Income Tax Appellate Tribunal - Pune
Carraro India Pvt. Ltd., Pune vs Department Of Income Tax on 22 February, 2012
ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE: SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND
SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No.1384&1385/PN/2010
Assessment Year : 2003-04 & 2004-05
DCIT Circle-1(1) Carraro India Ltd.
Pune Vs. Pune
(Appellant) (Respondent)
PAN No.AAACC 5292M
ITA No.205/PN/2011
Assessment Year : 2005-06
DCIT Circle-1(1) Carraro India Ltd.
Pune Vs. Pune
(Appellant) (Respondent)
Appellant By: Shri Ajit Korde
Respondent By: Shri Ved Jain
ORDER
PER R.S. PADVEKAR:-
This batch of 3 appeals are filed by the revenue challenging the respective impugned orders of Ld. CIT(A)-VI, New Delhi for the assessment years 2003-04, 2004-05 & 2005-06.ITA No.1384/PN/2010:
2. The revenue has taken the following grounds in the appeal:
1. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance on account of Royalty payment of Rs.1,38,23,945/- to Carraro Spa Italy and holding the same as revenue in nature on the ground that royalty payment was determined as a percentage of the goods sold whereas A.O. had relied upon the clauses providing that on expiration of the tenure of the agreement and subject to complete payment of the royalty, Carraro India shall be deemed to have acquired a perpetual and royalty free non exclusive license to use the licensed technology.
2. On the facts and circumstances of the case the Ld. CIT(A) erred in allowing the claim of depreciation of Rs.1,07,905/- of the Assessee considering the peripheral to be part and parcel and inclusive in the term computer, thereby allowing 60% depreciation as against 25% available under the Act.
3.1 The first issue is in respect of the royalty payment of Rs.1,38,23,945/-
paid by the assessee to the Carraro SpA, Italy which was treated by the A.O. as a capital expenditure and disallowed the same. The facts which reveal from the record are as under. The assessee company is in the manufacturing and trading of Tractor Transmission aggregates and Front Axles. The assessee is a joint venture company of Carraro SpA, Italy and Escorts Ltd. of India. Carraro SpA, Italy along with the Simest SpA holds 51% of the equity of the assessee 2 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune and Escorts Ltd. holds the balance 49%. The A.O. has observed that the assessee had paid an amount of Rs.1,84,31,927/- to Carraro SpA, Italy as a royalty paid for technical knowhow and which was claimed as the revenue expenditure. The A.O. sought the explanation of the assessee why the said expenditure should not be treated as a capital expenditure. The assessee contended before the A.O. that the `royalty' was paid in respect of goods sold in domestic market in terms of technical collaboration agreement approved by the Government of India and amount of `royalty' pertains to and is necessarily the expenses incurred to earn sales revenue during the year and thus the same is a revenue expenditure. The A.O. was not impressed with the explanation of the assessee. He referred to the clauses of the Agreement between the assessee and Carraro SpA, Italy and as per the interpretation given by him, the assessee company has been supplied with the technological inputs and data by Carraro SpA, Italy by which the assessee company significantly increased its efficiency, economy and competitiveness of his business by upgrading the technology of the threshold of the products. Hence, the assessee company has been deriving enduring benefits from the technological information received. The A.O. also referred to and relied on the following decisions:
1. CIT Vs. Jacubs (P) Ltd. 120 ITR 197 (Ker)
2. CIT Vs. Coel Shipment (P) Ltd. 82 ITR 402
3. Southern Switchgear Ltd. Vs. CIT 148 ITR 272.
3.2 In the opinion of the A.O., the royalty payment was towards acquiring technical knowledge which was in the nature of technical knowhow fees. He also observed that the payment of technical knowhow, if so, is clearly dealt with u/s 35AB of the I.T. Act, 1961 which states that whether the assessee has paid in any previous year in consideration for acquiring any knowhow for use for the purpose of business, 1/6th of amount was paid shall be deducted in computing the profit & gains of the business for the previous year etc. He also observed that in the A.Y. 2003-04, the assessee cannot be given any benefits of section 35AB but said provision is applicable for payment made in A.Y. 1998- 99 and before. The A.O. treated the entire payment as a capital in nature and allowed depreciation at 25% treating the payment made for acquiring intangible asset u/s 32 of the Act and he made the addition of Rs.1,38,23,945/-.
