Income Tax Appellate Tribunal - Ahmedabad
Indian Petrochemicals Corporation ... vs Dy. Cit on 16 March, 2001
Equivalent citations: (2002)74TTJ(AHD)281
ORDER
B.M. Kothari, A.M. All these appeals relate to the same assessee and hence they are being disposed of by this common order.
2. The appellant is a public sector undertaking of the Union of India. Therefore, it was necessary for them to obtain clearance from the committee on disputes appointed by the Central Government pursuant to judgment of Honble Apex Court in the case of Oil & Natural Gas Commission & Anr. v. Collector of Central Excise (1992) 104 CTR (SC) 31. The learned counsel submitted that the appellant-company has obtained necessary permission from Committee of Disputes (hereinafter referred to as the COD) and would confine their arguments only in relation to those grounds which have been allowed to contested by the COD.
3. We will now deal with the assessees appeal for assessment year 1984-85 being ITA No. 2871/Ahd/88. The only ground which has been allowed to be contested by the COD is ground No. 1. The permission granted by the COD in their meeting held on 26-10-1995, as communicated vide Circular dated 1-11-1995, is as under :
"Item No. 5Permission to pursue appeal in Tribunal by Indian Petrochemicals Corporation Ltd. regarding payment of know-how and technical fees for increasing production capacities and products range, involving an amount of Rs. 464 lakhs and 1,053 lakhs for assessment years 1984-85 and 1985-86 respectively.
(Note No. Nil dated 16-5-1995, circulated by the Department of Indian Petrochemicals Corporation Ltd.) The committee, having regard to the fact that the amount involved in the dispute was substantial and question of law involved in the dispute, permitted Indian Petrochemicals Corporation Ltd. to pursue the appeal in Tribunal. "
4. Shri J.P. Shah, learned senior advocate, submitted, that the assessee claimed deduction of Rs. 4,78,49,147 on account of know-how and technical fees paid during the year of account under review. This claim was made by the assessee by filing a revised return along with letter dated 4-6-1986. It was stated in the said letter that the revision of income has been done by the company due to the crystalization of legal position on admissibility of know-how and engineering fees on insertion of section 35AB of the Act. The assessee made written submissions in relation to the aforesaid matter, which is reproduced on page 9 of the assessment order which reads as under :
"IPCL has put up petrochemical complex, first of its kind in the country, based on technology purchased from various countries of the world. These technologies are in the developing stage and have very limited life. It was, therefore, believed that the amount, spent on acquiring technologies from abroad should not be considered as capital cost of the projects. This thinking has support from pronouncements by various courts, a few of which are listed below :
1. CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC);
2. Anti Friction Bearings Corporation v. CIT (1978) 114 ITR 335 (Bom);
3. CIT v. Tata Engineering & Locomotive Co. (P) Ltd. (1980) 123 ITR 538 (Bom);
4. Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (AP)(FB);
5. The Triveni Engineering Works Ltd. v. CIT (1982) 136 ITR 340 (Del); and
6. Electro Medicals v. CIT (1987) 163 ITR 807 (MP).
These decisions have been virtually accepted by government as seen from insertion of section 35AB in Income Tax Act with effect from assessment year 1986-87. IPCL has accordingly claimed Rs. 4,78,49,147 as revenue expenditure being lump sum payments for technology purchased. This has been done only for new projects than under implementation.
Details of Lump sum payments for acquiring foreign technology Project Collaborator Details of payments Scope Rs.
PP Co-Polymer Project M/s Technimont, Italy.
