Income Tax Appellate Tribunal - Chennai
Panasonic Home Appliances India ... vs Assessee on 1 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI
[BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND
SHRI HARI OM MARATHA, JUDICIAL MEMBER]
I.T.A No. 82/Mds/2009
(Assessment year : 2004-05 )
M/s Panasonic Home Appliances vs The Dy. CIT
India Company Limited Company Circle V(1)
No.5, Sholavaram Village Chennai 600 034
Ponneri Taluk
Chennai 600 067
[PAN AAACI1304E]
(Appellant) (Respondent)
I.T.A Nos. 1467/Mds/2009
(Assessment years : 2004-05)
The Dy. CIT vs M/s Panasonic Home Appliances
Company Circle V(1) India Company Ltd
Chennai 600 034 No.5, Sholavaram Village
Ponneri Taluk
Chennai 600 067
(Appellant) (Respondent)
I.T.A No. 718/Mds/2010
(Assessment year : 2005-06 )
The Dy. CIT vs M/s Panasonic Home Appliances
Company Circle V(1) India Company Limited
Chennai 600 034 SPIC House, Annexe 6th Floor
Guindy
Chennai 600 067
[PAN AAACI1304F]
(Appellant) (Respondent)
:- 2 -: ITA 82 & 1467/09
718/10
Assessee by : Shri R.Vijayaraghavan, Advocate
Department by : Shri P.Madhanasekaran, Jt. CIT
Date of Hearing : 01-12-2011
Date of Pronouncement : 06-01-2012
ORDE R
PER HARI OM MARATHA, JUDICIAL MEMBER:
I.T.A.No. 1467/Mds/2009 & 82/Mds/2009 -A.Y 2004-05 These appeals for assessment year 2004-05, are directed against the order of the ld. CIT(A), Chennai, dated 9.7.2008. The Revenue has taken the following grounds:
"1. The order of the learned CIT(A) is contrary to law and facts of the case.
2.1. The learned CIT(A) erred in holding that the entire payment made by the assessee to Matsushita Electric Industrial Company Ltd. (MEI), Japan under a collaboration agreement for mixer grinders constitutes revenue expenditure and no portion of the same can be disallowed.
2.2. The learned CIT(A) failed to appreciate that the assessee had acquired a valuable right for manufacture of mixer grinders which was used by the assessee for the purpose of its business to earn income over a considerable period and the agreement with MEI was not in the nature of a short-term venture.
2.3. The learned CIT(A) ought to have noted that for treating an expenditure as a capital one, it is not necessary that the assessee should be the absolute owner of the property or use the asset exclusively.
3.1. The learned CIT(A) erred in restricting the disallowance of royalty payment made by the assessee company to MEI in respect of electric rice cookers to 25% of the payment.
:- 3 -: ITA 82 & 1467/09718/10 3.2. The learned CIT(A) failed to no e that the impugned payment will result In enduring benefit to the assessee, in the light of the fact that the collaboration agreement between the assessee and MEI does not bar the assessee from parting with the technical knowhow in the form of a •sub licence in favour of any third party.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) m y be set aside and that of the Assessing Officer restored. "
2. The assessee has taken the following grounds:
1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and in the circumstances of the case.
2. The Commissioner of Income Tax (Appeals) erred in confirming the order of the assessing officer in disallowing 25% of the royalty payment with reference to Electric Rice Cooker as towards acquisition of a capital asset.
3. The Commissioner of Income Tax (Appeals) ought to have appreciated that as per clause 4.01 of the agreement MEI had agreed to grant to PANASONIC HOME APPLIANCES INDIA CO LTD(PHAI) (Formerly known as INDO MATSUSHITA APPLIANCES CO.LTD(IMACO) only a non exclusive license to manufacture the products.
4. The Commissioner of Income Tax (Appeals) erred in holding that appellant has parted with the technical assistance and other technical know how in the form of sub license in favour of any third party.
5. The Commissioner of Income Tax (Appeals) erred in not properly appreciating the terms of clause 6.01 of the agreement in the right perspective.:- 4 -: ITA 82 & 1467/09 718/10
6. The Commissioner of Income Tax (Appeals) ought to have appreciated that as per clause 6.01 of the agreement, should the sublicensing become necessary, the terms of sublicense shall be as mutually agreed upon in advance between MEI and PHAI (IMACO) In writing and shall further be subject to necessary approval of the Government.
