Income Tax Appellate Tribunal - Delhi
Power Plant Performance & Improvement ... vs Department Of Income Tax on 31 August, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F': NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER &
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
ITA No. 4317/Del/2009
Assessment Year : 2001-02
DCIT M/s. Power Plant Performance &
Circle 14(1), Vs. Improvement Ltd.
New Delhi. 8-A, Ring Road,
I.P. Estate,
New Delhi.
(Appellant) (Respondent)
Appellant by : Shri Istiyaque Ahmed, Sr. D.R.
Respondent by : Ms. Manju Bhardwaj, C.A.
ORDER
PER: C.L. SETHI, J.M. The revenue is in appeal against the order dated 31.08.2009 passed by the ld. CIT(A) in the matter of an assessment made by the A.O. u/s 147/143(3) of the Income Tax Act, 1961 ('The Act') for the assessment year 2001-02.
2. The grounds raised by the revenue are as under:-
"(i) On the facts and circumstances of the case as well as in law, the ld.
CIT(A) erred in deleting the addition of Rs. 34,45,250/- made by the Assessing Officer by treating the payment of royalty for technical know- how as capital expenditure.
(ii) On the facts and circumstances of the case as well as in law, the ld. CIT(A) erred in directing the Assessing Officer to treat the payment of royalty for technical know-how as revenue expenditure and not appreciating properly that the judgment of the Hon'ble Supreme Court in the case of Southern Switchgear Ltd. vs. CIT 232 ITR 359, relied upon by the Assessing Officer is squarely applicable to the assessee's case." ITA No. 4317/Del/2009
3. In this case, original assessment was completed on 09.02.2004 u/s 143(3) by the A.O. determining total income at Rs. 59,09,449/-. Thereafter, the case was reopened u/s 147, and notice u/s 148 dated 27.03.2008 was issued and served upon the assessee. It was noticed by the A.O. that assessee company had debited Rs. 131.81 lakhs in the profit and loss account on account of royalty paid to a foreign company. The assessee was asked by the A.O. to explain as to why 25% of the royalty paid should not be treated as capital expenditure in the light of the decision of Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. vs. CIT (1997) 232 ITR 359 (SC). In reply thereto, the assessee submitted that the facts of the case of Southern Switch Gear Ltd. vs. CIT (supra) are distinguishable from the assessee's case. In the case of Southern Switchgear Ltd. (supra), payment was made in lump sum over a period of five years for the use of technical know-how and aid to manufacture switchgear for automotives. The agreement clearly specified that the rights given to the assessee pursuant to the agreement will be made available even after the expiry of the agreement. The company was using technical drawings and designs etc in the future for manufacturing even after termination of the agreement. Thus, it was held that right provided in the agreement was of enduring nature benefit and therefore, a portion of it was held to be considered as capital expenditure. In case of the assessee company, facts are clearly different. The assessee is a joint venture of BHEL and Siemens Inc and has been set up to provide renovation and improvement of power plants. The royalty is paid for use of necessary technical 2 of 16 ITA No. 4317/Del/2009 information and provide technical assistance to undertake power plant improvement specific to a project. Royalty paid is dependent on "Net Sales Price" invoiced by the company and is not for providing the benefit of enduring nature to the assessee. But the A.O. has not accepted the assessee's contention in the light of the decision of Hon'ble Apex Court and had taken a view that 25% of royalty paid for technical know how is to be treated as capital expenditure. The A.O.'s order in this regard reads as under:-
"I have considered assessee's reply and the same is not acceptable as the Hon'ble Apex Court has clearly held that 25% of royalty paid for technical know-how to be capital expenditure and hence 25% royalty payment of Rs. 34.45 lakhs is disallowed being capital expenditure."
4. Being aggrieved, the assessee preferred an appeal before the ld. CIT(A).
5. On the issue about the A.O.'s order in considering 25% of the royalty as capital expenditure, the assessee submitted the facts of the case as well their submissions before the ld. CIT(A) as narrated hereinafter.
6. The assessee pointed out difference between the facts of the assessee's case with that of the case of Southern Switch Gear Ltd. vs. CIT (supra) by pointing out as under:-
Point of Facts of Southern Facts of assessee's case difference Switchgear
1. Nature of SSL, a manufacturing The assessee os s aservce business company which requires compamy and is engaged technology for establishing, in the renovation, life starting and operating a extentsion and factory for manufacture of modernization of thermal transformers and powerplants. The switchgears. company is working on the 3 of 16 ITA No. 4317/Del/2009 old power plants whose performance has gradually reduced over the period of time. Each old plant has different working performance parameters conditions and status.
