Income Tax Appellate Tribunal - Madras
Teletherm Instrument Co. (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 2 February, 1993
Equivalent citations: [1993]45ITD203(MAD)
ORDER
T.N.C. Rangarqjan, Vice President 1 to 2. [These paras are not reproduced here as they involve minor issues.]
3. The second issue is with reference to the claim of the assessee that the technical know-how fees paid should be allowed as revenue expenditure. The assessee had entered into an agreement on 1-10-1985 with Action Instruments Europe Inc. Clause 2 stated that the subject matter of the agreement was the sale of documentation/know-how/drawings and such other technical data pertaining to the licensed products by the foreign company. The licensed products were the complete range of Transpak (R) Transmitters. The consideration was a lumpsum of £ 35,000. One-third of this amount was to be paid within 30 days from the date the contract is taken on record by the Government, one-third on presentation of invoice and receipt of the documentation and the balance within one year from the commencement of production. One of the terms stated that the foreign company may with prior agreement of the assessee make the know-how available to other parties in India. The foreign company also required that the standard of the product should be maintained but did not grant any patent or trade names or copyrights belonging to it. The agreement was for a period of 5 years. The case of the assessee was that on the terms and conditions of this agreement coupled with the fact that it was a technology which was subject to very quick obsolescence the expenditure was a revenue expenditure. The Assessing Officer was of the view that the fee paid for know-how fell within the definition in Section 35AB and accordingly allowed 1/6 of the first instalment as a deduction. On appeal, the CIT (Appeals) agreed with the Assessing Officer to confirm the addition made by him.
4. In the further appeal before us it was contended on behalf of the assessee that the expenditure incurred for obtaining technology for improving the product already manufactured by the assessee was only a revenue expenditure. It was emphasised that the assessee did not acquire any enduring benefit and in actual fact the production tapered off after a couple of years because the analogue system which was the basis of this technology had been replaced by the digital system. It was submitted that since the assessee did not acquire any right as such but only the use of the technology for a very limited period, the deduction claimed should be allowed. On the other hand, it was contended on behalf of the revenue that the definition of "know-how" in Section 35AB clearly covered the facts of this case and the assessee was entitled only to 1/6 of the amount paid. In reply it was submitted on behalf of the assessee that even if the agreement were to be considered under Section 35AB, the deduction should be 1/6 of the entire amount payable under the agreement.
5. We have considered the submissions of both sides and perused the agreement. The first question that arises is whether the expenditure incurred is of capital or revenue nature. The general understanding of the i law on the subject is that if the assessee has an enduring benefit as by way of acquisition of any right, it would be an expenditure of capital nature. In the present case, the agreement itself says that it is for the sale of documentation and the amount paid is a lumpsum amount. The other aspects emphasised by the assessee such as the fast obsolescence of the know-how, that the assessee did not acquire any trade name or patent and that the know-how could have been sold to competitors do throw certain doubts on such a clear finding. Yet the fact that the assessee obtained the right to manufacture the improved product consistent with the quality maintained abroad for more than a year indicates that this was an expenditure which was incurred for earning income beyond the period of one year. We are, therefore, inclined to treat this expenditure as capital expenditure.
6. Prior to 1-4-1986 such capital expenditure would only be entitled to depreciation to the extent that it represented the acquisition of an asset viz., documentation recognised as plant. However, Finance Act, 1985 introduced Section 35AB which reads as follows :-
35AB. Expenditure of know-how.-(1) Subject to the provisions of Sub-section (2) where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years.
(2) Where the know-how referred to in Sub-section (1) is developed in a laboratory, university or institution referred to in Sub-section (2B) of Section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years.
Explanation : For the purpose of this section, 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto) The Finance Minister in his Budget Speech said :
With a view to providing further encouragement for indigenous scientific research, I propose to provide that lump sum consideration received by scientists for the know-how developed by them would be spread over a period of three years and charged to tax accordingly. I also propose to provide that industry may write off the lump sum consideration paid for acquiring know-how in six annual instalments. In cases where the know-how has been developed in Government laboratories. Universities, laboratories owned by public sector companies and other recognised institutions, the write-off would be permitted over a period of three years.