4. The assessee carried the issue before the Ld. CIT(A) by taking the different contentions. The main contention of the assessee before the Ld. CIT(A) was that royalty payment to the Carraro SpA, Italy was towards the goods sold in domestic market during the year in terms of the technical collaboration agreement and hence, the amount of royalty is directly linked 3 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune with the sales revenue and it is only on account of the revenue expenditure. The Ld. CIT(A) accepted the plea of the assessee that the royalty payment by the assessee to Carraro SpA, Italy as per the terms of the agreement was with regard to the non-transfer of the ownership of the technology being used by the assessee company and the royalty payment was based on the annual sales made by the assessee. The Ld. CIT(A) concluded that the assessee has been granted non-transferable license to knowhow and that technology to produce supplied by Carraro SpA, Italy could remain exclusive property of the licensor and the ownership right is not transferred to assessee company. The Ld. CIT(A) also observed that the expenditure is linked to a small percentage of sale of products in Indian market and therefore explanation (3) to section 32 is not applicable here. The Ld. CIT(A) also observed that the A.O. should read the whole agreement of technical knowhow and apply the terms of Agreement in the proper spirit. He also followed the decision of the ITAT Delhi in the case of ACIT Vs. Sierra Industrial Enterprises (P) Ltd. ITA No.3171/Del/2007. The ld. CIT(A) deleted the entire addition by accepting the assessee's contention that royalty payment to Carraro SpA, Italy is a revenue in nature. Now the revenue being aggrieved in appeal before us.
5.1 The Ld. CIT(DR) took us through the agreement (copy at page 63 to 80 in the paper book for the A.Y. 2004-05 ITA No.1385/PN/2010). The Ld. DR referred to the clause no.2.1 of the agreement and submits that in clear terms Carraro SpA, Italy has granted license to the assessee company with exclusive right save the right to sub-license (a) to manufacture, solely in the territory, the licensed products under the Licensed Technology and by providing itself of the technical assistance, all in accordance with and within the limits set forth in said agreement and (b) to delegate the third parties established in the territory, the manufacturing of single parts, components or individual elements of the licensed products. He submits that the assessee has been granted exclusive right to manufacture and sale the licensed products in the specified territory. He also referred to clause no.11 of the agreement (page 73 of the Paper Book) in which terms of payment of the fees are explained. He submits that though the royalty is worked @ 25% of the net sale price till the expiration of the agreement but mode of computation of the royalty is not decisive to determine whether it is a capital or revenue expenditure. He therefore pleaded that as per the terms of the agreement between the assessee and Carraro SpA, Italy, the assessee has been granted the exclusive license to use the technical knowhow and hence, the payment of the royalty may be linked to the sales cannot be treated as a revenue expenditure but as rightly held by the A.O., the same is in the capital nature.