2. Nature of The payment was made in The payment is based on royalty lump sum over a period of the net sales price @ payment five years for obtaining the 1.25% for Siemens and technology to set up a plant 0.25% for BHEL.
to aid to manufacture switchgear for automotives.
3. Terms of a) For SSL, the agreement a) Para 3.1 & 3.2 clearly Agreement clearly specified that the states that the license rights given to the assessee granted by SAG for use of pursuant to the agreement information is non-
are exclusive rights and exclusive and non-
would be available even transferable and the
after the termination of the license does not include agreement. the right to grant sub-
license to any third party.
b) The company could use b) Para 2.3 of the
the technical drawings and agreement clearly states
designs etc. in future for that no information or
manufacturing even after documentation shall be
the termination of the rendered about the design
agreement. and the manufacture of
components and
materials.
4. Enduring As per the terms of the The technology and
Benefit agreement the use of information used is
technical know-how was specific to a particular
available to the company powerplant and that too at
even after the expiry of the a particular point of time
term of the agreement. based on the Residual Life
Hence it was held that it Assessment (RLA) at that
was for providing enduring point of time and for that
benefit to the company to particular powerplant.
exploit the technical know- The findings of RLA
how. cannot be applied to
another powerplant and
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ITA No. 4317/Del/2009
therefore, technology used
for a powerplant cannot
be used for another
powerplant and therefore,
benefit of enduring nature
is derived to assessee.
7. In support of the assessee's company, the assessee relied upon following decisions:-
(i) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC)
(ii) CIT vs. Gujarat Carbon Ltd. (2002) 254 ITR 294 (Guj)
(iii) CIT vs. Jyoti Electric Motors Ltd. (2002) 255 ITR 245 (Guj)
(iv) CIT vs. J.K. Synthetic 176 Taxman 355 = 309 ITR 371 (Del)
8. After considering the assessee's submission and analyzing the aforesaid decisions relied upon by the assessee before the ld. CIT(A), the ld. CIT(A) deleted the disallowance made by the A.O. by treating the payment of royalty to be of revenue in nature.
9. Hence, the department is in appeal before us.
10. The ld. D.R. reiterating the A.O.'s observation has relied upon the decision of the Hon'ble Supreme Court in the case of Southern Switchgear Ltd. vs. CIT (supra) to contend that the total payment made by the assessee towards royalty is to be considered in the nature of capital expenditure inasmuch as there was no embargo on manufacturing even after the expiry of the agreement. He further submitted that the facts of the present case are quite akin to the facts of the Southern Switchgear Ltd. vs. CIT (supra), where Hon'ble Supreme Court had taken a view that 25% of the total payment are to be considered in the nature of 5 of 16 ITA No. 4317/Del/2009 capital expenditure. He, therefore, submitted that the A.O.'s order is to be restored.
11. The ld. counsel for the assessee, Ms. Manju Bhardwaj, has reiterated the facts and submissions as were submitted before the ld. CIT(A). The arguments of the assessee made before the ld. CIT(A) has already been reproduced above and, therefore, they need not to be repeated here again.
12. We have considered the rival contention of both the parties and have carefully gone through the orders of the authorities below. We have carefully perused the various documents and papers placed in the paper book filed by the assessee.
13. Various decisions cited at the Bar have been deliberated upon.
14. The assessee company is in the business of renovation and modernization of old power plants since its incorporation in May, 1997. Till financial year 2000-01, the assessee paid royalty in pursuance of the foreign collaboration agreement entered into between the assessee company, BHEL and Siemens Aktengesellschaft, Germany. The agreement was effective from/ on 1st September, 1997. The assessee company debited Rs. 131.81 lakhs in the profit and loss account on account of royalty paid on the basis of net sales/ turnover. The copy of foreign collaboration agreement between assessee, BHEL and Siemens, Germany effective from 1st September, 1997 is placed at pages 12 to 30 of the paper book filed by the assessee. As per this agreement, the assessee 6 of 16 ITA No. 4317/Del/2009 company is a joint venture of BHEL and Siemens. It is mentioned in the agreement that BHEL is, amongst other things, engaged in the business of manufacturing, development and sale of thermal turbine generators sets, and boilers and their related parts and components besides being internationally recognized as a leading supplier of quality products and services capable of undertaking engineering and construction on turnkey basis as well as Plant Performance Improvement of Power Plant, and the Siemens is, amongst other things, engaged in the similar account of business. BHEL and Siemens have more than two decades of successful cooperation serving the power generation market in India as well as in other markets. The present assessee company has been jointly set up by BHEL and Siemens to provide plant performance improvement in the agreed market. Both BHEL and Siemens had agreed to contribute to the equity capital of assessee's JVC. It was also agreed that Siemens would transfer necessary technical information and provide technical assistance to the assessee JVC. The nature of activity of "Plant Performance Improvement" has been described in clause 1.1 of the agreement as under:-
"1.1 "Plant Performance Improvement"
Such activities carried out at fossil fuel power plants, where either over the years the overall performance of such plants has shown a continuously years declining trend or does not represent the latest state of the art. Specifically, Plant Performance Improvement envisages cost effective and design oriented steps for improving the performance of the plant beyond the values achieved prior to the rendering of such activities such as restoring the lost capacity, efficiency and availability to its original rating or beyond or capacity upgradation and/ or extending the life of the plant based on in-depth examinations, residual life assessment 7 of 16 ITA No. 4317/Del/2009 studies and performance evaluation test. Plant Performance Improvement includes supply of parts and components according to original and/or new designs, the erection and commissioning as well as engineering services connected with such activities." 14.1 The scope of technical information agreed to be transferred by Siemens to assessee JVC is described in clause 1.2 of the agreement as under:-
"1.2 "Information" : technical information pertaining to Plant Performance Improvement which KWU FS to Siemens uses for the business of Plant Performance Improvement, whether oral or in recorded form, whether patented or not, which are available at the department KWU FS of the KWU-Group of Siemens and which Siemens has the right and the power to dispose of."
14.2 The nature of the services are Technology Transfer to be rendered by Siemens to JVC and grant of license, which are detailed in clause 2 and 3 of the agreement. In clause 2, it is provided that Siemens shall provide transmission of information and transmission of documentation to JVC. It is also provided therein that Siemens shall train joint venture company's experts in their facilities in Germany and at sites in order to familiarise such experts with the information and with the know-how incorporated in the documentation. The Siemens shall also delegate its experts to the facilities of JVC in order to asset the personnel of JVC in activities for plant performance improvement upon request of JVC, and Siemens is also prepared to provide further technical assistance against reasonable remunerations to be paid by JVC and upon request of JVC. It was also agreed that Siemens shall grant to JVC the non-exclusive, non-transferable license to use information and documentation supplied under the agreement including the related patents, if any, for carrying out on plant performance 8 of 16 ITA No. 4317/Del/2009 improvement in the agreed market and to sale plant performance improvement in the agreed market. The export of plant performance improvement to other countries other than the agreed marked may also be taken place on case by case based upon the prior written approval of Siemens. Clause 3.2 provides that the license granted under 3.1 shall not include the right to grant sub-license to any third party, and no rights are granted to JVC under the said agreement concerning the trade name and trade markets of Siemens. Clause 3.3 provides that JVC shall inform Siemens of all improvements of Plant Performance Improvement made by JVC under the agreement and shall grant to Siemens and their majority control subsidiaries a non-exclusive, non-transferable and royalty free license of such improvements and related patents thereon, if any, including a right to grant sub- license thereon. The JVC was allowed to use any its leaflets, offers and other records designation equivalent to the text "Carried out in India by Power Plant Performance Improvement Ltd. under license of Siemens and BHEL". It was further provided in the agreement that upon termination of this agreement JVC shall forthwith cease using any name, marketing or other term or designation indicating that plant performance improvement carried out by JVC are made according to Siemens information, unless otherwise agreed upon by the parties concerned in writing.
14.3 Clause 3.4.3 provides that JVC shall maintain the quality of Plant Performance Improvement carried out by JVC as required by Siemens and 9 of 16 ITA No. 4317/Del/2009 according to the information provided by Siemens and shall only deviate from such information with the prior written consent of Siemens. 14.4 Clause 3.4.4 provides that Siemens shall have the right to inspect Plant Performance Improvement carried out by JVC at JVC's facilities and/or at site. JVC shall take immediate action to remedy any quality problems. 14.5 Clause 3.4.5 provides that Siemens reserves the right to revoke its consent provided for under clause 3.4.1 above, if JVC fails to comply with any provision of clauses 3.4.3 and 3.4.4 above.
14.6 In consideration of the supply of information and documentation under the agreement and in consideration of the right granted by Siemens, the joint venture company shall paid to Siemens royalty at 1.25% of the net sale price but in no event exceeding Rs. 2.5 crores in a year during the first four years, and at the rate of 1% of the net sale price but in no event exceeding Rs. 3 crores in a year after the first four years. Clause 7 of the agreement provides that for the term of the agreement and five years thereafter JVC shall keep confidential all information and documentation furnished by Siemens under the agreement subject to the certain exceptions about any information of public knowledge or any information received from third party without any secrecy information. The agreement was terminable forthwith if other party fails to perform his obligation provide under the agreement.
10 of 16 ITA No. 4317/Del/2009 14.7 After expiration of the agreement, JVC will be free to carry out plant performance improvement in the agreed market without payment of any remuneration and fees whatsoever using the information and patent of Siemens which are furnished/ granted under the agreement.
15. In the light of the aforesaid conditions of the agreement, we are required to decide this issue whether payment of royalty under the agreement to the extent of 25% thereof is of capital in nature as so held by the A.O. It is well known that each case decided by the Court time and again on this issue are turn on its own conspectus of facts. It is, thus, useful to note important aspects of the foreign collaboration agreement entered into between assessee, BHEL and Siemens, which is relevant to decide the issue.
16. The Hon'ble jurisdictional High Court in the case of CIT vs. J.K. Synthetic Ltd. 309 ITR 371 (Delhi) has elaborately discussed the entire case laws on the subject.
17. After analyzing various decisions, the Hon'ble Delhi High Court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. These broad principles laid down by the Hon'ble Delhi High Court in the aforesaid case has been taken note of by the same Court in the decision rendered in the case of CIT vs. Sharda Motors Industries Ltd. (2009) 309 ITR 109 (Delhi), which shall be referred to little later herein.
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18. The aforesaid decision in the case of ld. CIT(A) vs. J.K. Synthetic (supra) were later considered in the recent judgment of Hon'ble Delhi High Court in the case of CIT vs. Sharda Motors Industrial Ltd. (2009) 319 ITR 109 (Delhi) and was also considered in the decision dated 9th October, 2009 in case of Climate Systems India Ltd. vs. CIT (2009) 319 ITR 113.
19. After making reference to the decision of Hon'ble Delhi High Court in the case of CIT vs. J.K. Synthetic Ltd. (supra) and decision of Hon'ble Supreme Court in the case of Southern Switchgear Ltd. vs. CIT (supra), the Hon'ble High Court in the case of CIT vs. Sharda Motors Industrial Ltd. (2009) 319 ITR 109 (Delhi) has held and observed as under:-
"3. In so far as lump sum payment against transfer of technical know- how provided by the Korean Company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The Commissioner of Income-tax (Appeals) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler.
4. We are of the opinion that this finding of the Commissioner of Income-tax (Appeals), as approved by the Income-tax Appellate Tribunal, is a finding of the fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year.
5. In CIT vs. J.K. Synthetics Ltd. (2009) 309 ITR 371 (Delhi), after elaborately discussing the entire case law on the subject, the court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principles enumerated therein reads as under :
"(v) expenditure incurred for grant of licence which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as 12 of 16 ITA No. 4317/Del/2009 revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:
(a) the tenure of the license,
(b) the right, if any, in the licensee to create further rights in favour of third parties,
(c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licensor,
(d) whether the licence transfers the 'fruits of research' of the licensor, 'once for all'.
(e) Whether on expiry of the licence the licencee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which 'access' to knowledge was obtained during the subsistence of the licence.
(f) Whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;"
6. In the present case, on facts, it was, inter alia, found as follows:
"(a) in that case the grant of technical aid was for setting up of the factory combined with the right to sell products while in our case our company is already producing exhaust systems and the technology agreement was not for setting up of the factory.
(b) in the cited case the foreign company who gave the technology agreed not to manufacture similar products in India while there is no such regulation in our agreement.
(c) In the cited case the technical knowledge obtained was held to give an advantage of enduring nature to the assessee-company and as it had the right to continue to manufacture the product even after termination of the agreement. While in our case the design patent applies to the foreign company and we are only licensed to produce the goods for Hyundai Car and we cannot continue to produce the goods if the agreement is terminated. This itself is a major difference between the case cited by your honour and the facts of our case."
7. On the facts and after applying the aforesaid principle, it becomes crystal clear that the expenditure is of revenue nature.
8. Ld. counsel for the revenue submits that the Tribunal has not considered the effect of the judgment of the Supreme Court in Southern Switchgears ltd. vs. CIT (1998) 232 ITR 359, inasmuch as in that case the 13 of 16 ITA No. 4317/Del/2009 payment of royalty was treated as capital expenditure. However, what is glossed over is that under the terms of the agreement in that case, the assessee company therein had agreed to pay the foreign company lump sum of royalty and it was in these circumstances the same was treated as capital expenditure and the Tribunal had disallowed 25 per cent thereof. In the present case, as pointed out above, royalty is to be paid on the quantity of the goods produced, calculating per piece of the said goods produced. Therefore, the Tribunal rightly held that the aforesaid judgment not applicable to the facts of the present case."
20. The aforesaid decision of Delhi High Court in the case of CIT vs. Sharda Motors Industrial Ltd. (supra) has been followed by the same High Court in the later decision in the case of Climate Systems India Ltd. vs. CIT (2009) 319 ITR 113 (Delhi) where it has been held as under:-
(extracted from head note) Held, allowing the appeal, that under the agreement, payments were to be made by the assessee in two parts : a lump sum fee for transfer of technology (which the assessee had admitted as being of capital nature) and royalty payment in consideration of providing technology services. The payment of royalty depended on the quantum of domestic as well as export sales which would decrease or increase every year depending upon the decrease or increase in the sales. This payment was not because of "transfer" of technology, but for providing "technical services". In such circumstances, the payment of royalty, which was a continuous process, should have been treated as revenue expenditure."
21. Applying the aforesaid principle culled out by the Hon'ble Delhi High Court to the facts of the present case, the position which is emerging would be that the amount of royalty paid by the assessee on turnover basis for use of technical information and assistance is invariably on revenue field.
22. The present case is not the case where any lump sum payment in made against transfer of technical know-how provided by Siemens. The royalty payment is running royalty payable every year, which depend upon the turnover 14 of 16 ITA No. 4317/Del/2009 of the products produced by the assessee company. As per clause 3 of the agreement, M/s. Siemens has granted to the assessee the non-exclusive and non-
transferable license to use information and documentation supplied by Siemens for carrying out all activities of plant performance improvement in the agreed market and to sale plant performance improvement in the agreed market or to some other countries as may be agreed to between the parties. In the agreement it is also mentioned that the aforesaid license granted to the assessee company to use information and documentation for carrying out plant performance improvement and to sale plant performance improvement, in the agreed market, shall not include the right to grant sub-license to any third party. The assessee was under obligation to keep confidential of information and documentation furnished by Siemens. The assessee was only allowed to carry out plant performance improvement in the agreed market after expiration of the agreement by using the information and patents already furnished and granted to the assessee. In other words, the assessee was allowed to use the information and documentation in respect of which, a non-exclusive and non-transferable license was granted by the Siemens during the term of the agreement. Therefore, this right given to the assessee to carry out plant performance agreement in the agreed market after termination of the agreement cannot be sufficient basis to hold that non-exclusive and non-transferable license to use information and documentation supplied by Siemens were on capital field. Therefore, the present case is distinguishable on facts from the case of Southern Switchgear Ltd. vs. CIT 15 of 16 ITA No. 4317/Del/2009 (supra) where under the terms of the agreement, the assessee company therein had agreed to pay the foreign company lump sum of royalty.
23. Therefore, in the light of the decision of Hon'ble Delhi High Court in the case of J.K. Synthetic (supra), CIT vs. Sharda Motors Industrial Ltd. (supra) and Climate Systems India Ltd. vs. CIT (supra), where the facts of the case are identical to the facts of the present case before us, we uphold the order of ld. CIT(A) in holding that the payment of royalty based on the turnover of every year at certain percentage on account of providing technical know-how informations and documentations is of revenue in character. Thus, the grounds raised by the revenue are rejected.
24. In the result, the appeal filed by the revenue is dismissed.
25. This decision is pronounced in the open court on 12th February, 2010.
Sd/- Sd/-
(SHAMIM YAHYA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 12th February, 2010.
Mamta
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
By Order
Deputy Registrar
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