7. The Commissioner of Income Tax (Appeals) ought to have appreciated that the appellant has not parted with the technical assistance and technical know how in the form of a sub-licence in favour of any third party.
8. The Commissioner of Income Tax (Appeals) erred In restricting the claim of deduction u/s 80HHC.
9. The Commissioner of Income Tax (Appeals) erred in holding that income from process sale scrap, credit balance written back and insurance claim received should be excluded from the profits while computing relief u/s .80HHC.
10. The Commissioner of Income Tax (Appeals) ought to have appreciated that the process sale scrap represents income realized from sale of scrap generated during the manufacturing activities and is inextricably connected with the export activity.
11. The Commissioner of Income Tax (Appeals) ought to have appreciated that provisions written back represents provisions allowed as deduction in earlier years and which was no longer required were reversed in this year and written back. This write back was assessed as business income u/s 41(1) and hence should not be reduced from the profits while computing deduction u/s 80HHC.
12. The Commissioner of Income Tax (Appeals) ought to have appreciated that the insurance claim received is towards compensation for goods damaged during transit and are in the nature of sale consideration.
13. Appellant craves leave to adduce additional grounds at the time of hearing.":- 5 -: ITA 82 & 1467/09 718/10
3. Briefly stated, the facts of the cases are that the assessee- company, namely M/s Panasonic Home Appliances India Company Ltd. [formerly known as Indo Matsushita Appliances Company Ltd (IMACO)] filed its return of income for assessment year 2004-05 on 1.11.2004 declaring total income of ` 43,64,549/-. The assessee- company entered into two Collaboration Agreements with M/s Matsushita Electric Industrial Co. Ltd., Japan (MEI) for the manufacture of Electric Rice Cookers and Mixer Grinders. The Collaboration Agreements were drafted in accordance with the guidelines prescribed by the Government of India. The mode of payment was by way of payment of one amount in lump sum and the other was to be paid in the form of royalty of the company on recurring basis. The payment made to MEI as initial lump sum payments were properly capitalized in the books of account by the assessee-company as fixed assets and also claimed depreciation thereon. The MEI rendered technical assistance and expertise to the assessee-company in setting up a factory in India to manufacture the products. The aforesaid technical assistance comprised of actual training to effectuate the following items (hereinafter referred to as 'Technical Assistance'):
:- 6 -: ITA 82 & 1467/09718/10
1. Advice and Instruction on the setting up of the factory including factory building and incidental construction thereto and factory layout;
2. Advice and Instruction for the manufacture, test and Inspection of the Products;
3. Advice and Instruction on installation, operation and maintenance of the Production Equipment used for the manufacture of the Products;
4. Other necessary advice and Instruction.
4. Pursuant to the terms and conditions of the agreement, MEI agreed to deliver to IMACO a set of the technical know-how to the extent available as on the date of this agreement which can be explained as under:
SECTION GROUP TITLE OF INDIVIDUAL
Product Product DOCUMENTS
Specifications Product specifications,
Specifications of Product,
Inspection, Product testing
method.
Components Components list Components specifications,
Specifications of
Components Inspection.
Manufacture Process Control Process control chart Chart Specifications of machinery and equipment, working instructions and operating Production Machinery and instructions, Maintenance Equipment equipment list. standards, quality troubles, Causes and remedies, measuring Instruments List, consumable items list.
Inspection Jigs and tools list Specifications of Jigs and Process control tools Process Inspection :- 7 -: ITA 82 & 1467/09 718/10 Standard specifications quality control rules.
Storage Storage standards Product storage standard,
List machine parts and indirect
materials storage standard.
Packing Packing list Packing specifications
5. Similar terms and conditions were there in agreement dated 17.8.2000 entered into between the assessee and the MEI for the manufacture of Mixer Grinder/Blender.
