Cit (Delhi-I) vs M/S. Goodyear India Limited
2000 Latest Caselaw 320 Del

ORDER

D.K. Jain, J.

1. By this petition under Section 256(2) of the Income-Tax Act, 1961 (for short 'the Act') the Revenue seeks a direction to the Income-Tax Appellate Tribunal, Delhi Benches, (for short 'the Tribunal') to state the case and refer the following questions, said to be of law, for the opinion of this Court.

"Whether on the facts and in the circumstances of the case the ITAT is justified in law :

1. In holding that the sum of Rs. 55,15,730/- paid by the assessee to Goodyear Tire & Rubber Co.,USA on account of technical know how fee to produce extra large OTR tyres was of revenue in nature?

2. In holding that the assessee was entitled to deduct a sum of Rs.1,31,81,180/- from the closing stock on account of excise duty paid thereon despite the Supreme Court's decision in the case of Mcdowell & Co. (154 ITR 148) wherein the Apex Court had held that the excise duty is a part of the turnover.

3. In holding that the amount of Rs. 2,52,55,428/- written back by the assessee in its books of account on account of excise duty liability was not covered under the provisions of Section 41(1)?

2. The petition pertains to the assessment year 1984-85, for which the relevant previous year ended on 31st March, 1983. The assessee is a public limited company engaged in the business of manufacture and sale of automotive tyres and tubes etc. During the course of assessment proceedings for the relevant assessment year, the Assessing Officer noticed that the assessee had claimed as business expenditure a sum of Rs. 55,15,730/- paid to M/s. Goodyear Tire & Rubber Company, USA. The said amount was paid vide memorandum of agreement dated 9th August, 1983 as consideration for M/s. Goodyear Tire & Rubber Company, Akron, Ohio, USA agreeing to provide to the assessee technical know how for the manufacture of extra large (ultra large) OTR tyres.

3. The Assessing Officer felt that since under the said agreement the assessee was to get designs and drawings for the manufacture of tire making machines, all the auxiliary equipment and technical data for manufacture of extra large tyres, it had acquired a new asset for the production of a new product and, therefore, the payment to foreign collaborator had to be regarded as capital in nature. The view taken by the Assessing Officer was affirmed by the Commissioner of Income-tax (Appeals). However, in further appeal to the Tribunal, while holding that the said expenditure had to be regarded as revenue in nature, the Tribunal observed as follows :

"Now testing the case on the touchstone of the guidelines given by the Apex Court we find that the agreement was not made for the manufacturing of an entirely new product. The consideration was paid for the betterment of the product in question. Assessee only enlarged the range of existing product. Admittedly, assessee was manufacturing OTR tyres. By acquiring know how assessee entered into the production of extra large OTR tyres.

The inclusion of the range of extra large OTR tyres constituted the profit making apparatus of the assessee company and the expenditure was laid out as a part of the process of profit earning. It was an outlay of business in order to carry it on and to earn a profit. It facilitated the trading operations. It reflected its impact on the profitability of the business. Having regard to the conspectus of the facts, we are of the opinion that the expenditure in question was of the nature of revenue expenditure."

4. The next issue relates to the addition of Rs.1,13,81,810/- under Section 43-B of the Act in respect of the excise duty paid and embedded in the valuation of closing stock as on 31st December, 1983. The assessee furnished before the Assessing Officer details of the unpaid statutory liabilities to the tune of Rs. 3,12,63,796/-. Out of the said amount, a sum of Rs.1,98,81,986/- was added in the computation of the total income by the assessee itself. However, in respect of the balance amount of Rs.1,13,81,810/-, the assessee claimed that there was change in the method of valuation of closing stock regarding the finished goods and in consonance with such change, the assessee had reduced the value of the closing stock by the said amount. The explanation furnished was not found convincing by the Assessing officer, who added the said amount to the total income by taking recourse to the provisions of Section 43-B. The CIT (Appeals) endorsed the view taken by the Assessing Officer. The Tribunal, however, accepted the plea of the assessee that the issue stood concluded in its favour by a decision of the Special Bench of the Tribunal in the case of Indian Communication Network Private Limited Vs. IAC. Accordingly, following the said decision, the Tribunal directed the Assessing Officer to deduct the said amount from the value of the closing stock with the observation that the opening stock for the subsequent assessment Year will also to be reduced by the same figure.

5. The third issue arises out of the Revenue's appeal before the Tribunal. In its profit and loss account the assessee had written back the excise duty liability to the extent of Rs. 2,52,55,428/-. The said amount represented post-manufacturing excise duty (PME) provided in the earlier years. Though the assessee had itself written back the said amount and had in fact included the same in its total income but vide its letter attached with the return it was contended that since the liability had not yet ceased, the amount may not be considered as income for this assessment year. It was submitted that the matter was still pending before the Punjab & Haryana High Court and, therefore, the demand was still alive.

6. The Assessing Officer, however, took the view that in the light of the judgment of the Supreme Court in the case of M/s.Bombay Tyres International Limited all controversies on the issue had come to an end and, therefore, the liability had ceased to exist, which was rightly written off by the assessee. He accordingly brought the said amount to tax under Section 41(1) of the Act.

7. The appeal to the CIT (Appeals), the Commissioner took the view that the liability will cease to exist and become the income of the assessee only in the year when a refund for the said amount is granted by the Assistant Collector. He accordingly deleted the said addition. The view taken by the Commissioner was affirmed by the Tribunal.

8. Revenue's application under Section 256(1) of the Act having been dismissed the present petition has been filed.

9. We have heard Mr. R.D. Jolly, learned senior standing counsel for the Revenue and Mr. S.K. Aggarwal, learned counsel for the assessee.

10. It is submitted by Mr. Jolly that the question whether an expenditure is capital or revenue in nature is always a question of law and, further, since the issue raised in the first question. Pertains to interpretation of various clauses of the agreement between the assessee and the American Company, the proposed first question is a question of law. Though there is no quarrel with the abstract proposition of law, as canvassed by learned counsel for the Revenue, but having regard to the facts found by the Tribunal in the instant case, we are of the view that the proposed question No.1 is not fit for reference.

11. In a recent decision in Jonas Woodhead and Sons (India) Limited Vs. Commissioner of Income-Tax (1997) 224 ITR 342, the Apex Court has laid down the test to determine the question when an expenditure can be regarded as a capital or revenue expenditure, thus :

"The question whether a particular payment made by an assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know how which was for the betterment of the product in question which was already being produced; whether the improvisation made, is part and parcel of the existing business or a new business was set up with the so called technical know how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made."

12. It is, therefore now well settled that where an expenditure is incurred for the expansion/extension or for the betterment of the product which was already being produced, and/or the improvisation made is part and parcel of the existing business,it is allowable as revenue expenditure. Applying the broad tests laid down by the Supreme Court, the expenditure incurred by the assessee for acquiring technical know how from American company relating to manufacture of extra wide OTR tyres has to be held to be revenue expenditure. It is evident from the afore extracted portion of its order, while accepting the contention of the assessee that the assessee had entered into an agreement with the American Company for enlarging the range of its existing products and had only acquired the right to use technical knowledge to manufacture new product in the same line of business, the Tribunal has, inter alia, recorded the findings that the agreement was not made for manufacturing of an entirely new product; the consideration was paid for the betterment of the product in question and the assessee had only enlarged the range of its existing products and the expenditure was an outlay of business in order to carry it on and to earn better profits. These are pure findings of fact, which have not been specifically challenged by the Revenue in the proposed question. In our opinion, in the light of the facts found by the Tribunal, which have attained finality, the Tribunal was justified in holding that the expenditure incurred by the assessee was revenue in nature. On the facts found, it was an inescapable conclusion.

13. Insofar as the second question is concerned, it has been fairly conceded by Mr. Aggarwal, learned counsel for the assessee, that it being a question of law, the Tribunal may be directed to refer the same to this Court.

14. Coming to the third question, it is stated at the Bar by learned Counsel for the assessee that the amount in question has since been included in the total income of the assessee for the assessment year 1999-2000. In support of the statement, a copy of the return for the said assessment year has also been placed on record.

15. From the summary position of provisions of excise duty on PME as per the books of account of the assessee, forming part of the said return, it appears that a sum of Rs. 2,52,55,000/- has been reduced from the total provision credited as amount written back during the year 1983. In view of the stated factual position, answer to proposed question No.3 would be of academic interest only and, therefore, we deem it unnecessary to call for reference on the question.

16. For the foregoing reasons, we decline to call for reference on proposed questions No.1 & 3 but direct the Tribunal to state the case and refer the following question for the opinion of this Court :

"Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the assessee was entitled to deduct the sum of Rs.1,13,81,810/- From the value of the closing stock on account of Excise duty paid thereon?"

17. The petition stands disposed of in the above terms with no order as to costs.