Process Know-how 53,17,801.85 Technology transfer fees Engg. fees 1,53,12,326.47 Rights and licence process know-how and patent A.F. expansion Du Point, USA Process know-how 2,16,35,692.30 Grant of licence Engg. fees 61,65,495.94 Providing engg. information LAB expansion UOP, USA Process and Engg. fees 14,17,830.28 Grant of licence furnishing details Total 4,78,49.146.84 Shri Shah also drew our attention to the various clauses of the agreements executed with M/s. Technimont, Italy and with Du pont, USA. He submitted that PP Co-Polymer Project for which know-how was obtained vide agreement executed with M/s. Technimont was an extension of the same business. The backward integration and forward integration and also expansion of the existing business with the rapid change in technology is a part and parcel of the same business. Likewise, the other agreement executed with Du Pont. USA, is also a part of the expansion of the existing business of the appellant-company. The various clauses of both the agreements clearly reveal that the appellant-company had acquired only a licence or right to use the know-how and, did not acquire any kind of ownership rights over such know-how. The appellant-company was bound to maintain secrecy and confidentiality in relation to the know-how so acquired and was authorised to allow other parties to use the same information, subject to the limitation and conditions provided in the said agreements. On termination of the agreements, the appellant-company was not authorised to use the technical know-how thereafter. There is a termination clause which authorises either of the parties to terminate the said agreement in the specified circumstances. All these clauses clearly reveal that the assessee had acquired only right of user of the said technical know-how, including the right to allow other parties to use such know-how, subject to the limitations and conditions prescribed in the said agreement. Shri Shah relied on the following judgments to support his contention that such lump sum payment made for acquiring technical know-how for improvisation of the existing products, for extending the range of its products, for starting new products in the process of backward integration or forward integration are of part of the same existing business. The expenditure is, therefore, clearly allowable as a revenue expenditure, in view of the following judgments :
1. CIT v. Suhrid Geigy Ltd. (1996) 220 ITR 153 (Guj);
2. CIT v. I.A.E.C. (Pumps) Ltd. (1998) 232 ITR 316 (SC);
3. Kirloskar Pneumatic Co. Ltd. v. CIT (1982) 136 ITR 746 (Bom);
4. Tata Robins Frazer Ltd. v. CIT (1986) 165 ITR 347 (Pat);
5. CIT v. Wavin (India) Ltd. (1999) 236 ITR 314 (SC);
6. S.R.P. Tools Ltd. v. CIT (1998) 237 ITR 684 (Mad);
7. CIT v. Kirloskar Tractors Ltd. (1998) 231 ITR 849 (Bom).
Shri Shah was, however, fair enough to state that on denial of the deduction, in respect of the aforesaid amounts as revenue expenditure, the assessee was granted depreciation, investment allowance, etc., on the aforesaid lump sum payments made for acquiring technical know-how in the year under consideration as well as in the subsequent years, If the amount in question is allowed as deduction as a revenue expenditure in the year under consideration, the depreciation and investment allowance allowed, thereon in the year under consideration as well as in subsequent years will have to be withdrawn.
He submitted that the assessee has no objection if the deduction by way of depreciation, investment allowance granted to the assessee in the year under consideration, as well as in subsequent years on the aforesaid amount of lump sum payment made for technical know-how, is simultaneously withdrawn in all the relevant years. The assessee will not raise any objection against such withdrawal of depreciation and investment allowance in the year under consideration, as well as in subsequent years.
5. The learned senior Departmental Representative submitted that the lump sum payment made for acquiring technical know-how, in respect of which deduction as revenue expenditure is claimed relate to the projects which are still under erection and implementation and those projects did not commence during the previous year relevant to the assessment year under consideration. He also submitted that the projects for which technical know-how was acquired were totally new projects and it cannot be treated as a part of the expansion of the old business. He relied upon the judgment of Honble Gujarat High Court in the case of CIT v. Deepak Nitrite Ltd. (2000) 108 Taxman 479 (Guj) to support his contention. Shri Gupta, the learned senior Departmental Representative further submitted that the assessee has acquired ownership rights which is evident from the fact that the assessee is not only entitled to use the technical know-how for its own manufacturing activities but was also entitled to alienate its right of user to somebody else.
The ownership is a bundle of rights and the nature of right and interest acquired by the assessee by virtue of this foreign collaboration agreements are in the nature of ownership rights. The assessee has acquired an interest of the nature of ownership rights, as a result of which, he is entitled to give the right of user to other parties in accordance with the terms of the two agreements in question. He drew our attention to the relevant clauses of the two agreements by which, the assessee was entitled to allow other parties to use the technical know-how acquired by the assessee under the aforesaid agreements. Shri Gupta also placed reliance on the judgment of Honble Supreme Court in the case of Eimco K.C.P. Ltd. v. CIT (2000) 242 ITR 659 (SC).
6. We have carefully considered the submissions made by the learned representatives and have gone through all the judgments cited by both of them. We have given our deep and thoughtful consideration to the submissions made and to the entire relevant evidence, to which our attention was drawn during the course of hearing.
