Delhi High Court
Commissioner Of Income Tax vs Lumax Industries Ltd. on 26 March, 2008
Author: Madan B. Lokur
Bench: Madan B. Lokur, V.B. Gupta
JUDGMENT Madan B. Lokur, J.
1. The Revenue is aggrieved by an order dated 12th May, 2006 passed by the Income Tax Appellate Tribunal, Delhi Bench 'B' in ITA Nos. 3575/Del/1998, 602 and 603/Del/1999, 4460/Del/2000, 3270/Del/2001 and 3656/Del/2002 relevant for the Assessment Years 1994-95 to 1999-2000.
2. The assessed is in the business of manufacturing headlights of motor vehicles since some time in 1945. The assessed has its own factory and own machinery but with a view to increase its efficiency and profitability it entered into an Agreement with M/s. Stanley Electric Co. Ltd. (SECL) sometime in 1984.
3. The Agreement has been annexed to the memorandum of appeal and we have been taken through some relevant clauses of the Agreement, particularly Clauses 2, 3 and 4 thereof.
4. Under Clause 2 of the Agreement, SECL grants to the assessed a non- exclusive right and license to manufacture the licensed products of SECL which are patented and also to receive technical information. Article 3 deals with technical assistance which is to be provided by SECL to the assessed and includes assistance in relation to the licensed products from time to time such as technical information, technical advise and dispatch of technical personnel to advise and assist the assessed. Article 4 deals with the consideration and expenses that have to be incurred by the assessed towards the license fee, royalty charges and payments to be made for technical assistance including technical personnel and their stay, etc.
5. According to the Assessing Officer, by virtue of the Agreement, the assessed derived an asset of an enduring nature and, therefore, the license fee that the assessed had claimed as a revenue expenditure was rejected by the Assessing Officer.
6. Feeling aggrieved, the assessed preferred an appeal which was allowed in its favor by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT (A) noted the fact that the assessed had been in business since 1945 and it had entered into the Agreement with SECL only in 1984. It was also noted that no new plant was set up nor any new machinery was obtained by the assessed; the assessed did not commence any new business nor did it initiate a new process or utilize new technology for manufacturing its products. What the assessed had actually done was to improvise the technology that was offered by SECL to increase its efficiency and profitability. It is possible that the assessed may have developed a product line for manufacturing the latest light equipments for which certain imports were made but this was found to be different from setting up a new plant with a completely new process and technology etc. The CIT (A) noted that the Assessing Officer had relied upon the case of Jonas Woodhead and Sons (India) Ltd. v. Commissioner of Income Tax (1997) 224 ITR 342 but unfortunately the Assessing Officer had relied upon a newspaper report giving the gist of the decision.
7. However, the CIT (A) considered the decision from the Report and noted the view of the Supreme Court, which is to the following effect:
The question whether a particular payment made by an assessed under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether the assessed obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made, is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement the assessed is required to give back the plans and designs which were obtained, but the assessed could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessed derived benefits coming to its capital for which the payment was made.
8. The CIT(A) also referred to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. Commissioner of Income Tax (1980) 124 ITR 1 wherein the Supreme Court has noted the following:
If the advantage consists merely in facilitating the assessed's trading operations or enabling the management and conduct of the assessed's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, more a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of the given case.
9. Relying upon these two decisions and on the facts of the case, the Commissioner concluded that the expenditure incurred by the assessed was a recurring expenditure and not a capital expenditure. The CIT (A) also referred to Circular No. 21 of 1969 dated 9th July, 1969 issued by the Central Board of Direct Taxes. This Circular dealt with foreign collaboration and technical know-how, etc. The relevant portion of the circular has been extracted by the CIT (A) and this reads as follows:
It can also happen in some cases that the receipts might be regarded as a capital receipt in the hands of the foreign participant but the payment may be regarded as revenue expenditure in the assessment of the Indian participant. However, before disallowing the expenditure in the assessment of Indian participants as a capital expenditure the Income Tax Officer must fully understand and comprehend the nature of the asset or enduring benefit which the assessed has acquired. If what has been acquired under the agreement is merely a license for the user, for a limited period, of the technical knowledge of the foreign participants, together with or without the right to use patents and trade marks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian participants, and should be regarded as expenditure incurred for the purpose of running the business during the period of the agreement. The payment would therefore be revenue in nature. The recent decision of the Supreme Court in the case of Commissioner of Income Tax v. Ciba of India Ltd. (1968) 69 ITR 692 provides clear guidance in cases of this type.
10. A perusal of the Circular shows that if in terms of the Agreement, only a license is required for user of technical knowledge from a foreign participant for a limited period together with or without the right to use the patents and trade marks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian party. Relying upon this Circular, the CIT (A) concluded that the assessed had been paying the license fee to the SECL on a year to year basis for acquisition of technical knowledge, even if the assessed acquired a set up of enduring nature it would not amount to a capital expenditure but would amount to a revenue expenditure.
11. The CIT (A) also noted that from the financial year 1985-86 till 1993-94, the assessed had been paying the license fee every year and for each of these years it had been incurring expenses claimed as revenue expenditure and this was being allowed by the Assessing Officer. Therefore, there was no reason why after a gap of almost 10 years, the Assessing Officer should suddenly change his mind and decide to treat the expenditure incurred by the assessed as a capital expenditure.
12. On the basis of these three conclusions, the CIT (A) held in favor of the assessed and held that the expenditure incurred was a revenue expenditure.
13. The Revenue then preferred an appeal which was rejected by the Tribunal by the order under challenge. The Tribunal has noted the view expressed by the CIT (A), which we have already dealt with. The Tribunal added that even if the assessed had obtained a long term advantage of an enduring advantage, that by itself would not convert any expenditure incurred by the assessed into a capital expenditure.
14. Learned Counsel for the Revenue has submitted, and we think rightly, that each case has to be decided on its own facts. In the present case, the facts have been fully considered and a concurrent opinion has been expressed both by the CIT (A) as well as by the Tribunal that the expenditure is of a revenue nature and not of a capital nature. We do not find any reason to differ with the opinion on the facts of this case and it is quite clear that the ratio of the decision of the Supreme Court in Jonas Woodhead and Sons (India) Ltd. and Empire Jute Co. Ltd. were fully applicable to the facts of this case and both the authorities were right in concluding that the payments made by the assessed towards license fee to SECL was a revenue expenditure. We may note that the Assessing Officer had allowed 75% of the expenditure but had disallowed only 25% of the license fee. Therefore, the dispute is limited only to the 25% amount.
15. No substantial question of law arises.
16. The appeal is dismissed.