(152 ITR St. 80) The Notes on clauses stated :
Clause 8 seeks to insert, with effect from 1-4-1986, a new Section 35AB in the Income-tax Act relating to expenditure on know-how.
The proposed section seeks to provide that any lump sum consideration paid by the assessee for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it equally over six years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the know-how is developed in a laboratory, University or institution referred to in Sub-Section (2B) of Section 32A, the consideration shall be spread equally over three years. For the purposes of this section, 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for discovery or testing of deposits or the winning of access thereto).
The proposed section will apply in relation to the assessment year 1986-87 and subsequent years.
(152 ITR St. 142) Circular No. 421 dated 12-6-1985 explained this provision thus:
Deduction in respect of expenditure on 'know-how' 15.1 With a view to providing further encouragement for indigenous scientific research, the Finance Act has inserted a new Section 35AB in the Income-tax Act. The section provides that any lump sum consideration paid by the tax-payer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it over 6 years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the 'know-how' is developed in a laboratory, university or institution, referred to in Sub-Section (2B) of Section 32A, the consideration shall be spread equally over 3 years.
15.2 For the purposes of this section, 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other source of mineral deposits (including the searching for. discovery or testing of deposits or the winning of access thereto).
Now what could be the incentive by the amortization. The assessee contends that since revenue expenditure would be a straight deduction, this section could be applicable only to capital expenditure. If such capital expenditure represents an asset the only advantage is a spread of 6 years as against a spread of 10 years 10 per cent depreciation. But the recent years depreciation spreads over 3 years only and there can be no advantage. Of course if such capital expenditure does not represent any asset, there will be an advantage. We must also remember that the concept of deferred revenue was unknown to Income-tax law with the result that the question whether an expenditure is capital or revenue was vexing every one. Perhaps this section does away with such a dispute by clarifying that expenditure for acquisition of know-how would be spread over 6 years. No doubt, in a case of quicker obsolescence the assessee gains no advantage. Yet where the expenditure relates to the earning of income for more than a year this amortisation puts paid to conflicting claims of assessee and revenue. The essential facts of this case viz., lump sum consideration for acquisition of know-how to assist in the manufacture of goods for use in the business of the assessee falls squarely within the scope of this section. Whatever be the position earlier, since this section applies to this assessment year, we have to confirm the view of the authorities below that the expenditure incurred by the assessee must be dealt with only under Section 35AB.
7. However, that section provides for a deduction of 1/6 of the amount paid as lump sum consideration. Section 43(2) defines "paid" to mean actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business". In the present case, it is not in dispute that the profit has been computed on the mercantile basis of accounting. A reading of the agreement clearly shows that this lump sum consideration was incurred when the agreement came into force under Clause 6.5 when approved by the Government on 24-2-1986. The lump sum consideration was £ 35,000 and when remitted was equal to Rs. 6,15,180.76. The assessee had wrongly claimed the deduction of Rs. 2,29,233 remitted as first instalment as a revenue expenditure and the Assessing Officer had allowed 1/6 thereof amounting to Rs. 38,205 and added the balance of Rs. 1,91,028. But if the provisions of Section 35AB were to be applied correctly, the assessee would be entitled to the deduction of 1/6 of Rs. 6,15.180 viz., Rs. 1,02.530 in this year. The assessee was also entitled to the deduction of an equal amount each in the next five successive assessment years. We direct accordingly.
8. The assessee was concerned by the fact that the disallowance of the claim for deduction of the revenue expenditure has led to the charging of interest under Sections 139 and 215 and stated that that was the reason why the claim for revenue deduction was pressed. We have no doubt that while recomputing the income the interest chargeable would also be recomputed under Section 215(3) and the case of the assessee for waiver of interest has also to be considered in the light of the fact that the provisions of Section 35AB was new and came into force only from the preceding assessment year. The assessee could not have understood the implications thereof and but for this section the assessee could have succeeded in claiming it as revenue expenditure. We direct the Assessing Officer to recompute the total income and tax demand accordingly.
9. The appeal is allowed.