7. The assessee is a public sector undertaking, engaged in the business of manufacture and sale of petro-chemicals. An agreement was executed between IPCL and M/s. Technimont (Italy) on 11-7-1983, containing the terms of the grant of licence and supply of engineering, procurement and technical assistance services for a plant for the manufacture of 25,000 MT/Y of propylene polymers to be implemented at Baroda. IPCL was interested in the production and sale of products and for that purpose, they were willing to obtain rights and licences under the technology for use in a plant to be constructed by IPCL for manufacture of products. M/s Technimont who has wide experience in design of petro-chemical plants agreed to provide the technical know-how, grant licence, provide engineering, procurement and technical assistance services for the implementation of the said plant under the aforesaid agreement dated 11-7-1983. M/s Technimont granted a licence for an exclusive right to employ the technology in the design, construction and operation of the plant, expansion of the plant and also to grant sub-licence during the term of the said agreement for the use of the technology in India at reasonable terms and conditions to be agreed upon, which terms and conditions shall not be less favourable than those, granted to the other licensees of licensor. There are clauses relating to confidentiality (art. 9), termination by licensor (art. 18.1). Termination by IPCL (art. 18.2) and relating to assignment (art. 19). Article 19 of this agreement clearly provides that agreement shall not be assignable by either party without prior written consent. The confidentiality clause contained in article 9 requires that IPCL agreed for a period of 15 years to keep the technical know-how confidential and not to disclose to any third party, any information received under the said agreement at any time from licensor, except as allowed in the said agreement.
8. Shri J.P. Shah also invited our attention to certain technical data with a view to provide a ready comparison of the existing process and proposed process which was sought to be achieved by acquiring the new technology from M/s Technimont under the aforesaid agreement. He submitted that such technical know-how was necessary for improvisation of the existing range of products and it was a part of the expansion of the existing business.
9. Likewise, the learned counsel also drew our attention to the various clauses of the second agreement executed with Du Pont on 16-2-1984, for expansion of the existing business. The existing process which was being carried out with technical know-how obtained from Asahi, Japan, was sought to be improved by obtaining technical know-how from Du Pont, USA. Comparative technical data of the two types of know-how have been given at page 78 of the paper book.
These facts were explained by Shri Shah with a view to explain that the appellant-company is engaged in manufacture and sale of petrochemical products. These technical know-how agreements have been executed with a view to improve the production, expand the range of its products either by way of backward integration or forward integration which are part and parcel of the same business.
10. Before we refer to the judgment cited by Shri Shah, let us go through the judgments which have been relied upon by learned senior Departmental Representative to support his contention. He relied on the judgment of Honble Supreme Court in the case of Eimco, K.C.P. Ltd. v. CIT (supra). The relevant headnote is reproduced hereunder :
"The appellant-assessee was a company, registered under the Indian Companies Act. It was incorporated in the year 1965. Two companies, Eimco, an American company, and K.P.C. Ltd., an Indian company, promoted the appellant-company. The authorised capital of the appellant was Rs. 1,00,00,000 consisting of 10,00,000 equity shares of Rs. 10 each. Each of them agreed to subscribe Rs. 4,70,000, out of which each would have to pay initially a sum of Rs. 2,80,000 towards its contribution. Towards its share, Eimco contributed technical know-how. It valued the know-how, etc., at a sum of Rs. 2,35,000 and paid the balance in cash as its contribution. The Board of Directors of the appellant allotted equity shares of Rs. 2,35,000 being the value of the know-how, to Eimco by resolution passed on 29-4-1968. In the assessment year 1969-70, the appellant claimed deduction of Rs. 2,35,000, as revenue expenditure paid to Eimco towards consideration for supply of technical know-how. The Income Tax Officer treated that amount as a capital expenditure and allowed 1/14th of the said amount as allowable expenditure under section 35A of the Act. The appellant challenged that order before the Appellate Assistant Commissioner on the ground that the whole expenditure ought to have been allowed as revenue expenditure. While so, the Commissioner in exercise of his power, under section 263(1) of the Act, revised the said order of the Income Tax Officer dated 25-3-1970, holding that the amount in question could not be treated as expenditure and that granting 1/14th of the said amount as capital expenditure under section 35A was erroneous and prejudicial to the interests of the revenue and thus set aside the same. Thereafter, the AAC dismissed the appeal and directed that 1/14th amount be added back as income of the assessee. Against both the orders, the appellant filed appeals before the Tribunal. The Tribunal on 12-12-1975, allowed the appeals of the appellant, taking the view that the said amount was revenue expenditure of the appellant. On a reference, the High Court held that the Commissioner had jurisdiction to pass the order in revision and that the sum paid by the assessee-company to the foreign collaborator did not constitute revenue expenditure. On appeal by the assessee to the Supreme Court.
Held (i) that the Commissioner could interfere, acting under section 263 of the Income Tax Act, with the order of the Income Tax Officer on a point, which was directly in appeal before the Appellate Assistant Commissioner."
It is clear from the aforesaid facts and decision that the appellant-company was a new company. One of the promoters Eimco contributed technical know-how by way of its capital contribution at the time of commencement of the companys business. It was an altogether new business commenced by the appellant-company. On these facts, the Honble Supreme Court held that the Commissioner could exercise his powers under section 263. The facts of the present case are clearly distinguishable. IPCL is an existing the old undertaking. It is carrying on the business of manufacture and sale of petrochemical items for last several years. The technical know-how was acquired for improvisation of the existing products and for widening the range of its products by way of backward integration and forward integration. The new projects commenced by IPCL with the technical know-how were a part of expansion of the existing business. A new unit of existing business is distinct than commencing an altogether new business.
11. The learned senior Departmental Representative relied on judgment of Honble Gujarat High Court in the case of Deepak Nitrite Ltd. (supra). In that case, the assessee-company claimed deduction of expenses incurred on foreign tour of some officials. It was admitted on behalf of the assessee that the foreign tours were undertaken to see, whether a plant for manufacture of ammonia could be established in India, for which the foreign travelling expenditure was incurred. On these facts, the Honble Gujarat High Court held that the Commissioner (Appeals) rightly held that assessee was not entitled to deduction. The facts of this case are also clearly distinguishable with the facts of assessees case.
12. Let us now go through judgment relied upon by the learned counsel, appearing on behalf of the assessee.
13. The Honble Gujarat High Court in the case of CIT v. Suhrid Geigy Ltd. (supra) held as under :
"Held, that the purpose of production of cyanuric chloride was found by the Tribunal, to be the manufacture of raw material for production of Tinopal, that is to say, the purpose was in the area of existing business of the assessee for carrying on the existing business with more profitability and was not for the purpose of entering into a new adventure for operating in a new area of business. Even applying the test of "acquisition of assets", it could be said that under the agreement, the assessee did not acquire the capital asset itself, namely, the technical know-how as a proprietor thereof. What it acquired under the agreement was the right to use technical knowledge. The expenditure incurred was on revenue account."
14. The Honble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) held that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business. The circumstance that the agreement pertained to a product already in the line of the appellants established business and not to a new product indicated that whatever stipulated was an improvement in the operations of the existing business and its efficiency and profitability. Such financial outlay for the better conduct and improvement of the existing business was revenue in nature and was allowable as a deduction in computing the business profits. The Honble Apex Court also observed that it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. These observations equally apply in relation to petrochemical products, manufactured by the appellant-company in the present case. The Honble Supreme Court in the aforesaid case had also observed that the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of "enduring benefit might break down.
15. The Honble Supreme Court in the case of CIT v. I.A.E.C. (Pumps) Ltd. (supra) held as under :
"Under an agreement entered into by the assessee with a foreign company, the assessee was granted a licence to use its patents and designs exclusively in India. The agreement was for a duration of 10 years with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others. The assessee was not to disclose to third parties any of the documents, made available by the foreign company to the assessee without having received a written authorisation from the foreign company. The High Court held that these features of the agreement clearly established that what was obtained by the assessee was only a licence and what was paid by the assessee to the foreign company was only a licence fee and not the price for acquisition of any capital asset. On appeal by the department to the Supreme Court :
Held, affirming the decision of the High Court, that the High Court had applied the proper principles of law and had rightly held that the expenditure incurred by the assessee was only revenue expenditure."
