Income Tax Appellate Tribunal - Delhi
New Holland Tractors (India) (P.) Ltd. vs Joint Commissioner Of Income-Tax on 12 November, 2001
Equivalent citations: [2002]83ITD137(DELHI)
ORDER
K.C. Singhal, Judicial Member
1. The only issue arising out of this appeal is whether the entire sum of Rs. 15,68,50,000 received by the assessee against the assignment of the right to use the technology for three years is taxable in the year under consideration.
2. The brief facts of the case are these. The assessee assigned the right to use its technical know-how for a period of three years to Escorts Ltd. for a lump sum consideration of Rs. 50 lakhs US $ which was to be received in Indian rupees under an tripartite agreement dated 14-7-1995. The parties to the agreement agreed for Escrow arrangement under Clause 1.04 according to which Citi Bank, NA, Connaught Circus, New Delhi was appointed as Escrow agent and consequently Escrow account was opened with Citi Bank. So the payment of the sum was guaranteed. This amount was deposited by Escorts Ltd. with Escrow agent after the completion of the legal formalities and the same was received by the assessee in Indian rupees amounting to Rs. 15,68,50,000. However, the assessee treated this amount as advance in its books of account and only a sum of Rs. 3,72,44,848 was credited to Profit and Loss account, being the amount attributable to the period from 15-7-1995 to 31-3-1996. The balance amount was shown as liability in the year under consideration and the same has been offered as income in the subsequent years proportionate to the period of user.
3. The submissions of the assessee vide letter dated 8-9-1998 before the Assessing Officer were as under :
Section 5(1) of the Income-tax Act, 1961 ('the Act') stipulates that the total income of any person, in any previous year includes all income which accrue or arise or is deemed to arise to him in India during such year.
Further, Section 145 of the Act stipulates that income chargeable under the head "Profits and gains of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
In view of the above, in order to determine the income of a person for a year, it is necessary to ascertain whether the income accrued to the assessee in a particular year, with reference to the method of accounting followed by him.
In this regard, we respectfully submitted that NHTIPL follows the mercantile (ie., accrual) system of accounting. In order to determine the accrual of the technical know-how fee with reference to the method of accounting adopted, we wish to draw your attention to Accounting Standard 1 ('AS-1'), issued by the Institute of Chartered Accountants of India ('ICAI'), AS-1 defines the term 'accrual' stating that "accrual refers to the assumption that revenues and cost are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate.
The assessee also relied on the High Court decisions reported as CIT v. Uttar Pradesh Financial Corporation [1992] 194 ITR 282' (All.) and CIT v. Punjab Tractors Co-operative Multipurpose Society Ltd. [1998] 234 ITR 1052 (Punj. & Har.). In view of these decisions, it was submitted before the Assessing Officer that if the receipt is relatable to a particular period in future, the income would fructify and mature during that period and not earlier. The assessee had also relied on various other decisions of the Tribunal and High Courts and Supreme Court listed at page 9 of the assessment order. '
4. However, the Assessing Officer did not accept the submissions of the assessee. According to him, the income accrues when the debt becomes due. Reliance was placed by him on the Supreme Court decision in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. According to him, debt was created in favour of the assessee as and when all the legal formalities were completed. The payment had also been deposited immediately by Escorts Ltd. with Escrow agent, which had also been received by the assessee. This all happened within a month or so. Therefore, the entire amount accrued to the assessee as income within this year and, therefore, the same was taxable. Accordingly, the Assessing Officer also added the balance amount of Rs. 11,96,05,152 to the total income of the assessee.
5. The matter was carried before the CIT(A) who after considering the various clauses of the agreement observed that there is no clause for revocation of the agreement during the period of three years. Hence, according to him, the entire sum accrued to the assessee in this year itself. Once the right to recover the sum accrues, the period of licence to use the technology is irrelevant. The order of Assessing Officer was, therefore, confirmed. Aggrieved by the same, the assessee is in further appeal before the Tribunal.
6. The learned counsel for the assessee Mr. Ganeshan has vehemently assailed the order of CIT(A) by contending that accrual of income has to be seen in the light of the method of accounting adopted by the assessee. According to him, the total income of the assessee under Section 5 includes all income which accrues or arises or is deemed to accrue or arise in India during the previous year. Further, Section 145 gives option to the assessee to adopt any system of accounting. Since Section 5 is subject to other provisions of the Act, it was argued by him that accrual of income has to be seen with reference to the method of accounting adopted by the assessee. Proceeding further, it was submitted by him that as the assessee has opted to follow the mercantile system of accounting, it is assessable only on the income which had accrued to the assessee in this year. Proceeding further, it was submitted that the amount of Rs. 15,68,50,000 was received by the assessee in advance which pertained to three years and, therefore, the entire amount could not be assessed in one year on the basis of receipt. He also drew our attention to various covenants of the agreement to point out that the entire amount related to three years and, therefore, the only amount relatable to the period under consideration was assessable in this year. To support his contention, he relied on the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 and also the other decisions of various High Courts CIT v. Ace Builders (P.) Ltd. [1993] 202 ITR 324' (Bom.), U.P. State Industrial Development Corporation v. CIT [1981] 130 ITR 8352 (All), Punjab Tractors Co-operative Multipurpose Society case (supra), CIT v. Printpak Machinery Ltd. [2001] 248 ITR 6841 (Delhi) and CIT v. Consulting Engg. Services (India) Ltd. [2001] 250 ITR 8492 (Delhi).
7. On the other hand, the ld. Sr. DR has strongly relied on the orders of the lower authorities. According to him, there is nothing in the agreement to indicate that the money received by the assessee was by way of advance. Further there is no clause for revocation of the agreement. According to him, the nomenclature in the books of account is irrelevant for determining the character of the transaction. Reliance was placed on the decision of the High Court CIT v. J.D. Italia [1983] 141 ITR 9483 (AP). Proceeding further, it was submitted that the case law relied upon by the assessee are distinguishable in as much as in those cases accrual depended upon some obligation being fulfilled in future but in the present case nothing was to be done by the assessee. Once there was accrual, it was taxable. In the present case, the accrual and receipt thereof was simultaneous and, therefore, the entire amount was taxable in this year.
8. Rival submissions of the parties, the case laws referred to and the material produced before us have been considered carefully. After giving our deep thoughts to the issue, we are unable to agree with the contention of the ld. counsel for the assessee. The total income of every person of a previous year is chargeable to tax under Section 4 of the Act. Section 5 provides the scope of the total income. According to this section, the total income of a resident includes all income derived from any source which (i) is received or is deemed to be received in India; (if) accrues or arises or is deemed to accrue or arise in India; (iii) accrues or arises outside India. Such income is to be computed under various heads. In respect of business income and income from other sources, the assessee is allowed under Section 145 to adopt the method of accounting of its choice. In the present case, the assessee has been following the mercantile method of accounting. According to this method, the income is booked on the basis of accrual. However, it is pertinent to note that once the income has accrued, the incidence of taxation cannot be postponed to future years by making entries in the books of account. Therefore, we are of the view that once the date of accrual is identified then the income has to be assessed under Section 4 in the year in which such date of accrual falls and the same cannot be deferred by the accounting entries. Reference can also be made to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 1724 wherein it was held that the accountants might have taken some other view but the accounting practice was not necessarily good law. Thus, it was held that accounting principle cannot override the legal position. Further, according to this judgment, the income-tax is attracted at the point when the income is earned. If at the point of accrual, the amount is of a revenue nature then it has to be taxed.
9. So the pertinent question to be answered is as to when the income accrues to the assessee. This issue has been considered by the Hon'ble Supreme Court in the celebrated judgment in the case of E.D. Sassoon & Co. Ltd. (supra) wherein it has been held that income accrues on the date when an enforceable debt is created in favour of the assessee. Once such right is acquired then assessee is assessable to tax in respect of such amount irrespective of the date of receipt. The receipt of money may be prior to or subsequent to the date of accrual or such receipt or accrual may be on the same date but in all cases, it is the date of accrual which is relevant.
10. Let us now consider the facts of the case in the light of the above legal position. The agreement in question is a tripartite agreement between (1) Escorts Ltd., (2) New Holland North America Inc. (described as "New Holland"), and (3) New Holland Tractors India Ltd. (described as "NH India"). The relevant clauses of this agreement are being reproduced as under:
1.02. Assignment of Design Engineering Services and Payment therefor.-As of binding date (defined in 4.01) MH India hereby assigns to Escorts for a period of three years the right use the technology used in the tractor model 1610 provided to ETL by New Holland U.K. Ltd. (formerly New Holland Ford Ltd.) between 1991 and 1994, subject to 2.02(b)(i), (ii), (iii) and (iv) in consideration of the foregoing. Escorts agrees to pay a technical fee in Indian rupees equivalent to US $ 50,00,000 at the date of deposit in the Escrow Account as provided in 1.04(d) below (Technical Fee') currently equivalent to approximately Rs. 15,30,000 after deducting TDS on a non-repatriate basis to NH India.
1.04 Escrow Arrangements.-The transaction mentioned in 1.01 and 1.02 above, shall be carried out as follows :
(a) Escorts, New Holland and New Holland India hereby agree to appoint escrow/custodian service. The Citi Bank, 12, Jeevan Bharti, 104, Connaught Circus, New Delhi - 110001 India (hereinafter Escrow Account) with which the Escrow Account is hereby agreed to be opened in accordance with the instructions referred to in (a) hereinbelow (hereinafter 'Escrow Account').
(b) New Holland will deliver all the share certificates of the shares along with duly executed transfer deeds and the registration interest of the New Holland nominated (3) directors on the Board of ETL, to be effective from the date of their release from the Escrow Account if any, to the Escrow Agent into the Escrow Account within 7 days of Binding date.
(c) Escorts will pay the purchase price into the Escrow Account with the Escrow Agent within; 7 days of the Binding date.
(d) Escorts will pay the Technical fee' into the Escrow Account with the Escrow Agent within 24 hours of the Binding date.
(e) New Holland, NH India and Escorts shall give irrevocable instructions to the Escrow Agent to release the said share certificates of the Shards, transfer deeds and resignation letters to Escorts or the nominee(s) and the Purchase Price to New Holland and Technical Fee to NH India upon given conditions being satisfied, all of which as set forth in the document entitled Escrow Agent Instructions, a copy of which is attached hereto as Exhibit 'D'.
4.01 Binding Date-Within two working days of the signing of the Agreement the parties will jointly file the Agreement with the Company Law Board and request that it enter an order making this Agreement a court ordered settlement. The date when the Company Law Board enters the above order shall be the 'Binding Date'. As from the Binding Date the parties shall carry out the Escrow Arrangements as set forth in 1.04. The parties agree that time is of the essence in carrying out the terms of the Agreement and therefore, should either party fail to perform any of its obligations within the .terms of this agreement the other party shall be relieved of its duty to perform and the agreement shall be null and void.
4.02 Effective Date/Termination---This agreement will become effective upon all necessary regulatory approvals referred to in 1.03 above being obtained and copies provided to New Holland and the certification by Escorts through an expert of its own choosing that no other approval is required being notified to New Holland and a copy provided to the Escrow Agent.
If by 16-8-1995 or by such subsequent date as may be mutually agreed to in writing by both parties all conditions referred to herein shall not have been satisfied or should the Escrow Agent be unable for any reason to release all of the documents or all of the sums in accordance with the Escrow Agent instructions, then this Agreement shall be automatically terminated.
The perusal of the above covenants clearly shows that the enforceable debt was not only created in favour of the assessee by 16-8-1995 but also was realised by that very date. The agreement specifically provides for down payment through Escrow agent after completion of all legal formalities mentioned in Clauses 4.01 and 4.02, Such formalities were required to be completed by 16-8-1995. If such formalities could not be completed then such agreement was to be automatically terminated. In fact, not only all the formalities were completed but the payment of technical fees was also made through Escrow agent by 16-8-1995. Thus nothing remained to be done on the part of the assessee. There is no clause for revocation or termination of the agreement before the expiry date of the agreement. Further there is no clause on refund of, money if the technology is not used for a part of the three years. Therefore, accrual of income did not depend upon any future event. Hence, in our opinion, the receipt of money could not be treated as advance or contingent receipt. Consequently, the contention of the assessee that money received by the assessee was in the nature of advance, cannot be accepted. It is settled legal position that accounting entries do not determine the character of the receipt. Therefore, if the income has accrued, it has to be taxed and taxability cannot be postponed on the basis of the entries made in the books of account. Even the parties to the agreement do not describe the payment in the nature of advance as there is no such covenant in the agreement. According to the commercial practice, the advance is given either to facilitate the recipient to perform his obligation or with a view that obligation shall be performed by the recipient in time in accordance with the agreement. Such advances are, therefore, appropriated towards income as and when the obligation is performed or the work is completed according to the specifications. However, if any part of the obligation is not performed to the satisfaction of the payer then such amount is bound to be returned/refunded. In such case, no enforceable debt is created on the mere receipt of the advance and income, therefore, accrues only on the fulfilment of the obligation wholly or any part, as the case may be. Since in the present case all the obligations on the part of the assessee were fulfilled and nothing remained to be done, we are of the considered opinion that the entire money received by the assessee was taxable in the year under consideration.
11. The case law relied on by the assessee's counsel are distinguishable. Heavy reliance was placed on the decision of Punjab and Haryana High Court in the case of Punjab Tractors Co-operative Multipurpose Society Ltd., (supra). In that case the facts were as follows :
The assessee had shown in its balance-sheet, a sum of Rs. 2,01,236 on the liabilities side under the head Tost Warranty Service Advances' (P.W.S. Advances). The assessee had received advances from the buyers of tractors to cover the service charges of tractors for a period of one year after the expiry of the warranty period of one year. The assessee explained before the Assessing Officer that there was an obligation on the part of the assessee to provide free services to the tractors under warranty for one year as required by the manufactures. After the expiry of the warranty* period of one year, further period of one year was also covered by the assessee for servicing the tractors and, for those services of the post-warranty period, the assessee received money from the buyers.
The Assessing Officer examined the quarterly receipts of the money and looked into the period covered by each quarterly receipt and treated, on proportionate basis, a sum of Rs. 15,953 as the income of the assessee.
12. In view of the above facts, the High Court held at page 112 of 234 ITR that the income was dependent upon the services rendered by the assessee since assessee could legally claim the amount only after rendering such services. The view taken by the High Court, in our opinion, does not help the assessee in as much as in the present case before us, there was no obligation on the assessee to be performed. Further, the assessee was not required to refund any amount if Escorts Ltd., had decided not to use the technology before the expiry of the period of agreement. Therefore, on facts that decision of the High Court cannot be applied to the present case. For the similar reason, we are of the view that the decision of Bombay High Court in the case of Ace Builders (P.) Ltd. (supra) would not help the assessee.
13. The next decision relied upon by assessee's counsel is in the case of U.P. State Industrial Development Corporation (supra). In that case, the assessee was engaged in financing the new companies on the condition that it would take 2% under-writing commission on the sale of shares to the public. The controversy before the Hon'ble High Court was as to whether underwriting commission on the sale of shares accrued to the assessee on the date when the agreement was entered into or during the period when the public issue was opened and closed. Their Lordships held that no income accrued on the date of agreement but it accrued with the opening of banking hours and ceased with the close of the banking hours of the last date of subscription in as much as the commission related to the services to be rendered by the assessee. Hence, it was further held that commission on unsold shares went to reduce the cost of shares in the hands of the assessee. So it is clear from the above judgment that accrual of income related to the obligation of the assessee to sell shares to the public and therefore, mere agreement was not enough to tax such commission. This case also, in our opinion, does not help the assessee since all the obligations regarding transfer of technical know-how were completed in the year under consideration and nothing remained to be done by the assessee in subsequent years.
14. The decision of the Delhi High Court in the case of Consulting Engg. Services (India) Ltd. (supra) does not lay down any ratio since the question referred to under Section 256(2) was not answered in as much as the finding recorded by the Tribunal was held to be finding of fact. Consequently, it was held that no question of law arose. Accordingly, this case does not help the assessee.
15. The last case which was heavily relied on by the ld. counsel for the assessee is the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra). This judgment has been relied on for the proposition that expenditure incurred in one year can be spread over the period for which it relates. The following observations of their Lordships were relied on by the counsel for the assessee :
Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.
The above observations were made with reference to these facts. In that case, the assessee by public issue issued debentures having face value of Rs. 100 with a discount of Rs. 2 per debenture. That means the debenture of Rs. 100 was issued at a price of Rs. 98. The period of debenture was 12 years and such debenture carried interest rate of 5.3/496 p.a. The debenture was however, to be redeemed at the price of Rs. 100. The total value of the debentures was Rs. 1.5 crores on which the total discount came to Rs. 3 lakhs. The dispute arose whether such expenditure could be allowed in one year or it could be spread over the period of 12 years. It is in view of these facts, the aforesaid observations were made by their Lordships. After going through the entire judgment, we are of the view that it is not an authority for the proposition that in each case where an expenditure is incurred in lump sum, it must be spread over the years to which it relates. On the contrary, the legal position has been reiterated to the effect that it must be allowed in the year in which it is incurred and the same cannot be spread over a number of years even if the assessee writes off in his books over a period of years. However, on the peculiar facts of the case, the Supreme Court decided that it should be allowed to spread over since allowing the entire expenditure in one year might give a distorted picture of profits. Therefore, the decision in that case has to be restricted to the facts of that case only. There is one more distinguishing feature in as much as in that case no actual expenditure has been incurred by the assessee in the first year and probably considering this aspect, the Hon'ble Supreme Court might have taken the view that allowing of the entire expenditure in one year would give a distorted picture of profits but in the present case, not only the profits have accrued to the assessee but also actually realised. Accordingly, it is held that the said decision is a distinguishable one on facts of the case. For the similar reason, the decision of Delhi High Court in the case of Printpak Machinery Ltd. (supra) is held to be distinguishable one.
16. In view of above discussions, it is held that the entire amount received by the assessee accrued in the year under consideration and, therefore, the same was taxable. The order of CIT(A) is, therefore, upheld.
17. In the result, appeal of the assessee is dismissed.