we shall take up ground No. 1 of both the appeals together as the issue involved therein, i.e., whether the closing stock is to be valued by including the amount of MODVAT or after excluding the same, is common.
5. At the outset of the appellate proceedings before us, learned authorised representative for the assessee brought to our notice a copy of the order of this Bench passed in the case of Dy. CIT v. Swaraj Engines in ITA No. 2158/Chd/1992 assessment year 1990-91, dated 24-10-2000, wherein this very issue has been decided in favour of the assessee and against the revenue.
6. Learned Departmental Representative for the revenue was fair enough to concede that the issue involved in ground No. 1 of the appeals, stands covered in favour of the assessee and against the revenue by the decision of the Bench (supra).
7. In this view of the matter, the issue involved in ground No. 1 of both the appeals is decided in favour of the assessee and against the revenue, and consequently ground No. 1 of both the appeals of the revenue is rejected.
8. Now, we shall take up ground No. 2 of both the appeals of the revenue together involving the issue relating to royalty amount paid to M/s. Kirloskar Oil Engine Ltd.
9. The relevant and material facts for the disposal of this ground of appeals are that in assessment year 1991-92, the assessee paid a sum of Rs. 26,65,340 and in assessment year 1992-93, a sum of Rs. 32,28,592 as royalty to M/s. Kirloskar Oil Engine Ltd. and claimed deduction of these amounts being admissible to the assessee. According to the assessing officer, the royalty paid to M/s. Kirloskar Oil Engine Ltd., on the basis of agreement dated 19-10-1989, was a lump sum payment covered within the definition 'know-how' under Explanation to section 35AB of Income Tax Act, so, only claim to the extent of 1/6th of the said amount was admissible to the assessee, hence, accordingly the assessing officer disallowed the balance amount of payment of royalty claimed by the assessee.
10. Aggrieved with the order of the assessing officer, the assessee filed an appeal before the Commissioner (Appeals) and submitted before her that royalty was paid to M/s. Kirloskar Oil Engine Ltd. on the basis of agreement dated 19-10-1989. As per clause 10(a) of the agreement, the assessee was to pay to the licensor royalty @ 3 per cent of the invoice price of licensed products, net of excise duty and sales-tax, minus cost of parts supplied by licensor. Such payment of royalty cannot be termed as lump sum payment falling under section 35AB. It was a payment with reference to sale of licensed products, hence the assessing officer was not justified in treating the claim of the assessee under section 35AB of Income Tax Act. It was also contended on behalf of the assessee that in the preceding assessment year, similar claim had been made and was duly allowed by the department, and no addition was made on this account. Thus, the contention of the assessee was supported by the past history of the case too. In support of its claim of deduction on account of payment of royalty, the assessee relied upon the decision of Andhra Pradesh High Court in Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (AP).
11. Learned Commissioner (Appeals) after considering the submissions of the assessee and also after referring to the agreement executed between the assessee and M/s Kirloskar Oil Engine Ltd., referred the order of the assessing officer by making following observations in her order :
"I have carefully considered the submissions made before me and also made reference to the agreement with M/s. Kirloskar Oil Engine Ltd. The royalty has been paid with reference to invoiced price of the licensed products and hence cannot be termed as a lump sum payment covered within the definition of 'know-how' in Explanation to section 35AB of Income Tax Act. Considering the submissions of the learned counsel as also the decision of the High Court on this issue, I am of the view that such payment of royalty is admissible as revenue expenditure being related to sales made. Royalty paid on sales works out of Rs. 24,66,340 and this deduction is held to be allowance (sic-allowed). The balance amount of Rs. 2 lakhs which is a lump sum payment for obtaining -drawings, documentations, etc. is in the nature of payment for obtaining technical knowhow falling under section 35AB of the Income Tax Act. Therefore, 1/6th of this would be admissible as deduction in the year under consideration in addition to royalty paid of Rs. 24,65,340. Thus, the total deduction works out to Rs. 24,98,673 (i.e., Rs. 24,65,340 + 1/6th of Rs. 2,00,000, i.e., Rs. 33,333) as against deduction of Rs. 4,44,223 allowed by the assessing officer. Thus, the appellant is entitled to further deduction of Rs. 20,54,450 (i.e., Rs. 24,98,673-4,44,223) on this account. To conclude, out of the addition of Rs. 22,21,116, relief to the extent of Rs. 20,54,450 is allowed and addition to the extent of Rs. 1,66,666 (i.e., Rs. 22,21,226 -20,54,450) is confirmed."
Aggrieved with the order of the Commissioner (Appeals), the revenue has come up in appeal before us for setting aside the order of the Commissioner (Appeals) and restoring that of the assessing officer.
12. In support of the assessee (sic-Revenue) that the royalty paid to M/s Kirloskar Oil Engine Ltd. on the basis of agreement dated 19-10-1989, was a lump sum payment covered within the definition of 'know-how' under Explanation to section 35AB of the Income Tax Act and the same has been rightly held to be admissible by the assessing officer only to the extent of 1/6th of the said amount of claim of the assessee, learned Departmental Representative for the revenue extensively relied upon the clauses of the said agreement and on the following cases :
12(i) CIT v. Polyformalin (P) Ltd. (1986) 161 ITR 36 (Ker), wherein their Lordships of the Kerala High Court held that the technical know-how acquired by the assessee fell within the definition of 'plant' and the expenditure incurred in acquiring the same was capital expenditure. Therefore the assessee was not entitled to deduction of the royalty paid as revenue expenditure. However, the assessee would be entitled to depreciation and development rebate since the technical know-how acquired was 'plant' and was a depreciable asset.
12(ii) CIT v. Aluminium Corporation of India Ltd. (1973) 92 ITR 563 (Cal), wherein their Lordships of Calcutta High Court held that on the facts, that as a result of the expenditure an improved method was introduced in the running of existing plant of the assessee and there had been a substantial increase in production, but, in the face of swift changing methods in technology, the methods recommended by the technicians would in course of time become out of date. The expenditure had not resulted in an advantage of a permanent nature and was not, therefore, capital expenditure. it was allowable under section 10(2)(xv) of the Indian Income Tax Act, 1922.
12(iii) Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), wherein their Lordships of the Supreme Court held reversing the decision of the High Court,
(i) that there was no material before the Tribunal to come to the finding that the appellant had obtained under the agreement a 'completely new plant' with a completely new process and a completely new technical know-how from Meiji. The business of the appellant from the commencement of its plant in 1961 was the manufacture of penicillin. Even after the agreement, the product continued to be penicillin and the agreement with Meiji stipulated the supply of the 'most suitable sub-cultures' evolved by Meiji for purpose of augmentation of the yield of penicillin.
(ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in relation to the exploitation of the new sub-cultures of the high-yielding strains supplied by Meiji. The mere improvement in or updating of fermentation process would not necessarily be inconsistent with the relevant and continuing utility of the existing infrastructure, machinery and plant of the appellant.
(iii) That the limitations placed in the agreement on the right of the appellant in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how, pertained more to the use of the know-how than to its exclusive acquisition.
(iv) That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business, an its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature, and was allowable as a deduction in computing the business profits of the appellant.
12(iv) Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342 (SC), wherein their Lordships of the Supreme Court held that affirming the decision of the High Court that the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign company, what was set up by the appellant was a new business, and the foreign company had not only furnished information and technical know-how but rendered valuable services in the setting up of the factory itself, and even after the expiry of the agreement there was no embargo on the appellant to continue to manufacture the product in question, the entire payment made could not be held to be revenue expenditure merely because the payment was required to be made at a certain percentage rate of the gross turnover of the products as royalty. The disallowance of 25 per cent of the sum paid as royalty by the appellant to the English company as capital expenditure not allowable as revenue expenditure under the provisions of the Income Tax Act, 1961, for the assessment years 1967-68 and 1968-69, was correct.
13. On the other hand, learned authorised representative for the assessee extensively quoting from the agreement dated 19-10-1989, submitted that the assessee's company started manufacturing engines from 8-8-1989, for self- consumption and also for sale to others. The company was set up with its plant, machinery and building and all other technical know-how of its own, and for setting up of the said unit, no technical know-how services were availed from the outside agencies. This agreement dated 19-10-1989, was entered into with M/s. Kirloskar Engines (P) Ltd. to achieve the desired level of output and quality for manufacturing the product with the assistant and technical know how of M/s. Kirloskar Engines (P) Ltd. Clause 1(a) of the agreement clearly stipulates that the technical know-how and assistance was being taken by the assessee for achieving the desired level of output and for quality of the goods manufactured by the assessee meaning thereby that the assistance and technical know-how were only for this purpose and were not for acquiring ownership of the said technical know-how. He further submitted that there were restrictive clauses also because as per clause 1(b) of the agreement, sales of various products cannot be made to any other country except with the permission of the licensor, i.e., M/s. Kirloskar Engines (P) Ltd. and as per clause 1(c) of the agreement, the licensee has been given right to use licensor's patents, if any, for the assembly and manufacture of the licensed products. Technical assistance as per clause 2 of the agreement cannot be given to anyone else without prior written consent of the licensee. It was further submitted on behalf of the assessee that as per clause 3 and clause 4 of the agreement, the assessee cannot enter into such agreement to manufacture product with this technical assistance and no other sub-licence can be given as per clause 5 of the agreement. He further contended that as per clause 7 of the agreement, the assessee was to achieve this quality at optimal cost and persons for training were also to be deputed by the licensor. The total payment to be made on account of such technical assistance was @ 3 per cent of the total sales, to be paid half-yearly and on the certification by the CA. He further contended that as per clause 10(f), the assessee was only entitled to use technical know-how, patents and other rights and clause 12(b) states that it only user for which rates were given to the assessee. He further contended that as per clause 17 of the agreement, this agreement was executed only for a limited period of 5 years. Thus, summing up his contention, learned authorised representative for the assessee submitted that the technical know-how or the assistance given to the assessee by M/s. Kirloskar Engines (P) Ltd. was relatable to production, and was for use of the same for manufacturing and, so, was directly connected to the production and hence, was an allowable revenue expenditure under section 37(1) of the Income Tax Act. In support of his contention, learned authorised representative for the assessee relied upon Goodyear India Ltd. v. Income Tax Officer (2000) 68 TTJ (Del)(TM) 300, Wellman Incandescent Endia Ltd. v. Dy. CIT (1995) 55 ITD 338 (Cal) and Praga Tools Ltd. v. CIT (supra).
14. In (1996) 55 ITD 338 (Cal) (supra), Tribunal, Calcutta 'C' Bench, held that prior to introduction of section 35AB, the consideration paid for acquiring any know-how for the purpose of business was held to be capital expenditure, not allowable as deduction under section 37(1). The consensus of judicial opinion was that expenditure for acquiring the technical know-how was different from expenditure incurred for obtaining the mere use of the technical know-how and information which was allowable as revenue expenditure. Thus, prior to the introduction of section 35AB, the law was that payments for acquisition of the technical know-how or information would be capital payments and payments for the mere use of such know-how during the currency of the agreement were revenue payments, deductible while computing the business income. Having regards to the state of law which existed prior to the introduction of section 35AB, it must be construed that the legislature wanted to provide for writing off of even payments made for the acquisition of technical know-how despite the fact that the judicial interpretation was not in favour of such view. The write off was, however, to be spread over a period of six assessment years. The only condition imposed by section 35AB is that the consideration for acquiring the know-how should be acquired for use for the purpose of assessee's business. The assessee's right to have the payments made for obtaining the use of the technical know-how allowed as revenue expenditure, remains unaffected by the new section 35AB. Section 35AB comes into play only when the consideration is paid for acquiring the know-how. From the above, it was clear that the assessee had not acquired any technical know-how or information on patent once and for all so that the lump sum consideration could be held to be a capital payment. The assessee had only obtained a right to use the technical information for the purpose of the specific work order. The expenditure was, therefore, revenue expenditure allowable under section 37(l). The provisions of section 35AB do not cover a case where there is only a right to use the technical know-how without any acquisition of the same. The instant case was a case of such type. Therefore, the assessee was entitled to the deduction of the entire fees of Rs. 1,66,45,542 paid as technical know-how and design engineering fees.
15. In the case of Praga Tools Ltd. v. CIT (supra), their Lordships held, reversing the decision of the Tribunal, that the expenditure incurred had a direct nexus or relation to the carrying on or conduct of the business of the assessee and, therefore, it had to be treated as an integral part of the profit making process. The very object of payment of royalty based upon the production and sales of the products manufactured by the assessee, was to obtain manufacturing licence and technical know-how including drawings, designs, specifications and other technical information to enable the assessee to make and sell the products indicated in the agreements. Merely because the agreements provided that the assessee shall be entitled to retain technical know-how, designs drawings, etc., even after expiry of the agreements, it did not alter the nature of the transaction. There was no property right transferable in the technical know-how. The fact that the assessee was not entitled to use the trademark of J.S. for the products after expiry of the agreement period, clinched the issue. The expenditure incurred by the assessee for the purpose of payment of royalty to the collaborators was revenue in nature and held deductible.
16. In the case of Goodyear India Ltd. v. Income Tax Officer (supra), the Bench observecl that in view of the above discussions, it was not a case of sale of technical know-how but it was a case of transfer of technical know-how and thus the assessee had not acquired ownership of the said technology. The assessee had already been manufacturing tyres. There was also no absolute certainty of its continued use for the business for a long period because of existence of the terms of the agreement for its termination even before 8 years. The assessee had not acquired any advantage in capital field. The advantage consisted merely of facilitating the assessee's manufacturing and operation to be carried on more profitably while leaving other capital untouched. Moreover, every enduring advantage is not of capital nature.
17. The other argument advanced by the learned authorised representative for the assessee in this case is that the department has already allowed claim of similar expenditure of the assessee in the assessment years 1989-90 and 1990-91 as revenue expenditure. The dispute had only arisen in the assessment years 1991-92 to 1992-93 under consideration because even in assessment year 1993-94, a similar claim of the assessee has been considered and allowed by the department. The learned authorised representative for the assessee further contended that a new agreement has been entered into by the assessee with M/s. Kirloskar Oil Engines Ltd. for another three years from 1-1-1994 to 31-12-1996, where the amount was to be paid @ 2 per cent of the sales. Again, a new agreement was entered from 1-1-1997 to 31-12-1998, where the payment was made at Rs. 175 per engine then it was discontinued and again agreement has been entered into from 1-7-2000, where Rs. 100 per engine is being paid. Thus, it is a continuous process by virtue of different agreements which are essentially relatable to the production only and a revenue expenditure. He further contended that under the aforesaid circumstances, the principle of res judicata does apply as has been held in the following cases :
(i) Union of India & Ors. v. Kaumudini Narayan Dalai & Anr. (2001) 249 ITR 219 (SC)
(ii) CIT v. Dalmia Dadri Cement Ltd. (1970) 77 ITR 410 (P&H)
(iii) Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) In Union of India & Ors. v. Kaumudini Narayan Dalai (supra), the Apex Court held that if the revenue did not accept the correctness of the judgment in the case of Pradip Ramanlal Sheth v. Union of India & Ors. (1993) 204 ITR 866 (Guj), it should have preferred an appeal thereagainst and instructed counsel as to what the fate of that appeal was or why no appeal was filed. It is not open to the revenue to accept that judgment in the case of the assessee in that case and challenge its correctness in the case of other assessees without just cause. For this reason, we decline to consider the correctness of the decision of the High Court in this matter and dismiss the civil appeal.
In the case of CIT v. Dalmia Dadri Cement Ltd. (supra), the Hon'ble High Court held that though as a general rule the principle of res judicata is not applicable to the decisions of the IT authorities and an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year, and the decision given in an assessment for an earlier year is not binding either on the assessee or the department in a subsequent year, this rule is subject to limitations, for there should be finality, and certainly in all litigations including litigation arising out of the income-tax and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due enquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. As it has not been shown in this case that the earlier decisions were either arbitrary or perverse or that by the time of the assessment year 1955-56 fresh facts had come into existence and come before the IT authorities, this was not a proper case in which the revenue should have gone back in its approach adopted in this case for well over a decade.
In the case of Radhasoami Satsang v. CIT (supra), wherein the apex court held that in the absence of any material change justifying the department to take a different view from that taken in earlier proceedings , the question of the exemption of the assessee-appellant should not have been reopened.
Strictly speaking, res judicata does not apply to IT proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
18. Lastly, the learned authorised representative for the assessee submitted that the decisions relied upon by the learned Departmental Representative for the revenue do not apply to the facts of the instant case of the assessee because in those cases (supra), technical know-how was given for the purpose of setting up of the business and bringing new assets into existence. However, according to learned authorised representative for the assessee Alembic Chemical Works Co. Ltd. v. CIT (supra), also relied upor! by the learned departmental Representative for the revenue, is applicable to the facts of the instant case of the assessee, so, he too placed reliance on the same.
19. We have heard the learned authorised representatives of both the, parties, perused the records and carefully gone through the orders of the tax authorities below, and the case law cited by both the parties as well as relevant clauses of the agreement dated 19-10-1989. Firstly, on going through the citations given by learned Departmental Representative for the revenue, we find that these are distinguishable on the facts but at the same time, the ratio of the citation Alembic Chemical Works Co. Ltd. v. CIT (supra) which has also been relied upon by the learned authorised representative for the assessee, has been applied to the facts of the instant appeals of the revenue under consideration.
20. We find that in this case, the assessee's business is of manufacturing engines which was started on 1-1-1989. The assessee obtained assistance and technical know-how services from M/s Kirloskar Oil Engine Ltd. simply to maximise its production and improve qualit of products 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, as per clause 13, the agreement was executed for a limited period of 5 years and: Was renewed thereafter. Further, as per clause 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 Engine 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 Commissioner (Appeals) 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 assessment years 1989-90 and 1990-91 and also subsequently in the assessment year 1993-94 but has only been disallowed in the assessment years 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 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.
21. On this reasoning too, the order of the assessing officer is liable to be set aside and Commissioner (Appeals) has rightly done so by allowing the claim of payment of impugned royalty amount holding the same to be revenue in nature.
22. For the reasons stated above, we uphold the order of the Commissioner (Appeals), in this regard, for the assessment years under consideration. Accordingly, ground No. 2 of both the appeals of the revenue is rejected.
23. Now, we shall take up ground No. 3 of the revenue in appeal No. 1443/Chd/1994 for the assessment year 1991-92.
24. At the outset of the proceedings before us, learned authorised representative for the assessee placed on record a photocopy of the decision of the Tribunal, Chandigarh Bench, in ITA No. 1179/Chd/1994; assessment year 1988-89 decided on 22-6-2001, and ITA Nos. 96 and 97/Chd/1996; assessment year 1989-90 and 1990-91 decided on 19-4-2001, and contended that after this decision, the issue involved in ground No. 3 stands decided against the revenue and in favour of the assessee, so, this ground of appeal is liable to be rejected.
25. Learned Departmental Representative for the revenue was fair enough to concede on this point.
26. In this view of the matter, ground No. 3 of the revenue's appeal in ITA No. 1443/Chd/1994; assessment year 1991-92 is rejected and the order of the Commissioner (Appeals) is upheld.
27. In the result, both the appeals filed by the revenue are dismissed.