6. In Revenue's appeal, the first issue pertains to the finding of the ld. CIT(A) regarding payment made by the assessee to M/s Matushita Electric Industrial Co. Ltd, Japan (MEI) under a Collaboration agreement in relation to manufacture of Mixer Grinders, which has been treated by the ld. CIT(A) as revenue expenditure as against treated by the Assessing Officer to the extent of 25% of the royalty payment as capital expenditure. The case of the Revenue is that the assessee had acquired a valuable right for the manufacture of Mixer Grinders which was used by it for the purpose of its business to earn income over a considerable period as the agreement was not in the nature of a short term venture. It was argued by the ld.DR that for treating the expenditure as a capital one, it is not necessary that the assessee should be the absolute owner of the property/asset or it should have been used exclusively for that purpose. On the other :- 8 -: ITA 82 & 1467/09 718/10 hand, the ld.AR has supported the finding of the ld. CIT(A) in this regard.
7. After hearing both sides, we have found that the technical know-how for setting up of the factory and commencing production by the assessee-company was provided by MEI in consideration of a lump sum payment which was capitalized in assessee's books of account in the respective years of payment. The royalty was paid by the company based on the sales effected by it @ 3% in the case of Electric Rice Cookers and @ 4% in the case of Mixer Grinders. The assessee- company paid royalty on sales effected by it and claimed the same as revenue expenditure deductible under the provisions of the Act. The Assessing Officer relied on the decision of the Hon'ble Madras High Court rendered in the case of CIT vs Southern Switchgear Limited vs CIT, 232 ITR 359. The Assessing Officer has considered a portion of this royalty payment as towards acquisition of a capital asset by the assessee-company and the balance towards revenue expenditure allowable under the Act. Accordingly, the Assessing Officer has treated 25% of the royalty payment after estimation towards cost of acquisition of the capital asset and disallowed the same.
8. It was argued by the ld.AR that reliance on the decision of Southern Switchgear Limited (supra) is not correct because that :- 9 -: ITA 82 & 1467/09 718/10 decision was rendered with respect to distinguishable and entirely different facts. It was further argued that the decision in the above case was rendered in the context of specific facts of that case in which the foreign company had agreed not to manufacture in India, any of the products in question or grant or make available to any other person any information relating to manufacture, licence or rights, for any of the products in question in India thereby conferring on the assessee exclusive right of manufacture and sale of the products. In that circumstance, it was held by the Hon'ble High Court that the assessee had paid royalty towards acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of such a right was to be treated as partly towards capital and partly towards revenue. The Hon'ble High Court has affirmed the treatment of 25% of the royalty as capital in nature which was estimated by the Tribunal.
9. We have considered the rival submissions in the light of the obtaining facts of this case. We have found that various clauses formulated under the heads 'licence to use, technical assistance and technical know-how' for the Collaboration Agreement for Mixer Grinders are as under:
"Clause 4.01:- During the term of this agreement, MEI agrees to (grant to IMACO a non-exclusive and non transferable license, with no right to sub license, to manufacture the products at IMACO's factory in India under the technical assistance and technical know how rendered by MEI hereunder.:- 10 -: ITA 82 & 1467/09 718/10
Clause 4.02:- The technical assistance and technical know how made available to IMACO hereunder shall be used only for IMACO's own manufacture of the products in its own factories in India, and IMACO undertakes that such technical assistance and technical know how shall be neither directly or indirectly transferred or be made available to any third party. The term 'third party' used herein shall mean any party who shall not sign this agreement.
Clause 4.03:- Nothing herein contained shall be construed to preclude MEI from furnishing, supplying, transferring or licensing for any purpose the technical assistance or the technical know how (to be supplied hereunder) to any third party other than IMACO.
Clause 4.04:- The technical assistance and the technical know- how made available hereunder shall neither extend to the manufacture of any of the components for the manufacture of any of the production equipment.
Clause 5.01:- IMACO shall keep the technical assistance and the technical know how made available hereunder strictly secret and shall cause suitable secrecy agreement or non-disclosure agreement to be signed by the staff and other employees of IMACO who may have access thereto, to the extent deemed proper by MEI"
10. Thus, it becomes amply clear from the above clauses that the assessee has not obtained an exclusive licence to manufacture the products as was the case in Southern Switchgear Limited, where the assessee had obtained a non-exclusive licence. It is also found that the assessee-company is debarred from making available the technical assistance to any thirty party without the prior consent of the collaborator. The collaborator can provide similar licence to any other person in India to manufacture similar products. The technical know- how provided by the collaborator for setting up of the factory of the :- 11 -: ITA 82 & 1467/09 718/10 assessee-company and for commencing production was not claimed as revenue expenditure by the assessee-company, but was capitalized in its books of account in the respective years of payments. The royalty payment under consideration is related to the quantum of sales which is payable every year for the right to use the technology. It is seen that the ownership of the right to technology ha snot been transferred or vested in the assessee-company but it remained the property of M/s MEI, the Collaborator. We are of the considered opinion that the facts of Southern Switchgear Ltd's case are distinguishable and are not similar to the case in hand. The decision rendered in the case of CIT vs I.A.E.C.(Pumps) Ltd, 233 ITR 316, is akin to the facts of the present case and hence, is applicable to the case under consideration. The Hon'ble Apex Court in the case of CIT vs I.A.E.C.(Pumps) Ltd (supra) has held thus as under:
"The only general principle that can be derived from the decisions, is whether under the terms of the agreement, the assessee acquired a "benefit of an enduring nature"
which will constitute "acquisition of an asset" and so the amount paid for the same is a "capital expenditure" or whether the assessee had only acquired technical knowledte for the manufacture of any particular item for a specific duration, and he acquired only a "licence to use the other party's patent and knowledge" and the amount paid would only be a "revenue expenditure" ...."
11. In view of the above decision, the impugned payment made under the Collaboration Agreement for Mixer Grinders amounts only to licence fee and not the price for acquisition of a capital asset. :- 12 -: ITA 82 & 1467/09 718/10 Obviously, this payment has to be treated as revenue expenditure and no portion of the same can be treated as capital in nature. Hence, we cannot allow Ground Nos.2.1 to 2.3 of Revenue's appeal and dismiss the same.
12. The next issue of Revenue's appeal covered by Ground Nos.3.1 and 3.2 pertains to similar payment made in the case of Electric Rice Cookers.
13. We have found that the clauses of Collaboration Agreement in respect of Electric Rice Cookers are significantly different. As per clause 4.01 of the Collaboration Agreement, during the term of the Agreement, M/s MEI agrees to grant to IMACO a non-exclusive licence to manufacture the products at IMACO's factory. This technical know- how has been held to be non-transferable. Clause 6.01 of the agreement states that notwithstanding anything contained in the other clauses of the agreement, IMACO shall be free to part with the technical assistance and technical know how in the form of a sub licence in favour of any third party. The ld. CIT(A) has construed imaging that it cannot be held that the entire royalty payment during the year was towards acquisition of the capital asset in the form of a right to part with the technical know-how by way of a sub-licence. According to him, some of the royalty payment must have been in the :- 13 -: ITA 82 & 1467/09 718/10 revenue field. For that matter, he has invoked the ratio of the decision in the case of Southern Switchgear Limited and has sustained the disallowance of 25% of the royalty payment as towards acquisition of capital rights for Electric Rice Cookers.
14. The case of the Revenue is that the impugned payment would result in enduring benefit to the assessee particularly because the agreement does not bar the assessee from parting it with the technical know-how in the form of a sub-licence in favour of any third party. However, no such action has been taken by the assessee as averred before us during the hearing of the case. While doing this, the ld. CIT(A) has directed the Assessing Officer to allow depreciation thereon.
15. The case of the assessee is that as per clause 4.01, MEI had agreed to grant to the assessee-company only a non-exclusive licence to manufacture the products. It was argued that the assessee had not parted with any technical assistance or technical know-how in the form of sub-licence in favour of any third party during the relevant period. The ld.AR averred that the ld. CIT(A) has not carefully treaded through clause 6.01 of the agreement in a correct perspective. As per this clause, sub-licensing does not become necessary and the sub-licence fee has to be as mutually agreed upon between the parties, in :- 14 -: ITA 82 & 1467/09 718/10 advance and that too in writing and subject to approval by the Government.
16. After considering the rival submissions, we have found that this issue raised by the assessee in its appeal and covered by ground Nos. 2 to 7 has to be decided in favour of the assessee. With the similar reasoning as we have given in the case of payment made towards Mixer Grinders. Accordingly, Ground Nos. 2 to 7 of assessee's appeal stand allowed and Ground Nos. 3.1 and 3.2 of Revenue's appeal stand dismissed.