4 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune5.2 The ld. Counsel for the assessee submits that as per the terms of the agreement, given in view of the clause no.2.1 of the agreement, there is no right to sub-license to the assessee in respect of the rights assigned to it to manufacture the licensed products under the Licensed Technology. There are fetters on the rights of the assessee as he is only the user of the license and the royalty payment is totally dependent on the sale effected by the assessee. The Ld. Counsel referred to clause no.13 and he said that till the expiration of the agreement, assessee having contractual obligation to pay the royalty. The Ld. Counsel referred to clause no.13.2 of the Agreement where the consequences on the expirations of Agreement are explained. He put his emphasis on the said clause and argues that after the expiration of the period of the agreement, the assessee cannot use the licensed trade mark. He therefore, submitted that when the period is mentioned in the agreement that clearly suggest that there is no exclusive right to the assessee to use the Licensed Technology. He further argues that for understanding the contractual nature between the assessee and the Carraro SpA, Italy, the entire agreement as such is to be understood. He also made his submissions on the decisions relied on by the Ld. D.R. more particularly in the case of Liquor Firm 190 ITR 197 (Ker.) as well as the different decisions relied on by the A.O. He submits that the decision in the case of Southern Switchgear Ltd. vs. CIT 232 ITR 359 (SC) relied on by the Ld. CIT(DR) is rendered on the different contractual terms as in that case there was an exclusive right to the assessee to use the technical knowhow. He alternatively submits that assessee company is incorporated in the financial year 1997-98 i.e. assessment year 1998-99 and the assessee has paid the total royalty from the A.Yrs. 2002-03 to 2008-2009 to the extent of Rs.18.96 crores. In that case, the assessee should be allowed 25% depreciation on the entire royalty payment on the very first year i.e. A.Y. 2002-03. The Ld. Counsel relied on the following precedents:
1. Climate Systems India Ltd. Vs. CIT(2009) 319 ITR 113 (Del)
2. Climate Systems India Ltd. Vs. ACIT (2010) 2 ITR (Trib) 168 (Del)
3. CIT Vs. Sharda Motor Industrial Ltd. (2009) 319 ITR 109 (Del)
4. CIT Vs. EKL Appliances Ltd. ITA 1069/2011 order dated 22.2.2012 (Del)
5. CIT Vs. Eicher Motor Ltd. (2007) 293 ITR 464 (MP)
6. CIT Vs. M. Subramaniam (2005) 272 ITR 525 (Mad)
7. DCIT Vs. Precision Pipes & Profiles co. Ltd. ITA No.374/Del/2009 dt. 30.4.2010.
8. CIT Vs. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC)
9. Kirloskar Pneumatic Co. Ltd. Vs. CIT (1982) 136 ITR 746 (Bom)
10. DCIT vs. Power Plant performance & Improvement Ltd. ITA No.4317/Del/2009 order dated 12.2.2010
11. Nippo Batteries Co. Ltd. Vs. ACIT (2011) 7 ITR (Trib) 303 (Chennai)
12. Modi Revlon (P) Ltd. Vs. ACIT (2010) 2 ITR (Trib) 632 (Del)
13. Arvind Fashions Ltd. Vs. ACIT (2010) 37 SOT 369
14. CIT Vs. G4S Securities System (India) (P) Ltd (2011) 338 ITR 46 5 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune
15. Kyungshin Industrial Motherson Limited vs. CIT ITA No.1226 of 2010 (Del) He therefore, pleaded for confirming the order of the Ld. CIT(A).
6. We have heard the rival submissions of the parties and perused the record. To decide the issue in controversy, it is necessary to consider the terms of the Agreement between the assessee and Carraro SpA, Italy. In the recital of the Agreement (page nos.64 to 80 of the Paper Book for 2004-05) it is stated that the assessee company desires to be granted a design and trade mark of a certain axle which is to be supplied with the designs, technology, knowhow and technical assistance to be manufactured by the assessee in the specified territory defined in para 1.9 of the agreement. The assessee has entered into licensed and technical assistance agreement with Carraro SpA, Italy, on 5.4.2001. The terms and expressions are also explained in the agreement but as all are not relevant for us, hence only important and relevant terms of their Agreement are reproduced here in under.
6.1 The expression Licensed Technology has been defined in clause no.1.5, which reads as under:
"Licensed Technology"
The technical information, drawings, know how data, techniques, plans and materials specifications on manufacturing, equipment, methods, process and formulas and the improvements thereof owned by or licensed to Carraro or its subsidiaries and followed and used by same in the manufacture of the Licensed Products out excluding technology the transfer or license of which to Carraro India would be prohibited, either generally or specifically, by any statutory or regulatory requirements, competent authority or contractual obligations to which Carraro or its subsidiaries are a party.
6.2 Clause no. 2.1 is also relevant which reads as under:-
"Grant and Scope of the License."
