Income Tax Appellate Tribunal - Delhi
Pme Power Solutions (I) Ltd., New Delhi vs Assessee on 27 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : F : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI K.G. BANSAL, ACCOUNTANT MEMBER
ITA No.288/Del/2011
Assessment Year : 2006-07
PME Power Solutions (I) Ltd., Vs. CIT,
26/36, East Patel Nagar, Delhi-V,
New Delhi. New Delhi.
PAN : AAACP1698Q
(Appellant) (Respondent)
Assessee by : Shri Ajay Vohra, Advocate & Shri
Avdhesh Bansal, ACA
Revenue by : Shri Ashok Pandey, CIT, DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
This is an appeal filed by the assessee. It is directed against the order dated 27th December, 2010 passed by CIT, Delhi-V, New Delhi u/s 263 of the Income Tax Act, 1961 (the Act). The grounds of appeal read as under:-
1. That on the facts and circumstances of the case and in law the order dated 27.12.2010 passed by the Commissioner of Income Tax, Delhi-V ('CIT') under section 263 of the Income Tax Act, 1961 ('the Act') revising the assessment to an income of Rs.3,75,28,005 is beyond jurisdiction, bad in law and void ab initio.
2. That on the facts and circumstances of the case and in law the CIT erred in holding that the assessment order dated 08.08.2008 passed under section 143(3) of the Act was erroneous and prejudicial to the interest of Revenue and in directing the Assessing Officer to modify the same, by bringing to tax 'One time technology transfer fees', amounting to Rs.3,71,40,000.2 ITA No.288/Del/2011
amounting to Rs.3,71,40,000.
2.1 That on the facts and circumstances of the case and in law the CIT erred in exercising jurisdiction under section 263 of the Act in respect of the said issue, without appreciating that the said issue of taxability of 'One time technology transfer fees' is debatable ousting jurisdiction under the said section.
2.2 That on the facts and circumstances of the case and in law the CIT erred in exercising revisionary powers under section 263 of the Act without appreciating that, on the said issue, the proceedings under section 154 of the Act had earlier been dropped by the Assessing Officer.
3 That the CIT erred on facts and in law in not appreciating that the twin conditions under section 263 of the Act, viz., assessment order being (i) erroneous as well as (ii) prejudicial to the interest of Revenue, were not satisfied, in as much as, no prejudice is caused to the Revenue in respect of the impugned issue as balance amount of 'One time technology transfer fees' has been offered for tax in the subsequent years.
4. That on the facts and circumstances of the case and in law the CIT erred in holding that the entire 'One time technology transfer fees' received by the appellant is taxable in the year of receipt, i.e., the previous year relevant to the assessment year under appeal.
5. Without prejudice to the aforesaid, the CIT erred in not directing the Assessing Officer to allow deduction of expenditure incurred by the appellant in subsequent years in connection with earning of the aforesaid income, on the matching principle.
The appellant craves leave to add, alter, amend or vary any of the above grounds of appeal before or at the time of hearing.
2. The assessee is engaged in the business activity of manufacturing of power distribution transformers. It filed its return of income at nil on 29th March, 2007 which was assessed vide order dated 8th August, 2008 passed u/s 143 (3) of the Act at nil income. The only addition made to the income of the assessee was with regard to delayed payment of ESI and PF amounting to ` 3,88,005/- which was 3 ITA No.288/Del/2011 adjusted against the brought forward losses to the extent of assessable income.
