Delhi High Court
The Commissioner Of Income Tax vs Denso India Pvt. Ltd on 8 October, 2010
Author: A.K.Sikri
Reportable
* IN THE HIGH COURT OF DELHI AT NEW DELHI
{ ITA 16 of 2008,ITAs 1011/2007, 107/2009, 293/2010, 840/2010
& 839/2010}
% Judgment Reserved on:14th September, 2010
Judgment Pronounced on : 08th October, 2010
(1) ITA 16 OF 2008
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
THROUGH: Ms.Prem Lata Bansal,
Advocate
VERSUS
DENSO INDIA PVT. LTD . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
(2) ITA 1011 OF 2007
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
THROUGH: Ms.Prem Lata Bansal,
Advocate.
VERSUS
M/S BHARAT SEATS LTD. . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
(3) ITA 107 OF 2009
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
THROUGH: Ms.Prem Lata Bansal,
Advocate.
VERSUS
M/S BHARAT SEATS LTD. . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
(4) ITA 293 OF 2010
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
ITAs NO. 16 of 2008, 1011/2007,839/2010,840/2010,293/2010,107/2009 Page 1 of 19
THROUGH: Ms.Prem Lata Bansal,
Advocate.
VERSUS
M/S BHARAT SEATS LTD. . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
(5) ITA 840 OF 2010
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
THROUGH: Ms.Prem Lata Bansal,
Advocate.
VERSUS
M/S BHARAT SEATS LTD. . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
(6) ITA 839 OF 2010
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
THROUGH: Ms.Prem Lata Bansal,
Advocate.
VERSUS
M/S BHARAT SEATS LTD. . . .RESPONDENT
THROUGH: Mr. M.S. Syali, Sr. Advocate
with Mr. Satyen Sethi, Ms.
Mahua Kalra, Mr. Sumit K.
Singh and Ms. Tunsal Syali,
Advocates.
CORAM:-
THE HON'BLE MR. JUSTICE A.K. SIKRI
THE HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. The issues involved in all these appeals are of identical nature.
The Counsel for the parties are agreed that the issues involved in ITA
16/2008 should be considered and the legal position in that case would
govern the other appeals as well.
2. The respondent assessee is engaged in manufacturing and sale of
auto electrical products such as Starters, Alternators, Wiper Motors, CDI,
Magnetos etc., for four wheelers and two wheelers. The assessee
company is promoted primarily by two Japanese Companies which are
M/s Denso Corporation, Japan and M/s Sumitomo Corporation, Japan.
These two companies had share holding 47.93% and 10.27%
respectively. Even M/s Sumitomo Corporation, Japan is an associate
company of M/s Denso Corporation, Japan. Thus, these two companies
have an overall share holding of 58.20% which is sufficient to exercise
overall management and control over the assessee company. However,
that is not a relevant consideration for the issue involved in the instant
appeal.
3. Here, we are concerned with the assessment year 2001-02. For
this year, the respondent assessee had filed return declaring income at
` 14,77,51,457/-. During the assessment proceedings, the Assessing
Officer noticed that the assessee had deposited ` 371.60 lacs on
technical know-how fees. In addition, the assessee had also made
payment of ` 77,03,487/- for the knowhow taken as part of the plant
and machinery. The break-up of the entire know how fee paid is as
under:-
"S.No. Nature of payment Amount Remarks
1. Acquisition of know how 3,08,14,000 Being 80% of total know
how fees payable for
acquisition of know how.
2. Supply of technology 63,46,000 for supply of technology
for improvement of the
existing products.
TOTAL KNOW HOW FEE DEBITED 3,71,60,000
TO P & L
3. Know how taken as part of 77,03,487 Being 20% of the total
know how payment
taken as part of the
plant and machinery but
no depreciation
charged"
The assessee had treated payment of ` 3,08,14,000 made to M/s
Denso Corporation, Japan in acquisition of know-how as capital
expenditure. On this amount, depreciation under Section 32 was
claimed. Likewise, the payment of ` 77,03,487/- was treated by the
assessee as capital expenditure . However, due to oversight, no claim
for depreciation under Section 32 of the Income-Tax Act was made in
this behalf.
