The order of the Bench was delivered by
Shri Mahavir Singh, JM:-This appeal by revenue is arising out of order of CIT(A)-VI, Kolkata in Appeal No.276/CIT(A)-VI/07-08/C-6 dated 24.07.2008. Assessment was framed by Addl. CIT, Range-6, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2005-06 vide its order dated 30.11.2007.
2. The only issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance made by AO on account of write off of technical know-how. For this, revenue has raised following effective ground nos. 2 and 3:
“2. That Ld. Cit(a) had erred in law and as well as on facts in deleting the disallowance of Rs. 53,51,012/-, made by the AO, on account of write off of technical know- how, where such intangible asset was very much in existence as on 01.04.2004.
3. That Ld. CIT(A) had erred in law and as well as on facts in holding that technical know how fees paid by the assessee as revenue expenditure whereas the assessee itself claimed depreciation over it for two consecutive assessment years.”
3. Briefly stated facts are that the assessee claimed deduction of technical knowhow relating to sliding nozzle refractories obtained from M/s. Krosaki Harima Corporation, Japan amounting to Rs. 53,51,012/- as revenue expenditure. The AO on perusal of records and submission of the assessee observed that the assessee has acquired intangible asset during FY 2002-03 relevant to AY 2003-04 for a total consideration of Rs. 80,77,002/-. But one-sixth of such expenditure amounting to Rs. 13,46,167/- was claimed as deduction on account of amortization of expenses @ one-sixth and balance was capitalized under technical knowhow in the group of intangible asset and claimed depreciation @ 25% on such assets. According to AO, in the relevant AY 2005-06, the assessee took out the WDV of such intangible asset at Rs. 53,51,012/- from the block of assets of intangible asset and claimed the entire amount as deduction while computing total income. According to AO, this is not allowable deduction and he disallowed the same by observing as under:
“Under the above circumstances when the assessee disclosed the above know-how under the block ‘intangible asset’ as on 31.03.2004 and the same was existent as on 01.04.2004, as discussed above, the writing off of the balance WDV/unamortized amount of Rs. 53,51,012/- is not allowed and depreciation at the prescribed rate of 25% is allowed (for less than 180 days) on the original value of the asset i.e. Rs. 80,77,002/- since the above asset was first time put to use on and from 1st Feb., 2005. The claim of depreciation/write off on such asset in the asstt. Years 2003-04 and 04-05 is not allowable and assessee ‘s remedial measure in those years are being initiated.”
4. Aggrieved, assessee preferred appeal before CIT(A), who after considering the submission of the assessee allowed the claim of the assessee by observing in para 2.4 as under:
“2.4. I have considered the submission of A/R of the appellant and finding of A.O. It is very much clear from the facts of case that entire expenses incurred on account of technical knowhow became obsolete and thereby written off. The technical knowhow fees incurred by the appellant did not bring into existence any asset and were incurred for gaining technical knowledge against payment of fees. The aforesaid expenditure was of revenue in nature and hence deductible in its entirety as a revenue expenditure. The aforesaid expenditure incurred by appellant did not bring into existence any asset. I agree with the contention of the appellant and also judicial views cited by the appellant in statement of facts of case filed. Considering the facts and circumstances of the case, I am inclined to accept the submission of A/R of the appellant that the appellant is entitled to claim such expenses written off as revenue expenditure, instead of depreciation as allowed by AO. In view of the above, accordingly, AO is directed to allow the claim of Rs. 53,51,012/- on account of write off of technical knowhow fee and depreciation of Rs. 10,09,625/- allowed shall be withdrawn. Accordingly, ground no. 4 is al1owed.”
Aggrieved, now revenue is in appeal before us.
5. Before us Ld. Sr. DR argued that the assessee has purchased/acquired technical know-how and in AY 2003-04 it has capitalized the asset and claimed 1/6th of such expenditure as an amortization of expenses and subsequently claimed depreciation @ 25% on such assets in AY 2004-05. He argued that once the asset is capitalized and claimed depreciation on the same, different treatment cannot be given and this cannot be claimed as revenue expenditure. According to Ld. Sr. DR, the assessee has acquired a capital asset and is deriving enduring benefit out of it. Hence, the expense cannot be claimed as capital in nature. Accordingly, he urged the bench to restore the order of AO.
6. On the other hand, the Ld. Counsel for the assessee supported the order of CIT(A).
7. We have heard rival submissions and gone through facts and circumstances of the case. The assessee company is engaged in the manufacturing of Specialized Refractories and Operating Systems used by producers of Iron & Steel. The assessee in pursuance to the technological up-gradation, entered into a technical assistance agreement with Krosaki Harima Corporation (KHC), by virtue of which, the assessee was granted a license to use the technical knowhow of KHC in its manufacturing operations. In consideration of KHC's disclosure of such technical information, assessee paid a sum of Rs. 80,77,002/- payable in three installments but was discharged in FY 2002-03 itself and in the same year the assessee claimed 1/6th of the said expenditure U/S 35AB of the Act. Further, assessee paid royalty calculated as 3% of the Net Sales Price of the products sold by the assessee in domestic market and 3% of the Net Sales Prices of all export refractory products of SNR manufactured and sold by IFGL in overseas market. The assessee claimed to have realised in FY 2003-04, that Sec. 35AB of the Act was only applicable to assessment year commencing on or before 1.4.1998 and hence was not applicable to the assessee. Therefore, assessee erroneously claimed depreciation @ 25% on unamortized expenditure, which was shown under the head 'Fixed Assets' of the Balance Sheet. Finally in FY 2004-05 relevant to this AY 2005-06, the assessee wrote off the entire balance of the unamortized know-how fees at Rs. 53,51,012/- and claimed the same as revenue expenditure. The assessee before AO claimed that technical know-how fee was in the nature of revenue expenditure for the reason that the same was incurred to obtain a license to use the know-how which was actually owned by the third party i.e. KHC. Therefore the said expenditure does not bring into existence any capital asset and hence is revenue in nature. But the AO was not convinced and treated the expenditure as capital in nature.
8. We find from the facts of the case that initially company was of the view that the benefit, from such revenue expenditure incurred on account of such technology, would be available at least for three to five years and accordingly the assessee did not claim the entire expenditure in the same year and decided to claim 1/6th in the first year and defer the amortization of the rest to the succeeding years. However, in course of in-house appraisal of technologies, it was realized that the said technology had become obsolete and substantial benefits were no longer expected to be received there from, hence, the assessee wrote off the balance of the unamortized technical fees in the relevant AY. The assessee in support of such claim of obsolescence of technology furnished a note, from which it is found that commercial production of products had commenced from lst February 2005. Secondly, technical advisor recommended write off of the unamortized portion as on 1.4.2004. We find that the AO added back the entire sum written off by the assessee and allowed only 50% of depreciation @ 25% of the total lump sum payment i.e Rs. 80,77,002/-. He further held that since the production began on 1.2.2005, the assessee was not entitled to depreciation in AY 2003-04 & 2004-05 also. From the above facts, it is clear that the amount was not written off on 1.4.2004 but was written off on 3l.3.2005, which was subsequent to commencement of production. This is substantiated by the fact that the letter of technical advisor is dated 31.3.2005, which shows that in-house appraisal of technologies took place in the year end in the course of which the writing off was done.
9. Secondly, the assessee had claimed depreciation on the same in AY 2004-05 and had shown the unamortized amount under the head 'Fixed Assets' of the Balance Sheet, however, treatment given by the assessee in the books of accounts is not conclusive. The true nature of the expenditure can be determined from the facts and circumstances of the case. Therefore let us now determine the true nature of the expenditure in the light of facts of the case and the legal position as argued by assessee. The first case law relied on by Ld. Counsel of the assessee is the judgment of the Supreme Court in case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) where the Hon'ble Court while drawing a line between capital and revenue expenditure had observed that "In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. " In view of the above position, let us now determine, whether the expenditure on account of technical know fees, in the assessee's case, falls under any of the above two categories, if not then the same should be held to be revenue in nature. From the above, it is clear that an expenditure regardless of its source being capital or income, will be held to be on capital account if:
(i) it is made for initial outlay or extension of business or a substantial replacement of the equipment or;
(ii) it brings into existence an asset or advantage for the enduring benefit of the business
We find that Hon’ble Supreme Court held that if the expenditure does not bring into existence an asset or advantage for the enduring benefit of the business, the same shall be revenue in nature. With regard to this, let us firstly determine whether the expenditure was in pursuance of a new line of business or not. In this regard it is pointed out that under the agreement the assessee was permitted to manufacture SNR products using KHC's technology, as per clause 2 of Article 1 of the agreement. Further, the assessee was already engaged in the manufacturing of SNR products as is evident from the clause of agreement that" .... IFGL has been supplying their product of SNR into the major steel mills in lower price ....”. Therefore, it is clear that with the new technology, the assessee was not producing a new product, rather the assessee was producing the same product but with improved technology. Thus, from the above it is clear that the expenditure on account of know-how was not in pursuance of a new line of business. Further, the said expenditure was not account of an initial outlay or extension of business. Neither was the expenditure incurred to replace any equipment. Therefore, it is clear that the assessee's case does not fall under category (i).
10. Now, whether the aforesaid expenditure brought into existence an asset for the enduring benefit of the business, it would be appropriate to analyse the terms and conditions of the said agreement. On perusal of the terms and conditions of the agreement the following facts have been noted:
(i) KHC had granted a similar license to other licensees also: This fact is evident from Clause 2 to Article 2 which reads as "KHC and its licensees can export or sell its products of SNR in India, upon the customer's request ". Further, even assessee as per Clause 1 to the Article 2 was entitled to non exclusively sell the products in the countries worldwide except Japan, Korea and Taiwan, like the other licensees were entitled to sell their products in India. The assessee did not have the right to sub-transfer the license, read clause 4 of Article 2 of the agreement.
(ii) The assessee was not entitled to apply or register any industrial property right in respect of any subsequent technological improvement (achieved by KHC) licensed under the agreement. (Clause 3 to Article 12)
(iii) The assessee was not entitled to apply or register any industrial property right in respect of the original technical knowhow licensed under the agreement. (Clause 1 to Article 12)
(iv) The assessee was not to sell, assign, transfer or otherwise dispose of any of technical information furnished by KHC. It was further required to hold the information in strictest secrecy and to take all reasonable precautions to prevent any disclosure of the technical information. (Clause 1 to Article 13)
(v) The assessee was required to pay a royalty calculated as 3% of the Net Sales Price of the products sold by the assessee in domestic market and 3% of the Net Sales Prices of all export refractory products of SNR manufactured and sold by IFGL in overseas market. (Clause 2 of Article 8)
From the above terms of agreement, two things are clear:
(i) Firstly, the fact that the assessee was paying a royalty which was linked to the sales of products, goes on to prove that the agreement was for use of know-how in return of which the assessee was paying royalty to the licensor. In fact the AO has himself allowed such royalty against revenue profits. The aforesaid allowance of the royalty, read consideration for know-how, by the AO proves that transaction was not for acquisition of know-how, but for mere use of know-how. Had the transaction been on capital account, the AO would not have allowed the running royalty, as the same would have constituted consideration towards acquisition of know-how.
(ii) Secondly, the technical know was at no point in time transferred absolutely in favour of the assessee. All the rights attached to ownership were still with KHC and had not been passed on to the assessee which was only given the rights of a user. By disclosing the technical information KHC had not parted with any of its assets and neither had the assessee acquired an asset.
11. We have gone through the Judgment of Hon’ble Supreme Court in case of CIT v Ciba of India Ltd. (1968) 69 ITR 692 (SC) wherein it is held that "the contribution was allowable as business expenditure under section l0(2)(xv). The assessee did not under the agreement become entitled exclusively even for the period of the agreement, to the patents and trade mark of the Swiss company; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The assessee was on that account a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade mark of that company. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period; by making that technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquired any asset or advantage of an enduring nature for the benefit of its business." Further the Supreme Court in case of CIT v Wavin (India) Ltd. (1999) 236 ITR 314 (SC) held that "The technical information given to the Indian company was "non-exclusive" and "non-transferable". In other words, this is not an out and out sale of technical know-how. The assessee was merely given a non-exclusive and nontransferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all."
From the reading of the above two judgments, it is clear that expenditure on account of know-how can be capitalized only if the related know-how is transferred absolutely or exclusively in favour of the assessee. Mere access to the know-how for a consideration cannot be held to be a transaction on capital account. But in the present case the assessee at no point in time became exclusively entitled to the technical information, which was available to KHC and its other licensees, even during the continuance of the agreement. The assessee had mere access to the said information. Under the agreement, the assessee merely had a right to draw, for the purpose of carrying on business as a manufacturer of SNR products, upon the technical knowledge of KHC. Further, by making the technology available, KHC did not part with any assets of its business, nor did the assessee acquire any asset or advantage of an enduring mature for the benefit of the business. Accordingly, by applying the principles laid out by Supreme Court in case of Ciba of India Ltd. supra & Wavin (India) Ltd. supra, we can safely infer that the expenditure incurred on account of technical know-how is revenue in nature and hence is deductible under the Act.
12. Thus in the light of the terms and conditions of the agreement and the principle as laid out in the pronouncements, as discussed above, it is clear that the assessee had not acquired any capital asset by incurring the expenditure on account of know-how. By incurring the expenditure the assessee merely became entitled to the use of the know-how subject to the terms and conditions as discussed in the agreement. Hence, it is clear that the expenditure on account of know-how was neither in pursuance of a new line of business nor did it bring into existence any asset of enduring nature. Further, our attention was invited to the decision of Hon’ble Supreme Court in case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), whereby it is held that "The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from the area of the day-to-day business of the assessee 's established enterprise. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure."
From the above judgment it is further clear when an organization manufacturing a given product, incurs some expenditure on improvement of technology used in the manufacture of the said product, then, said expenditure shall constitute an expenditure incurred for better conduct of business and hence shall be revenue in nature. In the given case, the assessee was already engaged in the manufacture of SNR products. The assessee had merely incurred the expenditure to upgrade itself technologically, i.e. to produce the same product with a better technology Therefore, applying the principles as laid out above, we are of the view that the said expenditure constitutes revenue expenditure. Accordingly, we confirm the order of CIT(A) and the issue of revenue’s appeal is dismissed.
13. In the result, the appeal of revenue is dismissed.
The order pronounced in the open court on 13.11.2015