3. Later on, the Commissioner of Income Tax-V, New Delhi (CIT ) issued show cause notice to the assessee dated 9th December, 2010 on the ground that the assessee had only credited a sum of ` 92,85,000/- in the Profit & Loss Account under 'other income' as against the total receipt of ` 4,64,25,000/- received by the assessee on account of one time technology transfer fee and the remaining sum of ` 3,71,40,000/- was shown in the balance sheet as under the head 'other liabilities.' According to the show cause notice, learned CIT has observed that the assessee is following mercantile system of accounting and, according to the provisions of Section 28 read with Section 5 describing the scope of total income, the assessee was liable to be assessed on the entire receipts of one time technology transfer fees. During the course of assessment proceedings, the assessee company was neither asked for any explanation regarding the entire one time technology transfer fees of ` 4,64,25,000/- nor any explanation in this regard was ever furnished by the assessee company. In view of all these circumstances, learned CIT proposed to modify/revise the said assessment order under the provisions of Section 263 of the Act. Copy of show cause notice is placed at pages 4-6 of the paper book. In response to the aforementioned show cause notice, the assessee has submitted a reply dated 20th December, 2010 copy of which is placed at pages 1-3 of the paper book. In the said reply, it was the case of the assessee that it is engaged in the manufacturing of power and distribution of transformers along with servicing and sales of electricity transmission and distribution products. It was submitted that the assessee is also engaged in providing consultancy in setting up power related projects in furtherance of its business it entered into an agreement with ZESA Enterprises of Zimbabwe for providing technical 4 ITA No.288/Del/2011 assistance and allied services for providing necessary drawings for repair and assembling, operating and instruction procedures and manuals. It was also under an obligation to carry out studies of the contracts, repairs and manufacturing facilities and was to assist in the preparation of such data or information as was required or necessary. Thus, it was submitted that the work arising out of the agreement was enormous and such agreement was entered into for a period of five years. The assessee was required to incur heavy cost on day-to-day basis on its employees on the material of search and development and on the provisions for various commitments undertaken through the agreements. The assessee was also responsible for damages and in other related claim by the third parties arising from defective technical information and parts provided to the contractee during the tenure of such agreement. Thus, it was claimed that the assessee has treated only 1/5 of the entire receipts as income pertaining to the year under consideration and the balance income was distributed in another four years as the contract was to prevail for five years. It was also submitted that earlier proceedings u/s 154/155 were initiated vide notice dated 31st March, 2010 which were dropped in response to reply submitted by the assessee on 27th April, 2010. Reference was made to the decision of Special Bench Chennai in the case of ACIT/DCIT vs. Mahindra Holidays & Resorts (I) Ltd. 39 SOT 438 (2010) wherein on similar issue regarding receipt of time share membership fees it was held that it was not income chargeable to tax in the initial year on account of contractual obligation that was fastened to receipt i.e., to provide services in future over term of contract. Finally, it was submitted that no prejudice has caused to the revenue by the action of the assessee in not treating the entire receipt as income in the current financial year as the assessee is having brought forward losses to the tune of ` 13,16,18,770/- and, in this manner, it was submitted that the order was neither erroneous nor prejudicial to the interest of revenue, 5 ITA No.288/Del/2011 therefore, powers u/s 263 could not be invoked. However, learned CIT has rejected such contention of the assessee and has come to the conclusion that the entire amount of ` 4,64,25,000/- was required to be brought to the tax instead of only a sum of ` 92,85,000/- and he directed the Assessing Officer to modify the order. He also directed the Assessing Officer to give a consequential effect to assessment years 2007-08 to 2010-11 by reducing the amount of ` 92,85,000/- in each of the said assessment years in view of the assessment of the entire amount in the year under consideration. In this manner, an addition of ` 3,71,40,000/- has been made by learned CIT (A). The assessee is aggrieved with such order passed by the CIT and has raised the aforementioned grounds of appeal.
4. After narrating the facts, it was vehemently pleaded by learned AR that as the agreement was to subsist for a period of five years, the assessee had rightly shown income of ` 92,85,000/- on that account being 1/5th of the total amount of ` 4,64,25,000/- and the balance amount was shown as a liability to be appropriated against the future four years. He submitted that originally the assessment was framed u/s 143 (3) and, thus, the Assessing Officer had adopted a view which was a reasonable view, hence, the powers u/s 263 could not be invoked by the CIT as per decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Max India Ltd. 268 ITR 128 (Pb).
5. He further referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goyal 197 Taxman 375 (Del) to contend that in order to put a sum chargeable to income-tax, it should accrue or arise to the assessee during the previous year; a right to receive a particular sum under an agreement would not suffice unless that right occurs by rendering of services and not by promising of services. He submitted that in order to bring the entire sum in the 6 ITA No.288/Del/2011 year under consideration, there should be either accrual or arising of the said sum to the assessee. He submitted that due to the obligation of the assessee extended to five years, the entire amount could not be said to have accrued to the assessee and, therefore, it was rightly taken by the assessee to be chargeable to tax at 1/5th of the entire sum and that being a possible view taken by the assessee, it cannot be said that power u/s 263 has rightly been invoked by the CIT.
6. He further referred to the decision of Hon'ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT 127 ITR 746 to contend that lumpsum payment received cannot be a criteria to assess the said income in its entirety in the year of receipt.