It is not necessary to make a detailed reference to all the judgments cited by the learned counsel. However, after a careful reading of all the judgments relied upon by the learned counsel, we are of the considered opinion that the lump sum payment made by the assessee for acquiring technical know-how for improving its existing products and for extending the range of its existing business and/or for expanding the said business is clearly allowable as revenue expenditure. We, therefore, direct the assessing officer to allow deduction of Rs. 4,64,31,317 incurred by the assessee, in respect of payments on account of know-how and technical fees to M/s. Technimont, Italy and M/s. Du Pont, U.S.A. as a revenue expenditure. The assessing officer is, however, directed to simultaneously withdraw the amount of investment allowance and depreciation granted to the assessee in respect of the said amount of Rs. 4,64,31,317 in the year under consideration as well as in the subsequent years. The learned counsel, appearing on behalf of the assessee had agreed that the assessee will have no objection to such withdrawal of deduction already granted by way of investment allowance and depreciation on the aforesaid lump sum amount paid for acquiring technical know-how. With this condition, the assessing officer is directed to allow deduction of the aforesaid amount as revenue expenditure in assessment year 1984-85. Before parting we would like to observe that from assessment year 1984-85, till today, the assessee must have already got the deduction of 100 per cent amount by way of depreciation over a period of several years at the prescribed rate. Apart from that, the assessee must have also been granted investment allowance on the aforesaid amount of technical know-how fees paid to these two parties. In fact the assessee must have got a deduction of about 125 per cent by way of investment allowance and depreciation. As against this, the assessee is claiming deduction only of 100 per cent in the year, in which such expenditure has really been incurred and paid.
16. It may be relevant here to make a useful reference to a judgment of Honble Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom). The relevant observations made by the Honble High Court are reproduced below :
"We have often wondered why the income-tax authorities, in a matter such as this, where the deduction is obviously a permissible deduction under the Income Tax Act, raise disputes as to the year, in which the deduction should be allowed. The question, as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction, in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the department, and one should have thought that the department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the department appears to delight in raising points of the character which do not affect the taxability of the assessee or the tax that the department is likely to collect from him whether in one year or the other."
17. The remaining grounds raised by the assessee in their appeal for the assessment year 1984-85 are rejected, as the COD has not granted permission for contesting those other grounds.
18. We will now consider the assessees appeal No. 2750/A/91 for the assessment year 1986-87. This appeal by the assessee is directed against the order passed under section 263 by the learned Commissioner for the assessment year 1986-87 on 27-3-1991. The COD has not granted permission to the appellant-company for pursuing this appeal. Hence this appeal is dismissed.
19. We will now deal with assessees appeal No. 4431/Ahd/90 and 5403/Ahd/91 for assessment years 1987-88 and 1988-89, respectively. The learned counsel submitted that the COD has refused to grant permission to pursue these appeals except in relation to one ground in respect of disallowance of staff welfare expenditure, which has been directed to be solved through discussion.
20. The directions given by the COD in its meeting held on 26-10-1995, as communicated by Circular dated 1-11-1995, are reproduced hereunder :
"Item No. 8Permission to pursue appeal in Tribunal by Indian Petrochemicals Corporation Ltd., regarding disallowance of staff welfare expenditure, involving an amount of Rs. 5 lakhs and 7 lakhs for assessment years 1987-88 and 1988-89, respectively. (Note No. Nil dated 16-5-1995, circulated by the department of Indian Petrochemicals Corporation Ltd.) The Committee, after discussion, directed M/s Indian Petrochemicals Corporation Ltd. and Department of Revenue (CBDT) to settle the matter through mutual discussion, keeping in view, the fact that the relief sought by M/s. Indian Petrochemicals Corporation Ltd. was granted to them for the period before and after the disputed assessment year."
Since the Honble COD has directed both the parties to decide this matter after mutual discussion, we need not give any decision on the merit of the assessees claim but we direct the assessing officer to settle the matter through mutual discussion in conformity with the directions of Honble COD. With these observations, the ground relating to the aforesaid point raised in both the appeals is restored back to the assessing officer for settling the same through mutual discussions as directed by Honble COD.
21. The remaining grounds raised in assessees appeal for assessment years 1987-88 and 1988-89 are rejected, as COD has not permitted them to contest those points.
22. In the result, the assessees appeal for assessment year 1984-85 is partly allowed. Assessees appeals for assessment years 1987-88 and 1988-89 are also partly allowed. Assessees appeal being ITA No. 2750/A/91 for the assessment year 1986-87 against the order under section 263 is dismissed.