High Court of Punjab and HaryanaITA/244/2005allowed

M/S Rockman Cycles Inds. Ltd. v. Commr. Of Income Tax, Ldh. And ANR.

2023-02-09Ms. Justice Ritu Bahri,Mrs. Justice Manisha Batra12 pages

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! ! ! GAURAV ARORA 2023.04.21 14:57 I attest to the accuracy and authenticity of this order/document P&H HC, Chandigarh

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C Explanation.- For the purposes of this section," know- how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). ! /

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/ ( 9;!6756 $!! &, "37.(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

Explanation 1.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

(2) [***] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

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11 / &, "21. This approach of the Tribunal is not correct in law. Interestingly, the Tribunal has accepted the fact that even when there was no formal written agreement with M/s. McKinsey and Co, the report was submitted by the said company for the task assigned. This report was produced before the Assessing Officer/Commissioner of Income-tax (Appeals). The Tribunal noted that as per the assesse the perusal of the report clearly indicated that the engagement was for the purpose of improving the operational efficiencies of the assessee and enhance the

profitability of the existing business. In these circumstances, not much importance could be attached to the fact that there was no written agreement with the said consultants to ascertain the scope of the study when such scope of study could very well be discerned from the report submitted by the consultants. To remove any doubts. learned counsel for the appellant produced the report given by the said consultants for our perusal as well and reading thereof con firms the contention of the appellant.

22. The helplessness shown by the Tribunal, for want of written agreement, was, therefore, clearly inappropriate. Once it is accepted as a fact that the assignment given to the said consultants was for the purpose of improving operational efficiencies and was not to incur any enduring benefit in capital field but to carry on the existing business more efficiently and profitably, the irresistible conclusion which follows is that such expenditure was allowable as business expenditure (See CIT v. Praga Tools Ltd. (1986) 157 ITR 282 (AP) and CIT v. Crompton Engineering Co. Ltd. (2000) 242 ITR 317 (Mad)). ! !

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19 / &,

22. When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration.

This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lumpsum royalty, though in five instalments, was paid therefore.

23) No doubt, this technical know-how is for the limited period i.e. for the tenure of the agreement. However, it is important to note that in case of

termination of the Agreement, joint venture itself would come to an end and there may not be any further continuation of manufacture of product with technical know-how of foreign collaborator. The High Court has, thus, rightly observed that virtually life of manufacture of product in the plant and machinery, establishes with assistance of foreign company, is co-extensive with the agreement. The Agreement is framed in a manner so as to given a colour of licence for a limited period having no enduring nature but when a close scrutiny into the said Agreement is undertaken, it shows otherwise. It is significant to note in this behalf that the Agreement provides that in the event of expiration or otherwise termination, whatsoever, licensee, i.e.

, joint venture company/ Assessee shall discontinue manufacture, sale and other disposition of products, parts and residuary products. All these things then shall be at the option of licensor. In other words, licensee in such contingency would hand over unsold product and parts to licensor for sale by him. In case licensor does not exercise such an option and the product is allowed to be sold by licensee, it would continue to pay royalty as per rates agreed under the agreement. Clauses 19 and 21, in our view, make the Agreement in question, i.e., establishment of plant, machinery and manufacture of product with the help of technical know-how, co-extensive, in continuance of Agreement.

The Agreement also has a clause of renewal which, in our view, in totality of terms and conditions, will make the unit continue so long as manufacture of product in plant and machinery, established with aid and assistance of foreign company, will continue. Since, it is found that the Agreement in question was crucial for setting up of the plant project in question for manufacturing of the goods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure.

The Tribunal is conclusion that it is only the other three memoranda which were necessary for setting up the manufacturing facilities and payment thereunder would qualify as capital expenditure, and not the payment of technical fees/royalty on the ground that this agreement was not in connection with the setting up of a plant or manufacturing facilities, is not correct. It would be interesting to note that even the Tribunal had nurtured doubt on the nature of this expenditure as TCA was signed simultaneously with the other memoranda to facilitate setting up of a new factory and not improvising the earlier set up.

not allowable since the know-how was bring obtained for the first time and was crucial to the setting up of the business of the assessee which undisputedly was to manufacture Honda cars in India. It may be recalled that this was also the view taken by the Assessing Officer. Further, the assessee was not already in the manufacture of cars and was commencing such an activity for the first time. It was not a case of a business already in existence. The payment was an "once for all" payment, though staggered over a period of years." Applying the ratio of the above mentioned judgments to the facts of the present case, the appeals are allowed and impugned orders are set aside. The appellant (s) company shall be entitled to treat the travelling expenses of the Director's wives as well as fees paid to M/s Kinsey and Co Ltd for professional service for the relevant assessment year as revenue expenditure.

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