7. He further referred to the decision of Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. vs. CIT 26 ITR 27 to contend that what is assessable as income being taxable in a particular year, it is an amount paid or received either actually or constructively. It was observed that 'accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned, there is no difficulty. The word 'accrue' and 'arise' are also not defined in the Act. The word 'accrue' is synonymous with 'arising' in the sense of springing as a natural growth or result. Both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less incohate. Thus, it was held that what is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income.' It was further observed as under:-
"It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires 7 ITA No.288/Del/2011 a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson (Inspector of Taxes), and Webb v. Stenton and Others, Garnishees. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him."
8. The learned AR further referred to the decision of Hon'ble Allahabad High Court in the case of CIT vs. Hindustan Computers Ltd. 233 ITR 366 (All) to contend that the entire receipts could not be assessed as income because they were received on account of AMC and was transferred to Profit & Loss Account as the same does not have the effect of changing the system of accounting and no real profit had arisen on the un-expired period of AMC. Therefore, the Tribunal was held right in deleting the addition of ` 72.05 lac even in accordance with the mercantile system of accounting.
9. The learned AR further referred to the decision of Hon'ble Supreme Court in the case of Calcutta Company Ltd. vs. CIT 37 ITR 1 (SC). Referring to the decision he contended that if there is a clear liability of the assessee to incur certain expenditure for certain period, then, the assessee is within its right to claim that expenditure in the year when the liability accrued. Thus, it was the contention of learned AR that the income which relates to subsequent years could not be assessed in the year under consideration.
10. It was further submitted that the assessment order passed by the Assessing Officer earlier cannot be said to be prejudicial to the interest of the revenue as even crediting the entire income in the year under consideration does not result in the loss of revenue as the 8 ITA No.288/Del/2011 assessee has brought forward loss of ` 13 crore which will be set off against such addition and the revenue result of the said addition will be negative.
11. On the other hand, learned DR carried us through the various terms of the agreement. He first referred to Article 7 according to which the assessee was entitled to receive "one time technology transfer cost of US $ 1 million." He submitted that by the nature itself, it was the one time payment which was to be received by the assessee on account of one time technology transfer cost. Then, learned DR referred to Article 4.2 to contend that according to clause 4.2, the licensee (the other party) was having the right to get its personnel trained and to study designs, etc. According to clause 4.5, the licensee was to bear the traveling expenses to and fro India by the persons of the licensor. Then, learned DR referred to Article 5.1 according to which the assessee as well as other party were entitled to exchange the improvements and further inventions relating to licensed products or in connection with the designs, manufacture and repair and use and sale of the products. Learned DR also referred to clause 6 according to which the assessee was to give soft loan to the other party for upgradation of plant and machinery. He also referred to clause 8 whereby the assessee was under an obligation to supply components, parts and raw materials, etc. to the other party if the same is required to be given as per written request. In regard to such requests, the other party was required to make the payment by letter of credit. Referring to all these clauses, it was submitted by him that for each and every act, the other party has to bear the cost and not the assessee. He submitted that for all these further activities the payment was to be received by the assessee in the shape of royalty as per clause 7.1 (b) which was to be paid @ 5% of the total ex-work sale of the licensed products. He submitted that the said payment of 9 ITA No.288/Del/2011 royalty is the major part of the consideration stated in the agreement as according to that clause the minimum payments was fixed at US $ 25,000/- per month. Thus, he submitted that one time technology transfer cost received by the assessee was nothing, but a lumpsum payment received by the assessee and the assessee was not to pay anything in the further five years for that purpose. He further referred to Article 11.4 according to which even in the case of termination of the agreement, the parties were obliged to perform the outstanding obligations under the agreement not affected by the termination. Thus, it was pleaded that the balance amount having not been taxed by the Assessing Officer made the assessment order erroneous as well as prejudicial to the interest of revenue. He submitted that it cannot be said that the order was not prejudicial to the interest of the revenue as the tax effect has to be taken into consideration even if it affects the loss or it reduce the loss claimed by the assessee. He pleaded that it has clearly been brought out in the order passed u/s 263 that the Assessing Officer did not discuss this issue during the course of assessment proceedings. He submitted that non-discussion or non- deliberation by the Assessing Officer on this issue during the course of assessment proceedings will make the assessment order erroneous as he failed to initiate any inquiry with regard an issue which has effect upon the chargeable income of the assessee.
12. In the rejoinder, it was vehemently contended by Learned AR that the obligation of the assessee for receiving one time technology transfer cost was not limited to the year under consideration, but it was for the extended period of five years applicable to the entire agreement. He submitted that bearing the cost by the other party as stipulated in the terms cannot in any way be interpreted against the assessee as, according to general terms and conditions, the incurring of expenditure on such items is always the liability of the person who is 10 ITA No.288/Del/2011 to obtain the benefit. Thus, he submitted that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of revenue, hence, it is to be held that power u/s 263 was not rightly exercised by the CIT.
13. We have carefully considered the rival submissions in the light of the material placed before us. It is noticed that the CIT has clearly recorded in his order that during the course of assessment proceedings the assessee company was neither asked for any explanation regarding the entire one time technology transfer fee of ` 4,64,25,000/- nor any explanation in this regard was ever furnished by the assessee company. Such fact is also not denied by learned AR. Hence, it is clear that during the course of assessment proceedings the issue regarding taxability of the entire amount in the year under consideration was not touched upon by the Assessing Officer or by the assessee. Therefore, it is a case where no examination was done by the Assessing Officer and the assessee also did not give any explanation on this issue. If it is so, then, the law is well established by the decision of jurisdictional High Court in the case of Gee Vee Enterprises vs. Addl. CIT 99 ITR 375 (Del) which is later on approved in the case of Malabar Industrial Company Ltd. vs. CIT 243 ITR 83 (SC) wherein it was held that vide Section 263 the intention of the legislature was to give a wide power to the Commissioner. He may consider the order of the ITO as erroneous not only because it contains some apparent error of reasoning or of law or of fact on the face of it, but also because it is a stereo type order which simply accepts what the assessee has stated in his return and fails to make inquiries which are called for in the circumstances of the case. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case, the ITO should have made further inquiries before accepting the statements made by the assessee in his return. The 11 ITA No.288/Del/2011 reason is obvious. The position and function of the ITO is very different from that of a civil court. The statement made in the pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral when it simply gives decision on the basis of the pleadings and evidence which comes before it. The ITO is not only an adjudicator, but also an Investigator. He cannot remain passive in the face of a return which is apparently in order, but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in Section 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when the circumstances would make such an inquiry prudent that the word "erroneous" in Section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. Thus, it is clear that the order can be termed to be erroneous if no inquiry is conducted by the Assessing Officer which was required to be called for. Thus, it is not a case of 'inadequate inquiry' but, it is a case of 'lack of inquiry' and this position has been accepted even in the case of CIT vs. Sunbeam Auto Ltd. 227 CTR 133 (Del). If the order is erroneous, then, it should also be prejudicial to the interest of revenue to bring the assessment order within the ambit of Section 263. Here, we find force in the contention of learned DR that if the amount is assessable on lumpsum basis in the year under consideration, then, there will certainly be a prejudice caused to the revenue and such prejudice cannot be washed away simply for the reason that there was ample brought forward losses against which such income could be wiped out. Now, as per well established law, reduction of loss also is at par with enhancement in 12 ITA No.288/Del/2011 taxable income, hence, it cannot be said that no prejudice can be caused to the revenue if there are sufficient brought forward losses to set of current addition.
14. However, to examine whether real prejudice has been caused to the revenue, the contention of learned AR regarding validity of addition is also to be considered on the basis of material available on record and on the basis of arguments submitted by both the parties as the Commissioner has held that the entire amount was taxable in the year under consideration and he has also directed the Assessing Officer to exclude the similar amount of ` 92,85,000/- in all the subsequent years from assessment year 2007-08 to 2010-11 as the entire amount is being added in the current year.
15. The addition of the entire amount in the year under consideration is contested by learned AR mainly on the ground that according to the obligations of the assessee in the agreement, the assessee has to extend various facility to the licensee for the entire period of five years, hence, the entire payment could not be related to the year under consideration only as it has to be bifurcated into five years. For this purpose, we have to carefully consider the contents of the agreement to ascertain that what was the obligation of the assessee relating to 'one time technology transfer cost.' It will be proper if Article 7 is reproduced in its entirety to know that what type of payments were to be received by the assessee under the agreement:-
"Article Article 7. Payment 7.1 In consideration of the Technical Information and the Industrial Property Rights furnished by Licensor to Licensee hereunder, Licensee shall pay to Licensor the following amounts in the manner specified below.13 ITA No.288/Del/2011
a) One time Technology Transfer Costs of US $ 1 million.
The payment of US $ 1 million is payment for the licence to be utilized by the Licensee in terms of this Agreement.
Licensee shall therefore pay Licensor US $ 500 000 within 6 months from the date of this Agreement and another US $ 500 000 six months later to cover the licence fee subject to approval by the Reserve Bank of Zimbabwe. The payment shall be made through a confirmed irrevocable Letter of Credit from a first class bank in India. The Letter of Credit should be raised within 30 (thirty) days of receipt of Reserve Bank of Zimbabwe approval.
b) Royalty It is agreed that the Licensee shall pay a Royalty fee of 5% of the total ex-works sales of the licensed products.
The Royalty payable shall be calculated and paid on the total output on an annual basis with an advance payment of US $ 25 000 paid per month to cover costs incurred by the Licensor in the execution of the project.
7.2 Raw Material Requirements To kick start the repair and manufacture of transformers, it is estimated that raw materials requirements shall be approximately US $ 2 million. Licensee has agreed to provide sufficient funds from time to time to ensure uninterrupted production activities as per requirements for the implementation of the envisaged production capacities. PMEL will organize materials from India at competitive pries and will ensure that the desired quality levels are achieved. Licensee shall establish the letter of credit through a first class bank for the initial value of US $ 1.8 million.
7.3 The Licensee shall generate the full foreign currency requirements for the payment of the licensing fees, royalty fees and for the imported raw materials.
7.4 It is understood that all expenses such as custom duties, VAT, handling, local transport and any taxes payable in Zimbabwe shall be borne by the Licensee."
16. The perusal of the aforementioned article 7 will reveal that against one time technology transfer cost, the assessee was to receive 14 ITA No.288/Del/2011 US $ 1 million which is equivalent to a sum of ` 4,64,25,000/-. Further to that the assessee was to receive a royalty fee of 5% of the total ex works sale of the licensed products. To see the volume of such receipts, it can be seen that minimum payment of US $ 25,000/- per month was to be paid by the licensee to the assessee to cover the cost incurred by the licensor in the execution of the project.
17. Apart from the above, the licensee was to pay the cost relating to raw material for which the amount was approximately fixed at US $ 2 million and the licensee was required to establish the letter of credit through a first class bank for initial value of US $ 1.8 million.
18. If the cost relating to raw material is excluded, then, the assessee, apart from receiving the one time technology transfer cost of US $ 1 million, was to receive 5% royalty of the total ex works sale of licensed products which was estimated to be not less than US $ 25,000/- per month meaning thereby US $ 0.3 million per year. Thus, what the assessee was to receive as a major revenue was the royalty in respect of total ex works sales of the licensed products.
19. We can take the brief overview of the entire agreement. The agreement is between the assessee being licensor and ZESA Enterprises Pvt. Ltd. being the licensee. The assessee having the expertise in the manufacture of power and distribution transformers to the electricity power sector and related activity has entered into an agreement with the licensee who desires to be authorized and obtained a licence to manufacture, repair, use and sale the licensed products utilizing the technical information furnished by the licensor who has given the authority and has granted the licence. Thus, according to the recital, the licensee wanted to be authorized to 15 ITA No.288/Del/2011 manufacture, repair, use and sell licensed products utilizing technical information furnished by the licensor. It can be divided into two parts; first to give the licence to manufacture and deal in the licensed products and then to manufacture, repair and use and sell the licensed products. The licensed products according to definition section means 'power and distribution transformers.' The definitions are contained in article 1 which defines 'licensed products', 'technical information', 'industrial property rights', 'effective date', and 'contract territory.' The technical information has been defined as of technical knowledge, know how, standard calculations, data and information development or otherwise generally used by the licensor pertaining to manufacture, repair, use and sale of the licensed products. 'Industrial property rights' mean any or all rights under patents, utility, models and application thereof, whether presently owned or hereafter acquired by the licensor and/or which licensor has or may have the right to control or grant license thereof during the term of the agreement and which are applicable to or may be used in the manufacture and repair of the products. The effective date means 1st January, 2006.
20. Vide Article 2, the licensor has granted license to the licensee of exclusive right to manufacture, repair, use and sell the licensed products using the industrial property rights and technical information furnished by the licensor in the contract territory. As per article 3, under the head 'sales and information' upon written request of licensee, the licensor is required to furnish to the licensee with the necessary drawings, technical data and price information on a break down basis in order to enable the licensee to prepare quotations, in so far as such information is currently available from Licensor. Article 4 stipulates 'technical assistance and services' according to which the licensor was required to supply the following data in order to enable 16 ITA No.288/Del/2011 licensee manufacture and repair to the best advantage the licensed products without delay:-
a) Drawings for designs, repair and assembling
b) Specifications
c) Materials list
d) General calculation sheet in respect of basic engineering
parameters
e) Data for inspections and trial operations.
f) Fabrication and assembly procedures,
g) Operating and instruction manuals
h) Any other necessary technical data and know how generally used
by Licensor.
21. Article 4.2 stipulates the condition regarding personnel of the licensee to be trained by the licensor for which all the expenses were to be borne by the licensee subject to the conditions mentioned therein. The licensor was also required to carry out the studies of the licensees repair and manufacturing facility and to assist it in preparation of specifications to procure plant and machinery and to be part of negotiation, inspection and supervision of the installation work. The article 5 deals with 'improvements' which stipulates that if at any time during the currency of the agreement, it is discovered or comes to the possession of any improvements or further inventions relating to licensed products or in connection with the design, manufacture, repair and use and sale of the same; the party shall furnish the other party with the information on such improvement or further invention without any delay and free of charge and, thus, it is not only the obligation of the licensor, but, it is a mutual obligation to be discharged by both the parties.
17 ITA No.288/Del/201122. Article 6 provide that 'financial arrangement' which is regarding soft loan to be given by the licensor to the licensee of US $ 2 million and it also stipulates that the licensor shall have no financial obligation with regard to operating expenses of their licensee. The Article 7 has already been reproduced in the above part of this order. Article 8 is regarding 'supply of components, parts and raw material' which are supplied by the licensor at the written request of the licensee for which the licensee is required to open irrevocable letter of credit from prime bank to buy components, parts and raw materials from suppliers recommended by the licensor. Article 9 describe about the records, auditing and reports. Article 10 specify the guarantee according to which licensor is responsible for damages and any other related claim by the third party arising from defective technical information and parts furnished by the licensor to the licensee. However, the licensor is not responsible for consequential damages resulting from faulty application of technical information by the licensee.
23. Article 11 defines duration and termination which is for the period of five years from the effective date subject to review, extension or termination by the parties. Article 11.4 describe that notwithstanding termination of the agreement, the parties have to perform all outstanding obligations not affected by the termination.
24. Article 12 describe 'use of trade mark and brand name' whereby the licensee has been granted with the licence by the licensor on the terms and conditions contained in the agreement with certain conditions stipulated therein. Article 12.4 states as under:-
"12.4 This License to use the Licensed Trademark is provided on a royalty fee basis."18 ITA No.288/Del/2011
25. The Article 12.5 stipulates that if the agreement is terminated, licensee shall immediately cease using the licensed trade mark. Article 13 deals with patent infringement and Article 14 deals with secrecy which stipulates that licensee has agreed that it shall not, without prior written consent of the licensor, shall, assign or divulge the technical information disclosed and furnished by the licensor in any manner to anyone except those of its employees and its sub- contractors who will be using such information in the repair, manufacture and erection of the licensed products. Article 15 to 23 contains general conditions which are not relevant for the purpose of determining the issue raised in the present appeal.
26. If the entire agreement is to be seen in the terms of obligations of the licensor vis-a-vis licensee, it can be observed that two types of revenue comes to the licensor; one is regarding one time technology transfer cost and the other is royalty earned during the subsistence of the agreement. It has already been observed that royalty constitute major part of revenue to be earned by the assessee from licensee. After giving the licensee a right to use the licensed products and manufacturing, sales and repairs thereof, the obligation of the licensor is to assist the licensee in all manner to enable the licensee to carry on its activity efficiently, smoothly and in a manner that it can generate substantial revenue. To earn substantial revenue by the licensee is the business interest of the licensor as it is to earn 5% of the total ex work sale of the licensed products. The substantial assistance required to be provided by the licensor to the licensee during the subsistence of the agreement is for the purpose of earning the royalty. It is important to note that for that purpose no cost has to be incurred by the licensor as the cost incurred by it has to be reimbursed or to be paid by the licensee only. Here, the argument of learned AR is that the licensor has to supply all the developments and improvements in the licensed 19 ITA No.288/Del/2011 products to the licensee, therefore, the licensor is under an obligation to provide the assistance to the licensee with regard to technology transfer, hence, the obligation of the assessee is extended to five years on that account also, therefore, the assessee is right in taking 1/5 of the total revenue as income for the year under consideration. We find no force in such contention of learned AR as the improvement and new invention, if any, is the mutual liability of licensee as well as licensor. It has already been observed that improvement and new invention is governed by Article 5 and it is not only the obligation of the licensor, but, it is mutual obligation. Moreover, if new invention is there and improvement is there, that will help in increasing the sales which will ultimately be coming to the assessee in the form of 5% royalty. After careful examination of the various terms of the agreement, we are of the opinion that the receipt of the assessee of US $ 1 million has nothing to do with the entire period of the agreement. It is only a one time technology transfer cost which is to be received by the assessee and is to be assessed only in the year under consideration. Therefore, on merits also the assessee has no case for coming to the conclusion that the entire receipts of US $ 1 million has to be divided into five parts. The case law relied upon by learned AR also do not support the case of the assessee. Coming to the decision in the case of CIT vs. Dinesh Kumar Goyal (supra), the assessee was running an institution for coaching students and the tuition fee was received in advance and it was held that if the entire receipts are treated as income, it would lead to an anomalous situation inasmuch as the expenses which will be incurred in the next year, are to be deducted to arrive at the net income. Here, the assessee has not been able to show that it has to incur or it has incurred any of the expenditures relating to the receipt of US $ 1 million which has been received by the assessee in the shape of one time technology transfer cost.
20 ITA No.288/Del/201127. In the case of Shriram Refrigeration Industries Ltd. (supra), the assessee was to receive US $ 50,000/- in three installments starting from the signing of the agreement till 24th months of signing of the agreement and it was held that the entire receipts were taxable in the year of agreement. In the case of E.D. Sassoon & Co. Ltd. vs. CIT (supra), it was held that the basic concept is that the assessee must have acquired a right to receive the income. According to that principle, in the present case, as the assessee has acquired the right to receive the income, it is to be assessed in the year in which it has acquired the right to receive the income. There is no provision in the agreement according to which it can be said that the right of the assessee to receive the income was restricted in any manner and was related to the year other than the year in which it was to be received by the assessee.
28. In the case of CIT vs. Hindustan Computers Ltd. (supra), the facts were that the assessee was receiving amounts for annual maintenance charges and it was held that merely because the entire AMC charges were transferred to P&L Account will not change the system of accounting and, on the basis of mercantile system of accounting the amount could not be taxed.
29. In the case of Calcutta Company Ltd. vs. CIT (supra), it was held that the expression 'profit or gains' has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning receipt is deducted therefrom and it was held that whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. Here, the assessee has not been able to show that what 21 ITA No.288/Del/2011 expenditure is actually incurred or what is the liability in respect thereof as accrued which has to be discharged by the assessee at a future date. The terms of the agreement have already been described in detail in the earlier part of this order and it is not coming out therefrom that the assessee was to incur any expenditure with regard to the impugned receipt or there was any liability which was to be discharged at some future date.
30. In view of the above discussion, we are of the opinion that learned CIT has rightly invoked the power u/s 263 whereby it has been held that the assessment order passed by the Assessing Officer was erroneous as well as prejudicial to the interest of the revenue. He is also right in holding that the entire amount of ` 4,64,25,000/- was required to be brought to tax instead of ` 92,85,000/- in assessment year 2006-07 and he has rightly directed the Assessing Officer to modify the order and give consequential relief to the assessee with respect to assessment years from 2007-08 to 2010-11. Therefore, we decline to interfere in such order passed by learned CIT and his order is upheld.
31. In the result, the appeal filed by the assessee is dismissed.
The order pronounced in the open court on 21.04.2011.
Sd/- Sd/-
[K.G. BANSAL] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 21.4.2011.
dk
22 ITA No.288/Del/2011
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar,
ITAT, Delhi Benches
23 ITA No.288/Del/2011
Date of Dictation 13.04.2011
Date of Presentation of the draft order 18.04.2011 to the Member Date of return from the Bench after pronouncement &signing Date of dispatch of the order to the Bench