1999-VIL-107-ITAT-AHM

Equivalent Citation: TTJ 068, 851,

Income Tax Appellate Tribunal AHMEDABAD

Date: 15.09.1999

SAYAJI INDUSTRIES LTD.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : R. K. BALI., GOPAL CHOWDHURY.

JUDGMENT

GOPAL CHOWDHURY, J.M.:

The assessee has filed the appeal against the order passed by the CIT(A) for the asst. yr. 1989-90. The first ground of appeal is regarding disallowance of Rs. 1,64,512 under s. 37(4) of the Act as guest house expenses.

2. The learned counsel on behalf of the assessee has submitted before us the break-up of the aforesaid expenses which includes rent on guest house, food, beverages, etc., depreciation on furniture and fixtures, salary of staff and electricity expenses out of which CIT(A) has allowed depreciation on furniture and fixtures. The disallowance of the remaining expenses have been confirmed by the CIT(A). The learned counsel has submitted that the aforesaid expenses were incurred for the purposes of the business of the assessee and covered by the decisions of Gujarat High Court in CIT vs. Kaira Distt. Co-operative Mills Producers Union Ltd. (1991) 100 CTR (Guj) 22 : (1991) 192 ITR 608 (Guj), CIT vs. Gaekwar Mills Ltd. (1991) 99 CTR (Guj) 19 : (1992) 193 ITR 734 (Guj) and the decision of the Tribunal Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 555 (Cal).

3. After hearing both the sides and in view of the decisions of jurisdictional High Court referred above, we direct the AO to allow the expenses.

4. The next issue is regarding disallowance of Rs. 1,92,150 on account of fluctuation in foreign exchange rate. The learned counsel on behalf of the assessee does not want to press this ground. Accordingly, this ground of appeal is dismissed.

5. The next issue is regarding disallowance of Rs. 1,16,219 under s. 37(3) of IT Act r/w r. 6D of IT Rules.

5.1. The AO disallowed the aforesaid amount being reimbursement of expenditure incurred by the employees on conveyance, telephone and trunk call charges, laundry, typing charges, etc. during the out station tour for the purpose of business. The finding was confirmed by the CIT(A).

5.2 The learned counsel on behalf of the assessee placed reliance on the decision of the Tribunal in Sundram Finance Ltd. vs. IAC (1984) 18 TTJ (Mad) (SB) 348 : (1984) 7 ITD 845 (Mad) (SB) and the decision of Calcutta High Court CIT vs. Vidyutt Mettalics Ltd. (1993) 203 ITR 779 (Cal). Further it was submitted that in the earlier year, there was no disallowance in respect of similar issue.

5.3. On the other hand, the learned Departmental Representative supported the order passed by the authorities below and submitted that the expenditure are hit by r. 6D of IT Rules.

5.4. Having heard both the sides, we find that the decision of Calcutta High Court (1993) 203 ITR 779 (Cal) supports the contention of the assessee wherein it has been held that r. 6D r/w s. 37(3) of the IT Act, 1961, limits the expenditure incurred on travelling to the extent of stay in hotels confining it to daily allowances referred to in r. 6D and does not extend to any other expenditure incurred provided the expenditure is wholly and exclusively laid out for the purposes of business. Having considered the nature of the expenditure incurred, we are satisfied that those expenditures were incurred for the purpose of business. Therefore, we delete the disallowance and allow the ground of appeal.

6. The next ground is regarding disallowance of Rs. 3,00,000 as fees paid to Shri B.V. Desai, Advocate. The learned counsel on behalf of the assessee has submitted that this amount has been allowed by the Tribunal in assessee's own case for the asst. yr. 1990-91 in ITA No. 1411/Ahd/1994. Accordingly, this ground of appeal is rejected.

7. The next issue is regarding disallowance of Rs. 23,23,880 under s. 35AB of the Act. This issue has been discussed by the AO at para 15 of his order. The fact of the case is that in the P&L a/c, the assessee debited the aforesaid amount as technical know-how and technical service fees, the break up of which is as follows:

Rs.
Technical know-how fees      20,35,335
Technical Service fees        2,88,545
                             ----------
                             23,23,880
                             ----------

7.1. The assessee submitted details of technical know how fees paid to M/s Amylum Belgium pursuant to the agreement entered with that foreign company. According to the assessee, the payment made to the foreign company should be allowed as business expenditure under s. 37 of the IT Act. The AO asked the assessee to explain as to why s. 35AB should not be invoked and 1/6th of the amount should not be allowed as deduction. The contention of the assessee was that the assessee had claimed only the amount to the extent of the instalment paid during the year under consideration, the foreign company shall retain the ownership of the right and the assessee is only a licensee for using the know-how in its existing business, the assessee did not acquire the know-how, which remained the property of the foreign company. Therefore, s. 35AB cannot be invoked. The contention of the assessee was not accepted by the AO and the claim of the assessee as revenue expenditure was rejected. The AO further directed that 1/6th of the total expenditure should be allowed in six equal instalments under s. 35AB of the Act. The finding of the AO was confirmed by the CIT(A) against which the assessee is in appeal before us.

7.2. Shri J.P. Shah, learned counsel on behalf of the assessee has brought to our notice the provision of s. 35AB of the Act and also the newly inserted provision i.e. Expln. 4 to s. 32(1) of the Act which came into effect from 1st April, 1999. The learned counsel on behalf of the assessee has submitted that from asst. yr. 1999-2000, no claim can be allowed under s. 35AB of the Act because technical know-how has been placed as intangible asset in s. 32(1) of the Act for the purpose of depreciation. The provision of s. 35AB applies to the case where the assessee becomes the owner of intangible assets called technical know-how and such expenditure is a capital expenditure but in the case where an assessee is merely a user of the technical know-how as licensee for the purpose of its business, the payment made for that purpose is to be allowed under s 37(i) of the Act as business expenditure. In the present case, admittedly the assessee had not acquired the technical know-how and it remained the property of the foreign company. The learned counsel has further placed reliance on the Circular No. 421 dt. 12th June, 1985 reported in (1986) 50 CTR (St) 31 : (1985) 156 ITR (St) 140 where it has been mentioned that with a view to providing further encouragement for indigenous, scientific research the Finance Act has inserted a new s. 35AB to the IT Act. According to the learned counsel on behalf of the assessee, the provision of s. 35AB is in relation to a lumpsum payment for acquiring any know-how which partakes the character of capita] expenditure and that is the reason for including such-expenditure within the purview of depreciation under s. 32 of the Act by inserting Expln. 4 thereon w.e.f. 1st April, 1999. In support of his contention, the learned counsel placed reliance on the decision of the Tribunal, Calcutta Bench reported in (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal) and also the decision of Gujarat High Court in Khimji Visram & Sons Gujarat (P) Ltd. vs CIT (1994) 122 CTR (Guj) 553 : (1994) 209 ITR 993 (Guj).

7.3 On the other hand, Shri Rakeshkumar Gupta, learned Departmental Representative supported the orders passed by the authorities below and further submitted that in the present case s. 37 cannot be applied because the statute has provided specific provision under s. 35AB which has to be applied. The expenditure incurred by the assessee even for a temporary use of know-how cannot be allowed as revenue expenditure. It was submitted that opening sentence of s. 37(1) of the Act says that any expenditure not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of business or profession shall be allowed. Since the present expenditure is allowable under s. 35AB of the Act, therefore, s. 37 has no application. The learned Departmental Representative has relied on the decision of Supreme Court in Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). A written submission has also been filed by the learned Departmental Representative wherein it has been stated that : (i) the argument of the assessee that s. 35AB is applicable in relation to capital expenditure is not correct; (ii) by amendment in s. 32 w.e.f. 1st April, 1999 by which intangible asset like know-how has been included for the purpose of depreciation that does not mean that it is a capital expenditure, and (iii) even if the assessee is only a licensee to use the know how the provision of s. 35AB is applicable because nowhere in the said provision, it has been mentioned that the assessee has to purchase the exclusive ownership right of the know-how. In some and substance, the argument of learned Departmental Representative is that the specific provision of s. 35AB has to be applied in the present case. The expenditure is not a revenue expenditure.

7.4. We have heard both the sides and perused the materials on record. For the purpose of appreciating the fact of the present case, we quote below the relevant portion of the ground of appeal including factual aspect in relation to the present issue filed before the CIT(A):

"The learned AO erred in disallowing Rs. 23,23,880 of technical know-how and technical service fees applying the provision of s. 35AB and allowing only 1/6th portion thereof. It is submitted that the AO herself has admitted that the technical know-how fees and technical service fees paid, to foreign company were of revenue nature. It is, therefore, submitted that on the facts and circumstances of the case as explained in detail in the letter dt. 11th Feb., 1992 of the appellant, the entire amount should have been allowed. It is further submitted that the fees were paid in respect of products which are being manufactured by the appellant company and they were for running plant more efficiently and not for setting up new plant. Moreover, the payment was not for acquiring ownership right over the know-how supplied by the foreign company. In fact as per cl. 10.1 of the agreement all information and know-how furnished by Amylum remains the property of Amylum. It is submitted that since expenditure was for the better performance of the existing business, the same should have been allowed fully as revenue expenditure. It is submitted that it be so held now and addition of Rs. 23,23,880 be deleted.

Without prejudice to above, it is submitted that the amount of Rs. 2,88,545 paid as technical service fees are not covered by the provisions of s. 35AB which are applicable for expenditure on know-how only and therefore, the same should not have been considered while making disallowance under s. 35AB. It is submitted that it be so held now."

From the above factual position the admitted fact is that the assessee paid lumpsum consideration to the foreign company for using the know-how for the purpose of its running business for a limited period. There is no controversy about the fact that the assessee did not purchase the same from the foreign company. There is no dispute in the proposition that if the expenditure is covered by ss. 30 to 36 of IT Act or it is of capital/personal expenditure, the same cannot be allowed under s. 37 of the IT Act. Therefore, the main issue is that whether the present expenditure is covered by s. 35AB or not, if it is covered by s. 35AB then s. 37 cannot have any application.

7.5 In the case of CIT vs. CIBA of India Ltd. (1968) 69 ITR 692 (SC), it has been held by the Hon'ble Supreme Court that the payments made for the right to have access to the technical knowledge and the fruits of continuing research and experience of a foreign company and to use its patents and trade-marks is of revenue expenditure.

(ii) In the case of CIT vs. British India Corporation Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC), the Supreme Court held that the lumpsum payment made to a distributor nominated by the foreign collaborator of the assessee as a condition of an agreement which entitled the assessee to the benefit of using the trade marks and special processes of the collaborator, is revenue expenditure.

(iii) In the case of Alembic Chemical Works Company Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC), the Supreme Court again held that a lump sum consideration paid for obtaining technical know-how in order to achieve higher levels of production by better technology was allowable as revenue expenditure.

(iv) In CIT vs. B.N. Alias & Co. (P) Ltd. (1987) 60 CTR (Cal) 144 : (1987) 168 ITR 190 (Cal), the Calcutta High Court held that if under the agreement there was no out and out transfer of the foreign know-how to the assessee and the know-how supplied by the foreign company remains the property of the foreign company for all times to come and the assessee had only a right to use the know-how during the currency of the agreement, the payment made under the agreement would be deductible as revenue expenditure. Similar view has been taken by the Calcutta High Court in the case of CIT vs. Indian Oxygen Ltd. (1978) 112 ITR 1025 (Cal) which was affirmed by the Supreme Court in CIT vs. Aquapump Industries (1996) 134 CTR (SC) 372 : (1996) 218 ITR 337 (SC).

7.6 In the case of CIT vs. Suhrid Geigy Ltd. (1996) 132 CTR (Guj) 102, the High Court of Gujarat has held as follows:

"The most important aspects relevant for the present purpose which can be culled out from various decisions is that where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement of acquiring technical know-how pertain to product already in the line of the established business which was intended to improve the operations of the existing business, its efficiency and profitability from the area of day to day business of the assessee's established enterprise's expenses be treated as revenue and not capital."

Similar view has been taken by Gujarat High Court in the case CIT vs. S.L.M. Maneklal Industries Ltd (1977) 107 ITR 133 (Guj).

7.7 In the case of CIT vs. Aquapump Industries (1996) 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad), Madras High Court held that the technical know-how supplied to the assessee for better running its business, lumpsum payment made for that is allowable as revenue expenditure, and also in the case of CIT vs. Simpson & Co. Ltd. (1998) 150 CTR (Mad) 492 : (1999) 239 ITR 83 (Mad) similar view has been taken.

7.8. The emphasis in all these cases was that if the payment is made for exclusive acquisition of the technical know-how or information the expenditure would be capital, but if the payment is made only to secure the use of the technical know-how or knowledge, it would be allowable as revenue expenditure. It is relevant to note that all the above mentioned decisions are in relation to the period before 1st April, 1986 and thereafter only the provision of s. 35AB came into existence.

7.9. The Calcutta Bench of the Tribunal in the case of Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal) held as follows:

"From the above we are of the view that the assessee has not acquired any technical know-how or information or patent once and for all so that the lump-sum consideration can be held to be capital payment. In our opinion, having regard to the various clauses of the technical know-how agreement and applying the tests laid down by the Supreme Court and the Calcutta High Court to them, the assessee has only obtained a right to use the technical information for the purpose of installing the furnace for TISCO at Jamshedpur. The expenditure is, therefore, revenue expenditure allowable under s. 37(1) of the Act. The provisions of s. 35AB do not cover a case where there is only a right to use the technical know-how without any acquisition of the same. The present case is a case of such type."

Before the Calcutta Bench of the Tribunal, the assessment year was 1991-92 i.e. after the provision of s. 35AB came into force. The Tribunal having considered the above mentioned decisions of Supreme Court and Calcutta High Court came to the conclusion that if the expenditure is incurred by the assessee to acquire the know-how i.e. to have the ownership of the same in that event s. 35AB will be applicable. On the other hand, if an assessee makes lumpsum payment to the foreign company only to have a right of use of the technical information for the purpose of its business, such expenditure is to be allowed as revenue expenditure under s. 37(1) of the Act.

8. In the case before us, we have already noticed that according to the assessee it had not purchased or obtained ownership of the technical know-how from the foreign company. On the other hand, the assessee is only a licensee by which it can use the know-how for the purpose of its business temporarily for which the lumpsum payment has been made. Therefore, the present case is not covered by the provision of s. 35AB as rightly held by the Tribunal, Calcutta Bench. Therefore, considering the entire circumstances of the case, we are of the view that s. 35AB has no application in the present case and the assessee is entitled to deduction under s. 37(1) of the Act.

9. In the result, the appeal is allowed.

 

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