4. Be that as it may, the dispute relates to the payment of `
63,46,000/- which was paid by the assessee to M/s Denso Corporation,
Japan, for supply of technology and improvement of the existing
products. The assessee has claimed that this expense was revenue in
nature and was allowable as business expenditure in its entirety during
the assessment year in question. The Assessing Officer, however,
treated this expenditure as capital in nature. He, therefore, disallowed
the same as revenue expenditure and was of the view that only
depreciation thereupon under Section 32 of the Act shall be allowed.
The assessee challenged this disallowance by the Assessing Officer by
filing an appeal before the Commissioner of Income Tax (Appeal) but
was unsuccessful in so far as this issue is concerned. Vide orders dated
30th August, 2004, the CIT (A) observed that drawing and designing of
technology was part of intangible assets. The assessee himself had
admitted that the technical information in the form of drawing and
designing was obtained to improve the quality of manufactured
products. Therefore, the said expenditure was to be treated as capital
expenditure eligible for depreciation in view of the amended provisions
of Section 32 with effect from 1st April, 1998. In further appeal to the
ITAT, the assessee has emerged victorious. Its contention has been
accepted by the Tribunal, who has held vide impugned decision dated
19th January, 2007 that the aforesaid amount of ` 63,46,000/- paid by
the assessee for supply of technology for improvement of products is to
be allowed as revenue expenditure. ITAT has observed that the design
acquired by the assessee was not in relation to setting-up of the plant or
machinery but related to the process of manufacturing and as such the
assessee did not obtain any asset of enduring nature. Know how
acquired by the assessee explained only the production process and it
did not result in the acquisition of any capital asset. Provisions of
Section 32 amended with effect from 1st April, 1998 cannot be extended
to treat the revenue expenditure as capital expenditure eligible for
depreciation. The instant appeal filed by the revenue was admitted on
6.9.2010 on the following substantial question of law:-
"A. Whether the ITAT was justified in law in
holding that the amount of ` 63,46,000 paid by
the assessee for acquiring technical know-how
was allowable as revenue expenditure?
B. Whether expenditure incurred by the
assessee for acquisition of technical know-how
was a revenue expenditure or a capital
expenditure eligible for depreciation under
Section 32 of the Act?"
5. As the counsel for the parties were ready to argue the matter
finally at a short date, the case was listed for arguments on 14 th
September, 2010 on which date the arguments were heard and
judgment reserved. With this background, we proceed to decide the
questions of law so formulated. From the brief narration of facts
disclosed above, it clearly transpires that for acquiring know-how by the
assessee from M/s Denso Corporation, Japan a substantial amount by
way of payment was given i.e. ` 3,08,14,000/- and ` 77,03,487/-. This
amount was treated by the assessee itself as expenditure which was
capital in nature. In addition, payment of ` 63,46,000/- was also made.
In order to ascertain the correct nature of this payment we may have to
dig into the circumstances under which this payment came to be made
by the assessee to M/s Denso Corporation, Japan. As noticed above, the
assessee is in the business of manufacture and sale of auto electrical
products such as Starters, Alternators, Wiper Motors, CDI, Magnetos
etc., for four wheelers and two wheelers. It is manufacturing the
products for its Indian clients like Maruti India and Hero Honda etc. For
the production and manufacturing of the aforesaid items for these
vehicles, it has obtained technical know-how from M/s Denso
Corporation, Japan and payment made for acquiring this technology has
been capitalized by the assessee.
6. It so happened that whenever there is a change in the model or
design manufactured by the Indian clients of the assessee, the assessee
is also required to suitably modify its design to enable it to manufacture
those items in accordance with the modified design of the automobile.
To facilitate and incorporate these changes in the technical know-how
and design already provided by M/s Denso Corporation, Japan,certain
modifications are required. For this purpose, i.e. to enable the assessee
to incorporate the modification in the earlier designs to suit the
requirement of its clients, the assessee entered into an agreement i.e.
dated 25th April, 2000 with M/s Denso Corporation, Japan. Since the
payment of ` 63,46,000 was made under that agreement, the import
effect and implication of this agreement will have direct bearing on the
nature of the expenditure made under the agreement with which we
are concerned. We, thus, reproduce hereunder the relevant portion of
the said agreement:-
"Whereas DNJP has been engaged in the
development, manufacture and sale of various kinds
of automotive electrical and electronic equipment
and has acquired substantial amount of technical
information and experience for such products;
Whereas, Denso India Ltd. (DNIN) has been engaged
in the manufacture and sale of some of automotive
electrical and electronic equipment, and has to meet
all requirements of its local customers in supplying
them any products ordered by them.
Whereas, DNIN is not in a position to develop or
design new products to suit the specific
requirements of its customers therefore, DNIN has
requested DNJP and DNJP has agreed to make new
design (s) or carry out new application work
regarding such products on behalf of DNIN.
Now, therefore, the parties hereto agree to the
following terms and conditions:
Article 1: Definitions
For the purpose of this Agreement, the following
terms shall have the following meanings:
(1) "products" shall mean products which are
manufactured or to be manufactured in future by
DNIN specified in Annexure 1.
(2) "Application works" shall mean the
modification or application or design works regarding
the products, or works for planning manufacturing
process and/ or lines or other work, which are
required to make the basic underlying technology
compatible with the Indian conditions and customer
specific requirements, and which, upon request by
DNIN, will be performed by DNJP for and on behalf of
DNIN with respect to the manufacture of the
products at DNIN.
Article 2: Consignment of Application works
2.1 During the terms of this agreement, DNIN
hereby consigns the Application Works under this
Agreement, including the following information:
- Technical requirements of the customer;
- conditions for performance calculation;
- conditions for evaluations of bench-test
2.4 Any result including intellectual property rights
and technical information arising out of such
application works shall be solely owned by DNJUP
and shall be used by DNIN only for manufacturing,
using and selling products.
Article 3: Payment
3.1 DNIN shall pay to DNJP a fee for the Application
Works to be calculated by the hourly rate set forth in
paragraph 3.2 and the expenses actually incurred at
DNJP through performing such Application Work
(hereinafter fee and expenses collectively referred to
as "Application costs"). However, total amount of
such payments during the term of this Agreement
shall not exceed two hundred million Japanese Yen (Y
200,000,000)
3.2 The hourly rate provided in Paragraph 3.2
above shall be six thousand two hundred fifty
Japanese Yen (Y 6250) at the effective date of this
Agreement, and shall be changed to the rate to be
negotiated by both parties from time to time during
the term of this Agreement, according to the change
of the wage rate in DNJP."
7. On scrutiny of the aforesaid agreement, the Tribunal was of the
view that since, the new design was only modification of the earlier
design, it could not be said that the assessee had acquired any new
capital asset and on the contrary, it had merely improved its original
design. The payment had been made for improving the quality of
products being manufactured and not to introduce any new line of
products. The assessee had not even acquired any proprietary interest
in the said design and was merely a licensed user of the modified know-
how provided by M/s Denso Corporation, Japan. Under these
circumstances, opined the Tribunal, the payment made was revenue in
nature and thus allowable as expenditure For this view, the Tribunal
relied upon the judgment of Bombay High Court in Gannon Norton
Metal Diamond Dies Ltd. Vs. CIT, 163 ITR 606 and extracted the
following discussion threfrom:-
"It is undoubtedly true that in the instant case a new
company was being formed to manufacture the
product which was hitherto being manufactured by
the foreign collaborators and imported by the Indian
partners, that is, Gannon Dunkerley & Company Ltd.
It is, however, to be remembered that in Telco's case
[1980]123ITR538(Bom) the agreement with Messrs
Daimler Benz was for manufacturing trucks which
were not at all being manufactured by Telco at the
time of the collaboration agreement. Telco was up to
the time of this collaboration only making
locomotives and for its new proposed activity,
namely, for the manufacture of trucks, it set up a
new factory after obtaining know-how from its
German collaborators, which collaboration was being
considered by the High Court. In principle, it would
seem to make no difference between a case where
an existing company undertakes a totally new line of
activity for which it has to establish a new factory,
and a case where for manufacturing a new product a
new company is constituted or formed. What we
have to consider is whether the payment has been
made for acquiring an asset of an enduring nature. If
know-how has been acquired unrelated to
secret or patented processes or the right to
use the trade name or trade mark then the
acquirer of that know-how - since that phrase
was repeatedly used or emphasised would
seem to acquire no asset of an enduring
nature. If the know-how acquired relates to the
setting up of the plant or machinery, then perhaps it
may have to be held to be capital in nature, although
we are not called upon to decide that question in the
present reference. If the know-how acquired relates
to the process of manufacturing, then the payment
made for the same would have to be considered as
revenue expenditure, since the acquirer does not
obtain by the expenditure any asset of an enduring
nature. It is only the acquisition of information,
guidance or, to put it in more familiar terminology,
"payment for consultancy". That the consultant gives
certain diagrams, specifications, list of machinery
and estimate of expenses, and explanations as to
how the production process is to be carried on and
what safeguards are necessary to be ensured for
securing a quality product which would be accepted
by the market would seem to make no difference."
8. The Tribunal also referred to its judgment in the case of T.E.I
Technologies Pvt. Ltd. wherein similar payment was treated as
expenditure having hue of the revenue. The Tribunal also referred to
the judgment of Supreme Court in Impire Jute Co. Ltd. 124 ITR 1,
for the proposition that in a case where expenditure even if incurred
for obtaining an advantage of enduring benefit, may, none the less,
be on revenue account and the test of enduring benefit may break
down. It is not every advantage of enduring nature acquired by an
assessee that brings the case within the principle laid down in this
test, namely, whether the assessee has obtained any asset of an
enduring nature. What is material to consider is the nature of the
advantage in a commercial sense, and it is only where the advantage
is in the capital field that the expenditure would be held as capital
expenditure. If the advantage consists merely in facilitating the
assessee's trading operation or enabling the management and
conduct of the assessee's business to be carried on more efficiently,
the expenditure would be on revenue account, even though, the
advantage may for an indefinite future.
9. At this stage itself, before we come to the nature of the
challenge posed by Ms. Bansal to the aforesaid judgment of the
Tribunal, we deem it appropriate to point out that the judgment of
the Tribunal in TEI Technologies (supra ) has been upheld by this
Court in the case of Commissioner of Income Tax Vs. TIE
Technologies, 304 ITR 262. While holding that no question of law
arises and dismissing the appeal on that ground, this Court
observed:-
"There is a finding of fact given by the Tribunal
that all that the assessed received was technical
assistance in the manufacture of the products.
There was no transfer of technology or knowhow
etc. which would enable the assessed to set up its
plant and machinery.. In Gannon Norton Metal
Diamond Dies Ltd. v. CIT [1987]163ITR606, the
Bombay High Court held that if the knowhow
acquired relates to the process of manufacture,
then any payment made for this purpose would
have to be considered as a revenue expenditure
since the acquirer does not obtain any asset of an
enduring nature it is more in the nature of a
payment for consultancy.
In so far as the present case is concerned, we find
that the only service that was rendered to the
assessed was in relation to the process of
manufacture. Even assuming that this would give
the assessed an advantage of an enduring nature,
but as held by the Supreme Court in Empire Jute
Co. Ltd. v.CIT [1980] 124 ITR 1, it is not every
advantage of an enduring nature that can be
classified as a capital expenditure. One has to take
a pragmatic and commercial view of the matter
and if that is done, there can be no doubt that the
assessed acquired technical knowhow to enable it
to manufacture the products and this was more in
the nature of information guidance or payment for
consultancy.
In any event, in view of the concurrent finding of
fact by the CIT (A) and the Tribunal, both
authorities having gone through the relevant
documents, we are not inclined to disturb the
conclusion arrived at"
In the aforesaid backdrop, the revenue had hardly any
arguable case against the findings that the payments made were
revenue in nature.
10. Ms. Bansal, however, took an altogether different rout in her
appeal to demonstrate that the payment could still be treated as
falling under Section 32 of the Act, thus liable to depreciation only
and, therefore, could not be allowed as business expenditure. This
submission of hers was based on Section 32 of the Act, as amended
by Finance Act, 1998 w.e.f. 1.4.1999, and particularly the insertion
of Clause-(ii) to sub Section-(1) thereof. Before we refer to the
contention, we deem it appropriate to reproduce the relevant portion
of Sub-section (1)of Section 32 of the Act:-
"Depreciation.
32.(1) (In respect of depreciation of-
(i) buildings, machinery, plant or furniture, being
tangible assets;
(ii) know-how, patents, copyrights, trade marks,
licences, franchises or any other business or
commercial rights of similar nature, being
intangible assets acquired on or after the 1st day of
April, 1998, owned, wholly or partly, by the
assessee and used for the purposes of the business
or profession, the following deductions shall be
allowed-)"
11. The argument of Ms. Bansal was predicated on Clause-(ii). She
submitted that now even the intellectual property rights in the form
of know-how, patents, copy rights, etc. including licence are eligible
for depreciation as per the aforesaid Clauses. She thus submitted
that when the know-how is given even in the form of a licence, it falls
under Section 32 and what can be allowed thereon is the
depreciation under that provision. She also referred to the following
judgments in support of her contention that the drawings furnished
by M/s Denso Corporation, Japan, could be treated as "plant" under
Section 32 (1) (i) of the Act and, therefore, the expenditure was to
be termed as capital in nature warranting depreciation thereupon.
12. In the case of the CIT Vs. Elecon Engineering Co. Ltd.
96 ITR 672 the Court held as under:-
"Know-how is a peculiar kind of asset. It is the
accumulated fund of knowledge acquired by years
of observation, research, experimentation and
experience. The whole of it is not in an intangible
form even while it is in the process of being
acquired and very often it takes a physical form, as
it grows, in the shape of formulae, drawings,
patterns, blue-prints, specifications and so on. The
material form it takes not only facilities
preservation, collation and ready reference, but
also makes it perceptible and visible and easily
capable of being transmitted to others. The books,
which one consults to inform one's mind and
thereby uses them in the course of one's business
or provision, are expressly included within the
meaning of the word "plant", there is no reason to
exclude from the wide range of its meaning objects
of similar nature as drawings, patterns, designs,
specifications, etc., which also like books are the
embodiment of know-how and serve the purpose
of teaching at long range. We are of the opinion,
therefore, that having regard to the clear
legislative intent to give a wide meaning to the
word "plant", material record of know-how (even
assuming that know-how itself is intangible) is
clearly included within the meaning of the word
"plant" in section 32."
13. In the case of Scientific Engineering House P. Ltd. Vs.
C.I.T (1986) 157 ITR 86 (SC), it was, inter alia, held as follows:-
"In other words the test would be: Does the article
fulfil the function of a plant in the assessee's
trading activity? Is it a tool of his trade with which
he carries on his business? If the answer is in the
affirmative, it will be a plant.
If the aforesaid test is applied to the drawings,
designs, charts, plans, processing data and other
literature comprised in the 'documentation,
service' as specified in Clause 3 of the agreement
it will be difficult to resist the conclusion that these
documents as constituting a book would fall within
the definition of 'plant'. It cannot be disputed that
these documents regarded collectively will have to
be treated as a 'book', for, the dictionary meaning
of that word is nothing but a "a number of sheets
of paper, parchment, etc. with writing or printing
on them, fastened 'together along one edge,
usually between protective covers; literary or
scientific work, anthology, etc., distinguished by
length and from & magazine, tract etc." (vide
Webster's New World Dictionary). But part from its
physical for the question is whether these
documents satisfy the functional test indicated
above. Obviously the purpose of rendering such
documentation service by supplying these
documents to the assessee was to enable it to
undertake Its trading activity of manufacturing the
theodolites and microscopes and there can be no
doubt that these documents had a vital function to
perform in the manufacture of these instruments;
in fact it is with the aid of these complete and upto
date sees of documents that the assessee was able
to commence its manufacturing activity and these
documents really formed the basis of the business
of manufacturing the instruments in question.
True, by themselves these documents did not
perform any mechanical operations or processes
but that cannot militate against their being a plant
since they were in a sense the basic tools of the
assessee's trade having a fairly enduring utility,
though owing to technological advances they
might or would in coarse of time become obsolete.
We are, therefore, clearly of the view that the
capital asset acquired by the assessee, namely,
the technical know-how in the shape of drawings,
designs charts, plans, processing data and other
literature falls within the definition of 'plant' and
therefore a depreciable asset."
14. The meaning of the expression "plant" was also examined by
the Apex court in the case of Scientific Engineering (supra) and it
was, inter alia, held as under:
"that "documentation service" comprised of
drawings, designs, charts, plans, processing data
and other literature, etc., and can be treated as
"plant" and depreciation can be allowed thereon.
That being the position, an obvious answer to the
question is in the affirmative, in favor of the
assessee and against the Revenue."
15. There is a clear fallacy in the aforesaid line of argument
advanced by the learned counsel for the revenue. The attempt is to
cover the payment under Section 32 of the Act and then to assert
that it qualifies for depreciation. There from, the learned counsel
wants to draw the inference that the payment is capital in nature and
not revenue. This kind of "reverse engineering" in our view is not
permissible.
16. As per the Scheme of the Act, we have to first determine the
nature of expenditure, namely, whether it is of revenue in nature or
whether the expenditure is capital in nature or it has the flavor of
revenue expenditure To determine this, tests are provided by
various judgments of the Apex Court as well as High Courts. That is
the precise exercise undertaken by the Tribunal; by referring to the
judgments of the Supreme Court, the Bombay High Court and that of
Delhi Bench of the Tribunal. Once it is found that the expenditure
incurred is the revenue expenditure, and it is incurred during the
course and for the purposes of business, same becomes allowable
expenditure in its entirety under Section 37 of the Act. The question
of depreciation would arise only if it is first determined and
established that the expenditure is capital in nature. Once it is
capitalized, the question of quantum of depreciation would come in
and only then the provisions of Section 32 would come into play, in
order to determine, first, whether the expenditure is of the nature
which falls within the ambit of Section 32 to be entitled to
depreciation and second, the rate at which such deprecation is to be
allowed.
17. The judgments cited by the learned counsel for the revenue are
the cases where the assessees had claimed depreciation even on
capital expenditure relating to drawings, designs etc. The dispute
was not as to whether the expenditure is revenue or capital in
nature. The assessee had accepted that the expenditure was capital
in nature and wanted depreciation. It was denied by the Assessing
Officer on the ground that Section 32 of the Act did not provide
depreciation on such an expenditure. Clause-(ii) which is inserted by
the Finance Act,1998 was missing at the relevant period when the
aforesaid cases were decided. It was in this backdrop that the
assessee wanted the such expenditure to be covered by Clause-(i) of
sub Section (1) of Section 32 of the Act, which includes depreciation
on "plant". Under these circumstances, the question had arisen as
to whether the acquisition of such drawings, designs, etc would
amount to "plant" within the meaning of that provision. The Court in
order to give benefit to the assessee had interpreted the expression
"plant" very widely, as is clear from the reading of the extracted
portion of the judgments referred to hereinabove.
18. By inserting Clause-(ii), in sub Section (1) of Section 32 of the
Act, the Legislature has granted the benefit to the assessee, by
providing depreciation in respect of capital expenditure incurred on
know-how, patents,. copyright, trade mark etc. This also becomes
clear from the memorandum explaining the provision in the Finance
(No.2) Bill, 1998, reported in 231 ITR (St.) 28 at page 243 which
reads as under:-
"Depreciation to be allowed on intangible
assets
Under the existing provisions, depreciation is
allowable when building, plant, machinery or
furniture is used by the assessee for the purposes
of his business or profession.
It is proposed to widen the scope of this section so
as to provide that depreciation will also be allowed
where intangible assets are owned wholly or partly
by the assessee and are used by such assessee for
the purposes of his business or profession.
Intangible assets, such as know-how, patent rights,
copyrights, trade m arks, licences, franchises or
any other business or commercial rights of the
assessee will form a separate block of assets. As
and when any capital expenditure is incurred by an
assessee on acquiring such intangible assets the
amount of such expenditure will be added to the
block of intangible assets and depreciation will be
claimed on the written down value at the end of
the financial year.
As a consequence of this amendment, it is
proposed to provide that any expenditure of a
capital nature incurred before the 1st April, 1998,
on the acquisition of patent rights or copyrights
used for the purposes of business shall not qualify
for deduction under the said section 35A. It is also
proposed to amend sub-section (1) of section 35AB
accordingly as to restrict the provisions of that
section to lump sum payments by the assessee in
any previous year relevant to assessment year
1998-99."
19. These are termed as "intangible assets" in contra distinction to
building, machinery, plant or furniture which are "tangible assets" as
stipulated in Clause-(i). Thus, now the depreciation is permissible in
respect of any of these tangible or intangible assets, falling within
these two Clauses of Sub-section (1). The question of allowing
deprecation would arise only when it is first determined that the
expenditure incurred is capital in nature. It is for this reason, we are
not in a position to accept the argument of Ms. Bansal.
20. Clause-(ii) uses to significant expressions, namely, "acquired"
and "owned". Thus, know-how , patents, etc which are intangible
assets should be acquired by the assessee on or after 01.4.1998
and owned, wholly or partly by the assessee in order to become
capital asset. In the present case, the findings of facts are recorded
that no such asset was acquired or owned by the assessee. It is only
modification of the asset already acquired for which the amount is
expended. We have already reproduced the relevant clauses of the
agreement arrived at between the assessee and M/s Denso
Corporation, Japan under which payments in question were made.
For the purposes of standardizing the modification to suit the
requirement of the clients of the assessee, namely, manufactures of
automobiles, technical fee was paid for the services rendered,
whichpayment is described as "fee for the application works" under
the agreement.
21. In CIT Vs. J.K. Synthetics Ltd. (2009) 309 ITR 371, 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 enumerate therein reads as
under:-
(v) Expenditure incurred for grant of License which
accords 'access' to technical knowledge, as
against, 'absolute' transfer of technical knowledge
and information would ordinarily be treated as
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 Licence.
(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 License
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 licensee 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."
22. The question had come up for consideration before this Court in
CIT s. Sharda Motors Industrial Ltd. 319 ITR 109. After analyzing
the agreement and the payments made in that case, the court
concluded that the expenditure was revenue in nature in the
following words:-
"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. Learned Counsel for the Revenue submits that
the Tribunal has not considered the effect of the
judgment of the Supreme Court in Southern
Switchgears Ltd. v. CIT [1998] 232 ITR 359,
inasmuch as in that case the 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."
23. The foregoing leads us to conclude that the Tribunal was
justified in its opinion that the payment made in question was
allowable as revenue expenditure and not as capital expenditure
allowable for deprecation under Section 32 of the Act. We, thus,
answer both the questions in favour of the assessee and against the
revenue resulting in the dismissal of ITA 16/2008 as well as all other
appeals.
(A.K. SIKRI)
JUDGE
(REVA KHETRAPAL)
JUDGE
OCTOBER 08, 2010
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