Carraro hereby grants to Carraro India the exclusive right, without the right to sub-license:
(a) to manufacture, solely I the Territory, the Licensed products under the Licensed Technology and by prevailing itself of the Technical Assistance, all in accordance with and within the limits set forth in this Agreement;
(b) to delegate to third parties established in the Territory the manufacturing of single parts, components or individual elements of the Licensed Products, it being understood that Carraro shall have the right, exercisable at any time in writing, to determine the single parts, components or individual elements of the Licensed Products whose, manufacturing delegation to third parties shall be subject to prior written consent by Carraro and to execution by such third parties of a confidentiality agreement conform to the Model Confidentiality Agreement attached hereto as Schedule 2.1 (b);
(c) to affix with and identity the Licensed Products manufactured under this Agreement by the Licensed Trademark, all in accordance with and within the limits set forth in this Agreement;6 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune
(d) to sell, solely in the Territory, the Licensed Products manufactured under this Agreement.
6.3 There is a limitation clause in clause no. 2.4 which reads as under:-
"Limits"
For the avoidance of doubt, it is hereby understood that the License does not include, and nothing in this Agreement shall be construed as a grant or a deemed or implied grant to Carraro India of the license right or privilege:
(a) except as consented under Clause 2.1(b) above, to sub-license, in whole or in part, the License or to delegate, in whole or in part, to any third party the performance of any activity the subject matter of this Agreement;
(b) to manufacture the Licensed Products outside the Territory;
(c) except as consented in Clause 2.2 above, to export, market, distribute, sell or otherwise deliver the Licensed Products outside the Territory.
6.4 Clause no.2.5 restrict the rights transferred to the assessee and which is also important clause in the said agreement which reads as under:-
Property
(a) The Licensed Technology made available to Carraro India under this Agreement shall remain in the exclusive property of Carraro or its Licensors until expiration of this Agreement pursuant to Article 13. Carraro India shall not, without prior written consent of Carraro, transfer it, fully or partially, to any third party and the Carrraro India sucessors and assigns shall have no rights whatsoever over it.
(b) At the expiration of this Agreement pursuant to Article 13 and subject to the complete payment of the Royalty. Carraro India shall be deemed to have acquired a perpetual and royalty free non exclusive licence to use the Licensed Technology.
6.5 Clause 7 and 8 are in respect of manufacture of the licensed product and use of the licensed trade mark and which are relevant to the same are reproduced as under:
MANUFACTURE OF THE LICENSED PRODUCTS
7.1 General, Carraro India shall throughout the term of this Agreement manufacture the Licensed Products strictly in accordance with the Licensed Technology and any statutory or regulatory requirement applicable thereto at any relevant time in the Territory.
7.2 Quality Controls;
Carraro India shall maintain adequate quality standards and specifications for the Licensed Products to assure that the good name ad reputation of Carraro are not adversely affected. Carraro India's manufacturing and assembly process, facility, equipment, inventory as well as purchased components and raw material may be audited annually, at agreed times, by representatives of Carraro to assure that adequate quality standards and specifications are maintained and the good name and reputation of Carraro are being protected. Carraro, moreover, shall have the right exercisable at any time and from time to time to verify that the Licensed Products manufactured by Carraro India hereunder conform with provision of Clause 7.1 above and to request 7 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune Carraro India to provide to Carraro a reasonable number of samples of the Licensed Products manufactured by Carraro India under this Agreement.
7.3 Licensed Products non Conformant;
If any product fails in the reasonable judgment of Carraro to meet the quality, specifications or standards imparted hereunder, then any such products shall not be deemed to quality as "Licensed Products" hereunder and shall at the election of Carraro and at the, cost of Carraro India, be withdrawn from the market forthwith and destroyed.
8. USE OF THE LICESED TRADEMARK 8.1 General Carraro India shal throughout the term of this Agreement;
(a) At all time consistently use the Licensed Trademark in the Territory without any material break in continuity, so as to ensure that Carraro rights therein and the notoriety, prestige and image of the Licensed Trademark are effectively preserved;
(b) Refrain from using the Licensed Trademark and any Licensed Technology in any way and/or for any purpose whatsoever different from the scope of the License, as specified under Article II and elsewhere in this Agreement;
(c) Cause all Licensed Products manufactured under the License to be affixed with or otherwise identified by the Licensed Trademark.
8.2 Standard Formats Carraro shall make or cause to be made available to Carraro India from time to time samples of its approved standard formats of the Licensed Trademark to be affixed o the Licensed products (inclusive of materials, colors and size specifications) (the "Standard Formats") and Carraro India shall, except as provided under Clause 8.3 below in using the Licensed Trademark in the Territory not deviate there from in any way.
8.3 Other Formats;
Carraro India may, at its costs, submit to Carraro, for approval by the same samples, in adequate quantities and ranges, of proposed formats of the Licensed Trademark other than the Standard Formats which it deems fit for use in the Territory, provided, however, that Carraro India shall not in any way implement any such proposed formats unless the same has been previously approved in writing by Carraro.
8.4 No Other Trademark;
Carraro India shall not affix to or otherwise identify the Licensed Products by any trademark, sign, logo, label, tag, or other identification other than the Licensed Trademark or any label or indication which might be imposed to be affixed thereto by any statutory or regulatory provision in force in the Territory.
8 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune6.6 Clause No.11 lays down the terms of the payment of the fees/royalty which are as under:
11. FEES AND REIMBURSEMENT 11.1 Fees Carraro India will pay to Carraro, until expiration of this Agreement, as consideration for the License and for the rendering of the Technical Assistance pursuant to this Agreement a royalty (hereinafter the "Royalty") to be paid every six (6) months (hereinafter the "Given Period") which will be equal for each Given Period to 2% (two percent) of the Net Sale Price at the end of the relevant Given Period.
11.2 Sales Reports Promptly following the end of each Given Period during the term of this Agreement, together with the payment of the relevant Royalty, Carraro India will send to Carraro a sales report drafted in a form reasonably acceptable to Carraro, reflecting complete details of all sales of Licensed Products occurred during such given Period.
11.3 Annual reports.
Within 60 (sixty) days after the end of each Calendar Year Carraro India shall furnish Carraro with a detailed and final report, drafted in a form reasonably acceptable to Carraro of the total sales of Licensed Products occurred during such year.
11.4 Inspections.
It is understood that Carraro shall have the right at any time and at its expenses to have its representatives inspect the books records and other documents of Carraro India in order to verify the amount of sales of the Licensed Products and the calculation of any royalty paid or to be paid by Carraro India hereunder.
11.5 Methods of Payment.
All payments hereunder shall be made by Carraro India to Carraro in US Dollars or Euro (subject to the Governmental and/or Reserve Bank of India approval), in immediately available funds by bank wire transfer, at Carraro account at such Italian credit instruction as may be from time to time designated in writing by Carraro.
11.6 Reimbursement.
Carraro India will reimburse to Carraro all out-of-pocket expenses reasonably incurred by Carraro following the request of Carraro India during the term of this Agreement.
6.7 Clause no.13 of the Agreement provides for the expiration of the agreement and also effect on the expiration which reads as under:
13. EXPIRATION OF THE AGREEMENT.
13.1 Expiration.
This Agreement shall came into effect on the date of its execution and, unless earlier terminated pursuant to Article XIV hereof, (i) on the date of the tenth (10th) anniversary of its execution or (ii) after seven (7) years from the date Carraro India will commence the production of the Licensed Products, whichever is earlier or (iii) any longer period as permitted by the govern and/or Reserve Bank of India.
13.2 Effects of Expiration.
Upon expiration of this Agreement:
(a) Carraro India shall promptly cease to use the Licensed Trademark;
provided however that so long as Carraro shall hold (whether directly or 9 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune through any Admitted Desinee of Carraro, as defined and pursuant to the Shareholders Agreement) not less than fifty-one (51%) percent of the paid up capital of Carraro India, Carraro India shall have the right to continue using the corporate name of "Carraro India" but provided further more that in the event of Carraro shareholding should fall below the said fifty-one percent (51%) then, in such event, Carraro India shall forthwith and take all necessary steps in order to promptly change its corporate name to another name not including the word "Carraro" or any other word confusingly similar thereto;
(b) Carraro shall have the right to exercise the option right set forth under Clause 14.4.
6.8. The termination clause of agreement is as under:-
TERMINATION 14.1 Either party Termination Either party shall have the right to terminate this Agreement, before the expiry, at any time upon written notice given to the other party under any of the following circumstances;
(a) In the event the other Party commits a material breach of this Agreement and such breach is not cured, fully and effectively, within 30 (thirty) days after notification of such breach;
(b) In the event the other Party becomes bankrupt or is the subject of proceedings for liquidation or dissolution or ceases to carry on its business;
14.2 Carraro Termination "Carraro shall have the right to terminate this Agreement at any time upon written notice given to Carraro India under any of the following circumstances:
(a) If Carraro should hold (whether directly or through any Shareholders Agreement) less than fifty-one (51%) of the share capital of Carraro India;
(b) In the event of Carraro should not be able to designate the majority of the board of directors of Carraro India;
(c) In the event of termination for whatever reason of the shareholders Agreement.
14.3 Effects of Termination "In case of termination, for whatever reason of this Agreement:
(a) Carraro India shall:
(i) promptly cease to use the Licensed Technology furnished to it by Carraro under this Agreement for the manufacture of the Licensed Products;
(ii) refrain from using the Licensed Technology for the manufacture of any other product different from the Licensed Products;
(iii) promptly cease to use, in any form, the Licensed Trademark and take all necessary steps in order to promptly change its corporate name to another name not including the word "Carraro" or any other word confusingly similar thereto; and
(iv) return to Carraro all documents, drawings, plans and materials provided by Carraro to Carraro India under this Agreement, it being understood that Carraro India shall not be entitled to keep copies or other reproductions of the same;
(b) Carraro shall have the right to exercise the option right set forth under Clause 14.4.10 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune
14.4 Option Right Without prejudice of the provision of Clause 14.3 above, o the event of termination or expiration, for whatever reason, of this Agreement, Carraro shall have the right exercisable at its discretion to purchase from Carraro India, at their respective book value, al or part of the patterns used by Carraro India for the manufacture of the Licensed Products."
7. Schedule is appended to the agreement in which the descriptions of the Licensed Product is given. As per the terms of the agreement, assessee has a right to manufacture the first steering axle and its optional accessories which are intended for use in 35 HP & 55 HP agricultural tractors. The specifications are also given those are not much more important for us. Prima facie it appears that the assessee has been conferred with the absolute License to manufacture and sell with the brand name of the Carraro SpA, Italy the Licensed Products mentioned in the schedule. As rightly argued by the Ld. Counsel, now we have to see the terms of the Agreement between assessee and the Carraro SpA, Italy, whether in fact the absolute right is confirmed on the assessee to use the technology for the purpose of manufactured Axles to sale save in specified territory. There is no dispute about the fact that only few parts are manufactured by the assessee. An agreement is also approved by the RBI. Clause 2.1 is important to understand the limits on the rights of the assessee to use the license. The use of the license or right given to the assessee is confined to himself and there is no right to sub-license the technology which has been supplied by the Carraro SpA, Italy, to the assessee. Clause no.2.4 make the further clarifications that assessee should not manufacture the Licensed products outside the territory and beyond the terms of the agreement not to export, market, distribute or sale or otherwise deliver the licensed product. Clause no.2.5 is also important as right in respect of the Licensed Technology has been retained as an exclusive property of Carraro SpA, Italy and on the expiration of the Agreement as terms of clause no.13, it is agreed that assessee company should not without the prior consent of the Carraro SpA, Italy, transferred fully or partially any of the rights to any third party. It is also pertinent to note that termination clause is also incorporated in the agreement. That clearly suggest that there is no absolute right in the nature of the property to the assessee to enjoy the same unlimited as Carraro SpA, Italy can terminate the agreement withdrawing all the rights given to the assessee.
8. In sum and substance on overall consideration of the terms and clauses in the agreement between the assessee and the Carraro SpA, Italy, it is difficult to accept the contention of the A.O. that assessee has been granted absolute right of the use of the technology. While granting the limited right of technology with putting lot of restrictions the payment of the royalty is linked 11 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune to the net sale turnover of the assessee in the specified territory. It is pertinent to note that royalty payment made by the assessee is not a lumpsum payment but it is spread over from the A.Ys 2002-03 to 2008-09 (as per the chart filed before us) which was clearly linked to the sales of the licensed product. We have also anxiously perused the decisions relied on different decisions by the Ld. Counsel. In the case of Climate systems India Ltd. (supra), Hon'ble High court of Delhi held that the royalty paid by the assessee to the foreign collaborators had a specified percentage of its domestic and export sales for using the technology and filing of the technical services as provided by the letter under the technical collaboration agreement is allowable as a revenue expenditure. The identical view has been taken in the different decisions. We have also considered the decisions relied on by the Ld. Counsel. More particularly, in the case of Fenner Woodroffe & co. Ltd. vs. CIT (Mad) 102 ITR
665. In the said case there was no limitation regarding exploitation of the knowhow beyond the term of the agreement. Though in the said case the agreement was stated to be in force for the period of 10 years, there was no prohibition for the use of the technical data by the assessee after the period of the 10 years nor there was any clause requiring the said assessee to return the technical data in respect of the benefit under the said agreement. But it is not the case of the assessee. We have also considered the decisions relied on by the Ld. CIT (DR) in the case of CIT Vs. Naya Sahitya 84 ITR 567 (Del) and to Visakhapatnam Sugar and Refinery Ltd. Vs. CIT 47 ITR 139 (AP) and in our opinion, both the decisions are not helpful to the revenue as the facts are totally different. In our opinion, the Ld. CIT(A) has rightly allowed the expenditure of the royalty as a revenue expenditure and we find no reason to interfere with the findings of the Ld. CIT(A) on the above reasoning.
9. In the result, the ground taken by the revenue is dismissed.
10. The next issue is the percentage at which the depreciation is to be allowed in the peripheral of the computer. The A.O. has observed that the assessee has claimed depreciation @ 60% on the computer accessories and peripherals like printers, etc. He has further observed that only computer and computer software are eligible for depreciation @ 60% and the said percentage cannot be extended to computer accessories and peripherals. Without giving any details of the peripherals and computer accessories, the A.O. worked out the disallowance by adopting depreciation at 25%. The Ld. CIT(A) allowed the claim of the assessee. The revenue is in appeal before us. We find that the issue is squarely covered in favour of the assessee by the decision of the Hon'ble High court of Delhi in the case of CIT Vs. BSES Rajdhani Power Ltd.
12 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., PuneITA No.1266/2010 order dated 31.8.2010 as well as by the decisions of the ITAT special bench Mumbai in the case of DCIT Vs. Datacraft India Ltd. 9 ITR 712 (Mum) (SB). We accordingly confirmed the order of the Ld. CIT(A) and dismiss the ground no.2 taken by the revenue.
ITA No.1385/PN/2010:11. Now we take up the revenue's appeal for the A.Y. 2004-05 being ITA No.1385/PN/2010. The revenue has taken the following grounds in the appeal.
1. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance on account of royalty payment of Rs.2,48,63,403/- to Carraro Spa Italy and holding the same as revenue in nature on the ground that royalty payment was determined as a percentage of the goods sold whereas A.O. had relied upon the clauses providing that on expiration of the tenure of the agreement and subject to complete payent of the royalty Carraro India shall be deemed to have acquired a perpetual and royalty free non exclusive license to use the licensed technology.
2. On the facts and circumstances of the case the Ld. CIT(A) erred in allowing the claim of depreciation of Rs.20,856/- of the Assessee considering the peripheral to be part and parcel and inclusive in the term computer, thereby allowing 60% depreciation as against 25% available under the Act.
3. On the facts and circumstances of the case the Ld. CIT(A) erred in allowing the deduction of Rs.1,40,915/-, disallowance made on account of Exchange fluctuation Loss, being a provision.
12. The ground no.1 is in respect of royalty payment of Rs.2,48,63,403/- paid to Carraro SpA, Italy. In this year also the A.O. treated the said payment as a capital in nature and restricted the allowance to the extent of the depreciation. We have already adjudicated the identical issue in the A.Y. 2003- 04 confirming the order of the Ld. CIT(A) following reasoning given in the said year on this issue. In this year also, we confirm the order of the Ld. CIT(A) and ground no.1 is dismissed.
13. So far as ground no.2 is concerned, it is in respect of the percentage of the depreciation on the computer peripherals and accessories. We have also decided the identical issue in assessee's own case in the A.Y. 2003-04 following our reasoning in the said year, we confirm the order of the Ld. CIT(A) in this year also. Accordingly, ground no.2 is dismissed.
14. Ground no.3 is in respect of the disallowance of Rs.1,40,915/- on account of exchange fluctuation loss. The A.O. has observed that the assessee has claimed the loss of Rs.1,40,915/- has foreign exchange fluctuation loss. As observed by the A.O., as per the assessee's submission dated 11.12.2006, the loss claimed pertains to the unrealized portion on account of reinstatement of creditors, debtors and loans availed. In view of the A.O., the reinstatement 13 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune of liability is in the nature of the provision and it provides for change to the availability which become payable had the entire payment to be made on the last day of the financial year on which the balance sheet is prepared. The A.O. made disallowances of the entire loss of Rs.1,40,915/-. The Ld. CIT(A) allowed the claim of the assessee and deleted the addition. The Ld. Counsel submitted that the provision of Rs.1,40,915/- is different of exchange rate prevailing on 31.3.2004. In respect of outstanding foreign currency liability and amount already booked in respect of the liability on the date of its occurrence. Even the adjustment is in the nature of the provision but it is of permissible. He also relied on the decision in the case of CIT Vs. Woodward Governor India P. Ltd. 312 ITR 254 (SC). We find that the assessee's case is clearly covered, as per the facts on record, by the decision in the case of Woodward Governor India P. Ltd. (supra). It is not controverted before us by the revenue that the loss pertains to the foreign exchange liability as on the end of the financial year and in respect of the rates of the outstanding foreign exchange liability the assessee had made the provision. We therefore find no reason to interfere with the order of the Ld. CIT(A) and ground no.3 is dismissed.
ITA No.205/PN/2011:15. Now we take up the revenue's appeal for the A.Y. 2005-06 being ITA No.205/PN/2011. The revenue has taken the following two effective grounds:
1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the disallowance on account of Royalty payment of Rs.3,08,01,101/- to Carraro Spa Italy and holding the same as revenue in nature on the ground that royalty payment was determined as a percentage of the goods sold whereas A.O. had relied upon the clauses providing that on expiration of the tenure of the agreement and on payment of the royalty, Carraro India shall be deemed to have acquired a perpetual and royalty free non exclusive license to use the licensed technology.
2. On the facts and circumstances of the case, the learned CIT(A) grossly erred in allowing the claim of depreciation on the computer peripherals and accessories to be part and parcel and inclusive in the term computer, thereby allowing 60% depreciation as against 25% available under the Act.
16. We have heard the parties. So far as the ground no.1 is concerned, it is in respect of the disallowances of the royalty payment of Rs.3,08,01,101/- which was paid to Carraro SpA, Italy by the assessee. We have already adjudicated and decided the identical issue in the A.Y. 2003-04 and 2004-05. Following our detailed reasoning in the A.Y. 2003-04 on this issue, we confirm the order of the Ld. CIT(A) in this year also and ground no.1 is dismissed.
17. So far as ground no.2 is concerned, it is in respect of rate of depreciation on the computer peripherals and accessories. We have already decided the 14 ITA Nos.205/PN/2011,1384&1385/P/2010 Carraro India Ltd., Pune identical issue in the A.Y. 2003-04 & 2004-05. As the facts are identical as reasoning given in the preceding years, we confirm the order of the Ld. CIT(A) directing the A.O. to allow the depreciation @ 60% on the computer peripherals and accessories. Accordingly, ground no.2 is dismissed.
18. In the result, all three appeals of the revenue are dismissed.
Pronounced in the open Court on 18.02.2013
Sd/- Sd/-
(G.S. PANNU) (R.S. PADVEKAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
VG/SPS
Pune,
Dated 18th February, 2013
Copy to
1 Department
2 Assessee
3 The CIT, New Delhi
4 The CIT(A)-VI, New Delhi
5 The DR, ITAT, Pune.
6 Guard file.
By Order