17. The next ground of assessee's appeal pertains to restriction of claim of deduction made u/s 80HHC of the Act. The facts apropos this issue are that the assessee has shown certain receipts under the head 'other income' in its books of account and these pertain to sale of scrap, process scrap sales, insurance claim received, provisions written back, credit balances written back and other miscellaneous incomes which were considered by the assessee as eligible for deduction u/s 80HHC being a part of the business income. As against this, the Assessing Officer has held otherwise after accepting that the receipts are a part of business income but still it was held as not eligible for deduction u/s 80HHC of the Act. It was argued that the provisions written back would not form the part of assessed income and :- 15 -: ITA 82 & 1467/09 718/10 therefore, would be out of the purview of clause (baa) appended to section 80HHC. The provision for doubtful debts has been recorded in the books of account but was added back in the memo of income filed alongwith the return. But recovery from out of such provisions made in that year or earlier years, though shown as other income in the books, would not be in the nature of income because the deduction for the provision made in this regard had not been claimed in the return.
18. We have verified the facts and the rival contentions and are of the of the opinion that the contention of the assessee-company is found to be correct. We have found that the receipts from sale of scrap would be a part of the income from business for the purpose of computing the eligible deduction u/s 80HHC. 90% of the receipts from sale of scrap would be required to be deducted from the profits of business in terms of clause (baa) appended to section 80HHC. The receipt from sale does not have any direct nexus with the export turnover. In our considered opinion also, this amount cannot be allowed u/s 80HHC. Likewise, set off of brought forward losses prior to computation of deduction eligible u/s 80HHC stands decided against the assessee in view of the decision of the Hon'ble Supreme Court rendered in the case of IPCA Laboratories, 266 ITR 521. Regarding component of eligible deduction u/s 80HHC on export incentive has neither been quantified nor been granted. Accordingly, for these :- 16 -: ITA 82 & 1467/09 718/10 issues, we go alongwith the ld. CIT(A) and dismiss Ground Nos. 8 to 12 of assessee's appeal.
19. In the result, the appeal of the Revenue stands dismissed and that of the assessee stands partly allowed.
I.T.A.No. 718/Mds/2010 - A.Y 2005-06
20. The grounds raised in this appeal of the Revenue for assessment year 2005-06 read as under:
"1. The order of the learned CIT(A) is contrary to law and facts of the case.
2.1. The learned CIT(A) erred in holding that the entire payment made by the assessee to Matsushita Electric Industrial Company Ltd. (MEI), Japan under a collaboration agreement for mixer grinders constitute expenditure and no portion of the same can be disallowed. Reliance has been placed on the order of his predecessor in ITA No.598/06-07 dated 9.7.08 for the a-y 2004-05.
2.2. It is submitted that the relied upon order has not become final and appeal before the Hon'ble ITAT has been preferred against the same.
3.1. The learned CIT(A) erred in deleting the disallowance of royalty payment made by the assessee company to MEI in respect of electric rice cookers.
3.2. The learned CIT(A) failed 0 no e that the impugned payment will result in enduring benefit to the assessee, in the light of the fact that the collaboration agreement between the assessee and MEI does not bar the assessee from parting with the technical knowhow in the form of a sub licence in favour of any third party.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored. ":- 17 -: ITA 82 & 1467/09 718/10
21. After going through the grounds, facts and the circumstances of the case, we have found that both the grounds raised by the Revenue are identical to the grounds raised in assessment year 2004-
05. Accordingly, we dismiss both these issues with the similar reasonings which we have taken in assessment year 2004-05.
22. In the result, the appeal of the Revenue for assessment year 2005-06 stands dismissed.
23. To summarize the result, Revenue's appeals for assessment years 2004-05 and 2005-06 stand dismissed whereas the assessee's appeal for assessment year 2004-05 stands partly allowed.
Order pronounced in the open court on 06-01-2012.
Sd/- Sd/-
(DR. O.K. NARAYANAN) (HARI OM MARATHA)
VICE-PRESIDENT JUDICIAL MEMBER
Dated: 6th January, 2012
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR