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1.2. That on the facts and circumstances of the case the CIT(A) erred in alleging that relevant Articles of Technical Collaboration Agreement (TCA) between appellant and HMCL, relating to payment of technical know-how fee and royalty to HMCL are void, in terms of Contract Act and permission granted by Reserve Bank of India.

1.3. That on the facts and circumstances of the case the CIT(A) erred in not appreciating that since appellant by virtue of TCA merely acquired a right to use the technical information and know-how, payment therefore in the nature of lump sum fee and royalty is revenue in nature and deductible business expenditure.

1.4. Without prejudice, that on the facts and circumstances of the case the CIT(A) erred in not directing allowance of depreciation on the amount of lump sum fee and royalty, treating the same as capital expenditure.

The facts of the ease are that in the returns of income filed for both the assessment years, the assessee had claimed deductions of Rs. 28,27,00,000/-and Rs.29,20,07,000/- being lump sum amount of "Technical Guidance Fee" paid to M/s. HMCL, Japan for the assessment years 2001-02 & 2002-03 under a Technical Collaboration Agreement (In short 'the TCA'). In addition, the assessee also claimed deductions of Rs. 12,38,27,000/- and Rs. 15,60,93,000/- being royalty paid to the foreign company under the agreement for the assessment years 2001-02 & 2002-03 respectively. During the course of assessment proceedings, the AO called upon the assessee to justify its claim as revenue expenditure. The assessee submitted that it had entered into TCA with M/s. HMCL, Japan, under which the assessee was granted an indivisible, non-transferable and exclusive right and license to use the know-how and technical information provided by M/s. HMCL. In consideration of right and license granted, the assessee company was required to pay a lump sum fee of US 30.5 million Dollars payable in 5 equal instalments beginning from the 3rd year after commencement of commercial production. The assessee furnished copy of the TCA. Relying on the two judgments of Hon'ble Supreme Court in the case's of CIT v. Ciba India Limited 69 ITR 692 and Alembic Chemical Wroks Co. Ltd. v. CIT 177 ITR 377, the assessee contended that the impugned expenditure was allowable as revenue expenditure. Similarly, the assessee had explained that the assessee was also required to pay Royalty @ 4% of the net sale price of the manufactured products sold in India under TCA for a period 7 years. The assessee claimed that such payments were also in the nature of Revenue expenditure and hence allowable. However, the AO referred to the various clauses of TCA and observed that without such agreement, the assessee could not even start its business, let alone run it. He observed that the agreement was crucial for setting up and starting the business of the assessee and the technical know-how provided for the foreign collaborators included inputs for setting up its plant and manufacturing facilities. The restrictions placed on the use of license, technical know how, trademark etc. were simply by way of abundant precautions and legality as the affairs of the assessee-company were being supervised and monitored by the parent company i.e. HMCL, Japan. Thus, the AO observed that by incurring expenditure in the nature of technical guidance fee, the assessee had obtained an advantage of enduring benefit and, therefore, such expenditure was capital in nature. He also relied on the two judgments of Hon'ble Supreme Court in the cases of CIT v. Ciba of India Ltd and CIT v. Warner Hindustan Limited (1998) 9 SCC 534 and the judgment of Allahabad High Court in the case of Ram Kumar Pharmaceutical Works v. CIT . He further observed that the expenditure incurred on payment of Royalty was also for acquisition of technical know-how, license etc. and, therefore, by incurring such expenditure, the assessee has obtained benefit of enduring nature. In this view of the matter, the AO disallowed both the Royalty payments and lump sum technical guidance fee being capital expenditure for both the assessment years.

9. Aggrieved, the assessee filed appeals against the assessment orders before the CIT(A) and submitted detailed submissions vide letter dated 10.08.2005. The Ld. CIT(A) called for further clarifications on the points noted on page 19 of the impugned order for the assessment year 2002-2003. The asscsscc furnished this information. It was submitted before the CITA) that both the lump-sum technical fee and Royalty were being paid by the assessee to HMCL under the Technical Collaboration Agreement dated 21.5.1996 where the assessee was granted an indivisible, non-transferable and exclusive right and license to use know-how and technical information for manufacture of automobiles etc. In consideration, the assessee was to pay a sum of US$ 30.5 million payable in 5 equal instalments. Similarly, Royalty @ 4% on the net sales (both internal and export sales) was payable by the assessee for the technical information and know-how etc. supplied by HMCL, Japan for a period of 7 years. It was submitted that the business of the assessee was a joint venture between HMCL & Siel Limited, an Indian Company where HMCL was to have 60% of share holding in assessee company and 40% was to be held by Indian partner - Siel Limited. However, share-holding had changed in the various years and in the year 2003, the shareholding by HMCL aggregated to 99.9% and by Siel Limited to 0.1 %. It was also submitted that taking into account the desired level of technological dynamism in Indian Industry, the Govt. of India had encouraged acquisition of foreign technology, import of technology and development of imported know-how as well as upgradation of indigenous technology, RBI accorded approval to all Industries for foreign technology collaboration agreements subject to the lump sum payment not exceeding US$ 2 million. Similar restrictions were placed on Royalty payments. The said policy was liberalized subsequently. The fact that lump-sum technical guidance fees and Royalty were paid to holding companies did not make any difference so far as the claim of the assessee was concerned because considering the commercial expediency of such payments, the same had been recognized by the Indian Government. It was submitted that the Govt. approval has been given under the governing statute e.g. Foreign Exchange Regulation Act or by a Department of Industries by Ministry of Government of India under a policy guideline because the outflow of precious foreign exchange is a matter of greater concern to the Government. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of LIC v. Escorts Ltd , where it was observed that Reserve Bank of India was the authority under Section 29(1) of the Foreign Exchange Regulation Act to grant permission for payments to foreign parties. It was also submitted that the mere fact that holding company i.e. IIMCL held 99.9% shares of the assessee company did not mean that the payment was made to self because both HMCL and Siel India were two distinct and separate legal entities. It was also submitted that if that were so, then the entire profit of the assessee should have been treated as income of the holding company and taxed in its hands in India. It was also argued that at the most, disallowance, if any, out of payments made to related party could be made under Section 40A(2)(b), provided the payments are found as excessive or unreasonable, having regard to fair market value of the goods/services. But in this case, such situation did not arise because the agreement was approved by the Govt. of India. Relying on the judgment of Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd 118 ITR 230, it was submitted that in a case where approval of remuneration to a son of a Director of the assessee was approved by the Company Law Board, no disallowance Under Section 40A(2) of the Act could be made. Reliance was also placed on the decision of the ITAT, Pune Bench in the case of Kinetic Honda Motor Ltd. v. CIT 77 ITD 393 where by referring to CBDT's Circular No. 6 P dated 8.7.1968 in the context of Section 40A(2)(b), the Tribunal had held that if payments were approved by one wing of the Government, there was no question of being treated as excessive and unreasonable having regard to the legitimate business needs. In this case also, there was change in the pattern of share-holding of a foreign company which had arisen from 28.56% to 51%. But the agreement was approved by the Govt. of India. It was held that there was no justification in making any disallowance once the agreement was approved by the Ministry of Industries. Reliance was also placed on the decision of ITAT, Bombay Bench in the case of Bombay-Burmah Trading Corporation Ltd v. DCIT in ITA No. 3518/Mum./2000. It was also submitted that the judgment of Supreme Court in the case of Jonas Wood head and Sons Indian Limited v. CIT 224 ITR 342 were distinguished on facts on the ground that in the present case, the lump-sum fee/Royalty paid by the assessee under the TCA was in lieu of use of know-how, designs for the manufacture, assembly testing or inspection of the cars provided by HMCL. Foreign collaborator was not obliged to provide technical assistance for the setting up of manufacturing facilities of the assessee. The assessee had qualified engineers, technicians and other personnel, some of whom were trained by IIMCL for the purpose of setting of its plant. The expenses of such personnel were capitalized by the assessee. It was also submitted that there were restrictions imposed on the assessee about the use of the technical know-how provided by the foreign collaborators within 90 days from the date of expiration or termination of TCA. Thus, the assessee did not enjoy exclusive right for unlimited period about the use of technical know-how provided by the foreign collaborators.

11. The Ld. counsel for the assessee reiterated the submissions made before the authorities below. He drew our attention to pages 1 to 24 of the paper book which is a copy of written submissions filed before the CIT(A). He further referred to pages 96 to 123 of the paper book which is a copy of Technical Collaboration Agreement between the assessee and the HMCL. He referred to page 100 of the paper book where the assessee had entered into a TCA on 21.05.1996 with M/s/HMCL as per which the assessee had agreed to obtain license and technical assistance from M/s. HMCL for the manufacture and sale of certain automobiles. He referred to page 102 of the paper book, which defines the term "know-how" as to mean all secret and technical information, including but not limited to drawings, standards, specifications, material lists, process manuals and directions maps, which directly related to the products or the license parts themselves or was necessary for the manufacture of the products or the licensed parts. Clause (7) of the said agreement defines the term "Technical Information" as to mean the know-how and technical information, such as service materials and Japanese Industrial Standard, which directly related to the products or the licensed parts or was necessary for the manufacture of the products or the licensed parts. Article-2 of the said agreement provided that the assessee was granted to licensee an indivisible, non-transferable and exclusive right and license of manufacture, use and sell the products and the licensed parts within the territory under the Intellectual Property Rights and by using know-how, and the technical information, provided that the licensee may grant sub-licenses with a prior written consent of licensor. As per Article 7.1. of the TCA, the know-how and the other non-public technical or business information of licensor of the M/s. HMCL shall remain the sole and exclusive property of licensor and the same shall be held in trust and confidence for licensor by the assessee. Thus, he submitted that the assessee was merely licensee and not owner of the technical know-how and the business information. He further referred to Article 8 on page 107 of the paper book where the assessee was restricted to use the said technical know-how only for the manufacture of its products and the assessee was precluded from allowing the use of such information by any third party. The assessee was directly prohibited from sharing such information with anybody else. He then referred to Article 14 of the agreement on page 111 of the paper book which provided the consideration in the form of lump-sum fee and royally payable to HMCL. He further referred to Clause 14.3 on page 112 of the paper book which clearly provided that all payments and remittance by licensee will be subject to tax deduction at source/levy of cess. Thus, he submitted that the observations made by the CIT(A) in the impugned orders that there was no clause for payment of tax in respect of lump-sum guidance fee was factually incorrect. He also submitted that the statement too show that the assessee had deducted tax while making payment of royalty and lump-sum fee to HMCL. These have been placed at pages 438 to 440 of the paper book. He submitted that various clauses of the agreement referred to above show that the assessee had limited right to use and access of knowledge and technical information for manufacture of its own products. The assessee was not owner of the such know-how and had limited excess for manufacture of a limited use for manufacture of its own car. He further referred to Article 16 of the TCA which provided use of trade marks of HMCL. As per agreement, the assessee was prohibited from use or permitting any third party, the trade marks licensed hereunder in the servicing, sale or other disposition of any goods other than the products and the parts for repair or replacement. The agreement further pointed out that on termination, the shall discontinue the use of trademarks licensed by licensor. Article 19 on page 115 of the paper book provided that agreement was effective for a period of 10 years from the date of agreement or 7 years from the date of commencement of commercial production and shall thereafter be renewed subject to the prevailing laws. He referred to page 117 of the paper book where the assessee was required to discontinue the manufacture, sale and other disposition of the products and the parts, use of the Intellectual Property Rights, Technical Information licensed or furnished by the licensor under this agreement. The assessee was required to return all relevant documents and information belonging to HMCL. Article 23 of the agreement further prohibited the assessee from assigning any rights, directly or indirectly to any other party without prior written consent of the other parties. Thus, he submitted that expenditure incurred by the assessee by way of payment of lump-sum fee and technical guidance and royalty for the right to use know-how and technical information for manufacture of automobiles was revenue expenditure as the assessee had not acquired ownership right in the technology/information received and had only limited right to use the same. In support of such contention, the Ld. counsel relied upon the following judgments: