Gets India Pvt. Ltd., New Delhi v. DCIT, New Delhi

ITA 2534/DEL/2011 | 2005-2006
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 253420114 RSA 2011
Assessee PAN AAACA8125F
Bench Delhi
Appeal Number ITA 2534/DEL/2011
Duration Of Justice 2 month(s) 13 day(s)
Appellant Gets India Pvt. Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 29-07-2011
Date Of Final Hearing 19-07-2011
Next Hearing Date 19-07-2011
Assessment Year 2005-2006
Appeal Filed On 16-05-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C NEW DELHI) BEFORE SHRI C.L. SETHI JUDICIAL MEMBER AND SHRI K.G. BANSAL ACCOUNTANT MEMBER I.T.A. NOS.2534 & 2535/D/2011 ASSESSMENT YEARS: 2005-06 & 2006-07 GATES INDIA LTD. VS. DY. C.I.T. C-434 DEFENCE COLONY CIRCLE 12(1) NEW DELHI NEW DELHI PAN NO.AAACA 8125 F (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.L. CHANDAK FCA RESPONDENT BY : SHRI SALIL MISHRA SR. DR ORDER PER K.G. BANSAL: AM: THESE TWO APPEALS OF THE ASSESSEE FOR TWO DIFFERENT YEARS WERE ARGUED IN A CONSOLIDATED MANNER BY THE LEARNED COUNSE L FOR THE ASSESSEE AND THE LEARNED SR. DR. THEREFORE WE FIND IT CONVENIENT TO PASS A CONSOLIDATED ORDER. ASSESSMENT YEAR 2005-06 1.1 THE ASSESSEE HAS TAKEN UP ONLY ONE GROUND IN THIS APP EAL IN RESPECT OF CAPITALIZATION OF THE EXPENDITURE INCURRE D ON PURCHASE OF SOFTWARES. THE GROUND CONTAINS AVERMENT OF FACTS AND T HE CASES SOUGHT TO BE RELIED UPON. THUS THE GROUND IS NARRATI VE AND ARGUMENTATIVE IN NATURE. WHEN THE LEARNED COUNSEL W AS CONFRONTED WITH THIS FACT IT HAS BEEN STATED THAT THE GROUND MAY BE READ AS OVERLEAF:- 2534-2535-2011-GI 2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF `2 29 870/- IN RESPECT OF SOFTWARE EXPENSES. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY FI LED NIL RETURN ON 31.10.2005. THE RETURN WAS PROCESSED U/S 143 (1) ON 15.02.2007. THEREAFTER STATUTORY NOTICES U/S 143(2) AND 142(1) WERE ISSUED ON 17.08.2006 AND 15.06.2007 RESPECTIVELY FOR SC RUTINIZING THE RETURN. IT WAS FOUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING IN RUBBER HOSES. COMING TO THE POINT OF DISPUTE IT IS MENTIONED THAT THE ASSESSEE CLAIMED DEDUCT ION OF SOFTWARE EXPENSES AMOUNTING TO `5 74 674/-. THE ASSESSEE WAS REQUIRED TO JUSTIFY THE CLAIM. IN RESPONSE THE DETAI LS OF EXPENSES WERE FILED AND IT WAS SUBMITTED THAT THE EXPENSES ARE REVENU E IN NATURE ON ACCOUNT OF HIGH OBSOLESCENCE OF THE SOFTWARES. THE ASSESSI NG OFFICER CONSIDERED THE FACTS. IT HAS BEEN MENTIONED THAT SOFTW ARE PACKAGES ARE INTANGIBLE ASSETS AS THEY ARE USED IN THE PROCESS OF B USINESS AND INCLUDED IN FIXED ASSETS. THE ISSUE OF OBSOLESCENCE IS TAK EN CARE OF BY PROVIDING A HIGH RATE OF DEPRECIATION @60%. THUS T HE EXPENDITURE OF `5 74 674/- HAS BEEN HELD TO BE CAPITAL EXPENDITURE. AFTER DEDUCTING DEPRECIATION OF `3 44 804/- ADDITION OF `2 29 870/ - HAS BEEN MADE TO THE TOTAL INCOME. 2.1 BEFORE THE LEARNED CIT(A) THE SUBMISSIONS MADE BEF ORE THE ASSESSING OFFICER WERE REITERATED. HE ALSO CONSIDERED TH E DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY I NDIA ENTERPRISES 114 TTJ 476. ACCORDING TO HIM IT HAS BEEN HELD IN ITS CASE THAT WHEN AN ASSESSEE ACQUIRES A COMPUTER SOFTWARE OR GETS THE LICEN SE TO USE THE SOFTWARE HE ACQUIRES AN INTANGIBLE ASSET. HOWEVER THE SOFTWARES BECOME OBSOLETE RAPIDLY WITH TECHNICAL INNOVATIONS T HEREFORE IF THE LIFE OF THE SOFTWARE IS LESS THAN TWO YEARS THE EXPENDI TURE MAY BE 2534-2535-2011-GI 3 TAKEN AS REVENUE EXPENDITURE. IF THE UTILITY PERIOD IS MORE THAN TWO YEARS THEN IT CAN BE SAID THAT A BENEFIT OF ENDURING NATURE ACCRUES TO THE ASSESSEE. THAT BY ITSELF WILL NOT MAKE THE EXPENDIT URE TO BE CAPITAL EXPENDITURE. IN SUCH A CASE FUNCTIONAL TEST HAS TO BE APPLIED. ON THE BASIS OF THIS DECISION AND THE DECISION IN THE CASE OF MA RUTI UDYOG LIMITED VS. DCIT 1922 ITD 119 IT HAS BEEN HELD THAT SOFTWARE IS A CAPITAL ASSET OF INTANGIBLE NATURE. THE PURCHASE OF SO FTWARE HAS GRANTED BENEFIT OF ENDURING NATURE TO THE ASSESSEE. NO EVIDENCE EXISTS ON RECORD THAT THE SOFTWARES PURCHASED BY THE ASSESSE E HAVE A SHORT SPAN OF LIFE. THEREFORE THE FINDINGS OF THE ASSE SSING OFFICER HAVE BEEN CONFIRMED. 2.2 BEFORE US THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE PURCHASED SOFTWARES OF THE VALUE OF `16 61 402/- IN T HIS YEAR. THE EXPENDITURE OF `10 86 782/- IN RESPECT OF CORPORATE DATA LINK (CARDS) BUSINESS CARD SCANNER AND SOFTWARE OF THE VALUE OF `10 72 528/- `6 500/- AND `7 700/- RESPECTIVELY HAS BEEN CAPITALIZ ED. THE AGGREGATE VALUE OF THESE SOFTWARES AMOUNTS TO `10 86 728/-. THUS ONLY THE BALANCE AMOUNT OF 5 74 674/- HAS BEEN CLAIMED AS REVE NUE EXPENDITURE. THIS SHOWS THAT THE ASSESSEE HAS APPLIED MIND TO THE USEFUL LIFE OF VARIOUS SOFTWARES AND TREATED THE EXPENSE S TO BE REVENUE IN NATURE ONLY IN CASES WHERE USEFUL LIFE WAS SHORT DUE TO OBSOLESCENCE. THE DETAILS OF THESE EXPENSES HAVE BEEN PL ACED ON PAGE NO.36 OF THE PAPER BOOK WHICH ARE REPRODUCED BELOW:- PARTICULARS DATE OF PURCHASE AMOUNTS (`) SOFTWARE PURCHASES DURING THE YEAR CORPORATE DATA LINK (CARD SCANNER) 31 ST JULY 2004 1 072 528/- BUSINESS CARD SCANNER 28 TH AUG. 2004 6 500/- BUSINESS CARD SCANNER 30 TH APRIL 2004 3 50 000/- BACK UP SOFTWARE 11 TH MAY 2004 575/- TDS SOFTWARE 7 TH JUNE 2004 575/- MCAFEE ANTI VIRUS 2 9 TH OCTOBER 2004 178 524/- 2534-2535-2011-GI 4 SUPPORT CHARGES & INSTALLATION FOR ANTI VIRUS 45 000/- SOFTWARE PURCHASED 27 TH OCTOBER 2004 7 700/- TOTAL SOFTWARE PURCHASES 1 661 402/- LESS: CAPITALIZED DURING THE YEAR 1 086 728/- CLOSING BALANCE AS 31 ST MARCH 2005 574 67 4/- 2.3 COMING TO THE FINDINGS OF THE LOWER AUTHORITIES IT HAS BEEN MENTIONED THAT FUNCTIONAL TEST HAS NOT BEEN CONSIDERED BY THEM AND THE ADDITION HAS BEEN UPHELD BECAUSE NO EVIDENCE COUL D BE BROUGHT ON RECORD TO SHOW THAT USEFUL LIFE WAS LESS THAN TWO YEA RS. IN VIEW OF THE FACT THAT THE SUBSTANTIAL EXPENDITURE HAD BEEN CA PITALIZED BY THE ASSESSEE ITSELF IT IS ARGUED THAT THE CLAIM IN RESPECT OF REVENUE EXPENDITURE SHOULD BE ALLOWED. 2.4 IN REPLY THE LEARNED DR SUBMITTED THAT A SOFTWAR E PACKAGE IS INTANGIBLE ASSET AS HELD IN THE CASE OF MARUTI UDYOG L IMITED (SUPRA). THE ACT OR THE RULES DO NOT MAKE ANY DISTINCTION BETW EEN A CAPITAL ASSET OR REVENUE EXPENDITURE IN SO FAR AS INTANGIBLE ASSE TS ARE CONCERNED. THE ASSESSEE HAS NOT PLACED ANY EVIDENCE ON RECORD THAT THE LIFE OF SOFTWARES WAS LESS THAN TWO YEARS. THE DETAI LS SHOW THAT BACKUP SOFTWARE WAS PURCHASED FOR A CONSIDERATION OF `3 50 000/-. THIS SOFTWARE IS IN THE NATURE OF APPLICATION SOFTWARE WHICH HAS TO BE CATEGORIZED AS CAPITAL EXPENDITURE ONLY. 2.5 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSI ONS MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE INCURRED TOTA L EXPENDITURE OF `16 61 402/- FOR PURCHASE OF VARIOUS SOFTWARES. OUT OF THIS EXPENDITURE A SUM OF `10 86 728/- WAS CAPITALIZED AN D THE BALANCE EXPENDITURE OF `5 74 674/- WAS CLAIMED AS REVENUE EXP ENDITURE. THE MAJOR CLAIM IS IN RESPECT OF BACK UP SOFTWARE AMOUNTIN G TO `3 50 000/-. THE OTHER SOFTWARES ARE TDS SOFTWARE ANTI VIRUS AND EX PENSES INCURRED FOR SUPPORT AND INSTALLATION. THE EXPENDITU RE INCURRED IN 2534-2535-2011-GI 5 RESPECT OF SUPPORT CHARGES IS OBVIOUSLY REVENUE IN NATUR E. THE TDS SOFTWARE IS NOT USED IN THE PROCESS OF MANUFACTURE. THE REFORE IT CAN BE SAID ON FUNCTIONAL BASIS THAT THE EXPENDITURE IS REV ENUE IN NATURE. FURTHER ANTI SOFTWARE VIRUS IS PURCHASED TO PROTECT OT HER SOFTWARES AND THEREFORE THE EXPENDITURE IS OF REVENUE NATURE . THIS LEAVES US WITH BACKUP SOFTWARE PURCHASED AT THE COST OF `3 50 00 0/-. NO DETAIL OR EXPLANATION HAS BEEN FILED ABOUT THE NATURE AND U TILITY OF THE SOFTWARE. NO EVIDENCE EXISTS ON RECORD ABOUT THE USEFU L LIFE SPAN OF THE SOFTWARE. FROM THE NARRATION IT APPEARS THAT TH IS SOFTWARE IS USED TO PROVIDE NECESSARY SUPPORT TO ALL OTHER SOFTWARES. TH E BURDEN TO PROVE THAT EXPENDITURE IS REVENUE IN NATURE IS ON TH E ASSESSEE WHICH HAS TO BE DISCHARGED BY FILING RELEVANT FACTS. SUCH F ACTS ARE ABSENT IN THIS CASE. THE QUESTION OF APPLICATION OF DECIDED CASE S COMES ONLY THEREAFTER. IN OTHER WORDS IN ABSENCE OF FACTS IT C ANNOT BE SAID THAT THE EXPENDITURE IS REVENUE IN NATURE. ACCORDINGLY IT IS HELD THAT EXPENDITURE OF `3 50 000/- ONLY AND NOT `5 74 674/- IS CAPITAL IN NATURE. THE ASSESSING OFFICER IS DIRECTED TO REVISE THE ORDER BY TAKING `3 50 000/- ONLY AS CAPITAL EXPENDITURE. THE CALCUL ATION REGARDING DEPRECIATION SHALL ALSO BE REVISED ACCORDINGLY. THUS THIS APPEAL IS PARTLY ALLOWED. ASSESSMENT YEAR : 2006-07 3. THE POSITION OF FIRST GROUND IN THIS APPEAL IS SIMILA R TO THE GROUND TAKEN IN THE APPEAL FOR ASSESSMENT YEAR 2005-06 (SUPRA). THE ASSESSING OFFICER HAD CAPITALIZED A SUM OF `37 130/- BE ING THE EXPENDITURE INCURRED FOR PURCHASE OF VARIOUS SOFTWARES LIKE CARD SCANNER NOVELL NETWARE AND GROUP SOFTWARE MS PROJEC T 2003 AUTOCAD MICROSOFT VISAL PROFESSIONAL LEAP SOFTWARE MICROSOFT O FFICE ETC. THE SUBMISSIONS OF THE ASSESSEE ARE SIMILAR TO THE SUBMISSIONS MADE IN THE PROCEEDINGS FOR ASSESSMENT YEAR 2005-06. THE ASSESSING OFFI CER 2534-2535-2011-GI 6 CAPITALIZED THE EXPENDITURE AND ALLOWED DEPRECIATIO N @60% LEADING TO NET ADDITION OF `14 855/-. THE LEARNED CIT(A) UPHE LD THE DECISION AS IN EARLIER ASSESSMENT YEAR 2005-06. THE SUBMISSIONS OF THE LE ARNED COUNSEL AND THE LEARNED DR BEFORE US ARE ALSO THE SAME AS IN ASSESSMENT YEAR 2005-06. WE FIND THAT NO DATA WHATSOEVE R HAS BEEN FURNISHED IN RESPECT OF USEFUL LIFE OF THE SOFTWARES AN D THE PURPOSE FOR WHICH THEY ARE USED. IN ASSESSMENT YEAR 2005-06 THE ASSE SSEE HAD CAPITALIZED THE EXPENDITURE IN RESPECT OF CARD SCANNE R SOFTWARE. THIS HAS BEEN CLAIMED AS REVENUE EXPENDITURE IN THIS YEAR. IN ABSENCE OF THE DETAILS ABOVE THE NATURE USE AND USEFUL LIFE OF T HE SOFTWARES IT IS HELD THAT THE LOWER AUTHORITIES WERE RIGHT IN CAPITA LIZING THE EXPENDITURE AS THE BURDEN CAST ON ASSESSEE U/S 37 HAS NOT BEEN DISCHARGED. THUS THIS GROUND IS DISMISSED. 3.1 GROUND NO.2 IS AGAINST CAPITALIZATION OF ROYALTY PAYMENT OF `29 77 118/- TO GATES CORPORATION USA UNDER TECHNIC AL COLLABORATION AGREEMENT. IT IS MENTIONED THAT SIMILAR EXPENSES HAD B EEN ALLOWED IN PAST WHILE THERE IS NO CHANGE IN THE FACTS. IN THIS CO NNECTION IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE INCURRE D EXPENDITURE BY WAY OF ROYALTY AND TRAINING AMOUNTIN G TO `29 77 118/- AND `1 98 936/- RESPECTIVELY. IT WAS SUBMITTED THAT T HE ASSESSEE IS CARRYING ON THE BUSINESS OF MANUFACTURING AND TRADING IN RUBBER HOSES SINCE ITS FORMATION IN SEPTEMBER 1999. IN FINANCIAL YEAR 2005-06 IT HAS PAID ROYALTY TO GATES CORPORATION USA AS PER TECH NICAL ASSISTANCE AGREEMENT ENTERED INTO WITH IT. THE ROYALTY IS PAID FOR THE LICENSE GRANTED TO MANUFACTURE AND SELL THE LICENSED PRODUCTS USING THE INDUSTRIAL PROPERTY RIGHT AND TECHNICAL INFORMATION FURNISHED TO THE ASSESSEE IN PURSUANCE OF A NON-EXCLUSIVE RIGHT TO SELL THE PRODUCTS THROUGHOUT THE WORLD. UNDER THE AGREEMENT THE GAT ES CORPORATION HAS SUPPLIED TECHNICAL SERVICES AN EXCLUSIVE NON-TRANSFE RABLE LICENCE AUTHORITY PERMISSION TO USE THE LICENSED TRADEMARKS IN RESPECT OF THE 2534-2535-2011-GI 7 LICENSED PRODUCTS. IT HAS BEEN ARGUED THAT THE ASSESSEE D ID NOT ACQUIRE ANY TANGIBLE OR INTANGIBLE PROPERTY AND THE ROYALTY IS PAID ON THE BASIS OF A FIXED PERCENTAGE OF THE TURN OVER. A CCORDINGLY IT IS ARGUED THAT THE EXPENDITURE IS REVENUE IN NATURE. A NUMBER OF CASES WERE CITED BEFORE HIM. THE ASSESSING OFFICER ALSO FOUND OUT THE CASES WHICH SUPPORT THE VIEW THAT THE EXPENSES OF ROYALTY AR E PARTLY CAPITAL IN NATURE. HE REFERRED TO THE DECISION IN THE CASE O F CIT VS. CIBA INDIA LTD. 69 ITR 692 SRIRAM PISTONS & RINGS LTD. VS. CIT 1 71 TAXMAN 81; CIT VS. GUJARAT CARBON LTD. 254 ITR 294; AND CIT VS. JYOTI ELECTRIC MOTORS LTD. 255 ITR 345 RELIED UPON BY THE ASSESSEE. HE ALSO CONSIDERED THE DECISION IN THE CASE OF CIT VS. BRITISH I NDIA CORPORATION LIMITED 165 ITR 51; CIT VS. INDIAN OXYGEN LTD. 218 ITR 337; CIT VS. IAEC (PUMPS) LTD. 232 ITR 316; CIT VS. WAVIN INDIA L IMITED 236 ITR 314. ON THE BASIS OF THESE DECISIONS HE CULLED OUT VAR IOUS PROPOSITIONS WHICH LEAD TO THE CONCLUSION THAT THE EX PENDITURE IS REVENUE IN NATURE. THESE ARE AS UNDER:- I) THE RIGHT IS NON EXCLUSIVE AND NON TRANSFERABLE; II) NO BENEFIT OF ENDURING NATURE IS DERIVED; OR III) RIGHT OF USAGE IS ONLY DURING PENDENCY OF AGREEM ENT; IV) AGREEMENT IS OF SHORT TENURE; V) ON EXPIRY OF AGREEMENT NO RESIDUAL RIGHT REMAINS W ITH THE ASSESSEE. 3.2 HE ALSO CONSIDERED THE DECISION IN THE CASE OF JONA S WOODHEAD & SONS (INDIA) LTD. VS. CIT 224 ITR 342 AND SOUTHERN S WITCH GEAR LIMITED VS. CIT AND OTHERS 232 ITR 359. ON THE BASIS OF THESE DECISIONS HE CULLED OUT THE PROPOSITION WHICH SUPPORT THE VIEW TH AT THE EXPENDITURE IS CAPITAL IN NATURE. THESE ARE AS OVERLEAF:- 2534-2535-2011-GI 8 I) THE TECHNICAL ASSISTANCE COVERS ESTABLISHMENT OF FACTO RY AND OPERATION OF THEREOF; II) EVEN AFTER TERMINATION OF AGREEMENT THE ASSESSEE IS ENTITLED TO CONTINUE MANUFACTURE IF GOODS; III) THE RIGHT TO MAKE OR MANUFACTURE CERTAIN GOODS EXCLUSIVELY IN INDIA ITSELF IS AN INDEPENDENT RIGHT SECURED BY ASSESSEE F ROM FOREIGN COMPANY. 3.3 FINALLY IT HAS BEEN HELD THAT THE TERMS OF AGREE MENT ARE QUITE COMPREHENSIVE AND THE WHOLE TECHNICAL KNOW-HOW TO SET UP THE BUSINESS HAS BEEN PROVIDED BY THE GATES CORPORATION USA . THE ASSESSEE HAS BEEN GIVEN INDIVISIBLE NON-TRANSFERABLE AND E XCLUSIVE LICENSE TO ASSEMBLE AND MANUFACTURE PRODUCTS AND PARTS I N THE TERRITORY OF INDIA AND TO SELL THE PRODUCTS SO ASSEMBLED OR MANUFACTURED. COMPREHENSIVE TECHNICAL KNOW-HOW HAS B EEN PROVIDED BECAUSE OF WHICH THE ASSESSEE IS A MARKET LEADER. THEREF ORE THE EXPENDITURE OF `23 82 041/- HAS BEEN CAPITALIZED. T HE DEPRECIATION ALLOWANCE HAS BEEN DEDUCTED @25% THUS LEADING TO NE T ADDITION OF `23 82 041/-. THE FINDINGS OF THE ASSESSING OFFICER IN RESPECT OF ROYALTY EXPENDITURE HAVE BEEN UPHELD BY THE LEARNED CIT(A) ON THE GROUNDS INTER ALIA THAT THE AGREEMENT IS VALID FOR A PERIOD OF 10 YEARS AND IS FURTHER EXTENDABLE WHICH SHOWS THAT THE BENEFIT IS NO T RESTRICTED ONLY TO 10 YEARS. THE ASSESSEE HAS OBTAINED BENEFIT OF ENDURI NG NATURE IN RESPECT OF ITS MANUFACTURING AND INDUSTRIAL PROCESS. TH ERE IS NO PROVISION REGARDING REVERSION OF RIGHTS OBTAINED BY TH E ASSESSEE TO THE GATES CORPORATION USA. HOWEVER THE EXPENDITURE IN RESPECT OF TRAINING HAS BEEN HELD TO BE REVENUE IN NATURE. 3.4 THE LEARNED COUNSEL TOOK UP THROUGH THE ROYALTY AGREEMENT DATED 24.08.2004 A COPY OF WHICH HAS BEEN PLACED ON RECORD. IT IS ARGUED THAT ON THE FACTS VARIOUS CASES RELIED UPON BY HIM BEFORE THE 2534-2535-2011-GI 9 LOWER AUTHORITIES SUPPORT THE CONTENTION THAT THE EXP ENDITURE IS REVENUE IN NATURE. IN REPLY THE LEARNED DR DREW O UR ATTENTION TO THE FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED CIT(A) . IN PARTICULAR IT IS SUBMITTED THAT THE AGREEMENT IS EXTENDABLE BEYON D 10 YEARS. THE AGREEMENT PROVIDES THE COMPREHENSIVE TECHNICAL KNOW-H OW TO THE ASSESSEE. THEREFORE IT IS ARGUED THAT THE LEARNED CIT( A) WAS RIGHT IN HOLDING THAT THE EXPENDITURE IS CAPITAL IN NATURE. 3.5 IN REJOINDER THE LEARNED COUNSEL SUBMITTED THAT ALTHOUGH THE REVENUE HAS RELIED ON THE DECISION IN THE CASE OF SOUT HERN SWITCH GEARS LIMITED (SUPRA) THE WHOLE OF THE EXPENDITURE H AS BEEN HELD TO BE CAPITAL IN NATURE. AT BEST ONLY A PART OF THE E XPENDITURE COULD HAVE BEEN TAKEN AS CAPITAL EXPENDITURE. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIO NS MADE BEFORE US. THE QUESTION AS TO WHETHER AN EXPENDITURE IS CAPITAL OR REVENUE IN NATURE IS ALWAYS A VEXED QUESTION WHICH HA S TO BE DECIDED ON THE BASIS OF THE FACTS OF EACH CASE. WHEN THE EXPEN DITURE LEADS TO ACQUISITION OF AN ASSET OF FIXED NATURE IT CONSTITUTES CAPITAL EXPENDITURE. ANOTHER TEST IS THAT WHEN AN EXPENDITUR E LEADS TO A BENEFIT OF ENDURING NATURE TO THE ASSESSEE IT IS CAPITA L EXPENDITURE. HOWEVER IT HAS TO BE SEEN WHETHER THE BENEFIT IS IN C APITAL FIELD OR IN REVENUE FIELD. 4.1 WITH THIS PRELIMINARY REMARK WE EXAMINE THE CON TENTS OF THE AGREEMENT DATED 24.08.2004. THE RECITAL TO THE AGR EEMENT SHOWS THAT THERE WAS A PRE EXISTING AGREEMENT DATED 03.02.1996 WHICH EXPIRED ON 14.05.2003. THE INSTANT AGREEMENT IS STATED TO BE MADE SUBSTANTIALLY ON THE SAME TERMS FOR GRANTING RIGHT OR L ICENSE TO MANUFACTURE USE AND SELL THE LICENSED PRODUCTS. IN AR TICLE 1 VARIOUS TERMS USED IN THIS AGREEMENT HAVE BEEN DEFINED. IN PA RTICULAR 2534-2535-2011-GI 10 TECHNICAL INFORMATION HAS BEEN DEFINED TO MEAN AND INCLUDE THE EXISTING PATENTED AND UN-PATENTED TECHNOLOGICAL KNOW LEDGE AND INVENTIONS TRADE SECRETS FORMULAE MANUFACTURING PROC ESS AND METHODS FOR THE MANUFACTURE OF LICENSED PRODUCTS SUCH A S DESIGNS ASSEMBLY DATA AND DRAWINGS; MODELS; METHODS; PROCESS SPECIF ICATIONS; PRODUCT ENGINEERING; MATERIAL SPECIFICATIONS; OPERATI ONAL ENGINEERING AND MANUFACTURING DATA; NORMS OF PRODUCTIVITY AND SCR AP; AND QUALITY PARAMETERS AT ALL STAGES OF PRODUCTION. UNDER ARTICLE 2 THE ASSESSEE HAS BEEN GRANTED SOLE RIGHT TO MANUFACTURE AND SELL TH E LICENSED PRODUCTS USING INDUSTRIAL PROPERTY RIGHTS AND TECHNICAL INFORMATION IN THE CONTRACT TERRITORY. THE ASSESSEE HAS ALSO BEEN GRANT ED RIGHT TO SUB-LICENSE THE RIGHTS BUT ONLY ON PRIOR APPROVAL OF T HE GATES CORPORATION. UNDER ARTICLE 4 THE GATES CORPORATION SHALL PROVIDE TECHNICAL SERVICES SO THAT THE ASSESSEE MAY MANUFACTURE LI CENSED PRODUCTS TO THE BEST ADVANTAGE. THE SERVICES INCLUDE D RAWINGS FOR DESIGNING MANUFACTURING AND ASSEMBLING; SPECIFICATIONS; MATERIAL LIST; GENERAL CALCULATION SHEET; DATA FOR INSPECTION AND TR IAL OPERATION FABRICATION AND ASSEMBLY PROCEDURES OPERATING AND INST RUCTION MANUALS AND ANY OTHER NECESSARY TECHNICAL DATA AND KN OW-HOW GENERALLY USED BY THE GATES CORPORATION. PROVISION H AS ALSO BEEN MADE FOR DEPUTING TECHNICAL PERSONNEL AT THE REQUEST OF THE ASSESSEE FOR WHICH COST OF ROUND TRIP LODGING AND OTHER ASSOCI ATED EXPENSES AND TAXES SHALL BE PAID BY THE ASSESSEE. UNDER ARTICLE 5 ROYALTY IS TO BE PAID AT A PERCENTAGE OF THE NET SELLING PRICE FOR EACH SALE OF THE LICENSED PRODUCT AS SET FOURTH IN THE APPENDIX TO THE AGREEMENT. THE PERCENTAGE IS 1%. THE FORMULA FOR COMPUTING NET SELL ING PRICE HAS BEEN SPECIFIED. UNDER ARTICLE 10 THE ASSESSEE HAS ALSO B EEN GRANTED LICENSE ON AN EXCLUSIVE NON-ASSIGNABLE BASIS TO USE LICEN SED TRADEMARK RELATING TO LICENSED PRODUCTS DURING THE SUB SISTENCE OF THE AGREEMENT. THE AGREEMENT IS TO REMAIN IN FORCE FOR AN INITIAL PERIOD OF 10 YEARS. IT MAY BE MENTIONED BY US AT THIS STAGE THAT GROSS BLOCK OF 2534-2535-2011-GI 11 FIXED ASSETS AMOUNTED TO ABOUT `88 CRORES AND ADDITION OF WORK IN PROGRESS OF ABOUT `4.26 CRORES WAS MADE IN THIS YEAR. W ITH THESE FACTS WE PROCEED TO EXAMINE AS TO WHETHER THE EXPEND ITURE CREATED ANY FIXED ASSET ARE LED TO A BENEFIT OF ENDURING NATU RE TO THE ASSESSEE IN THE CAPITAL FIELD. 4.2 WE HAVE ALREADY MENTIONED THAT THE ASSESSEE HAD BEE N CARRYING ON THE BUSINESS OF MANUFACTURING INDUSTRIAL HOSES. THE G ROSS BLOCK OF THE ASSETS AT THE BEGINNING OF THE YEAR AMOUNTED TO AB OUT `88 CRORES. AFTER DEPRECIATION THE VALUE OF NET BLOCK WAS ABOUT `45.47 CRORES. THIS CLEARLY ESTABLISHES THAT NO NEW BUSINESS HAS BEEN SET U P BY THE ASSESSEE IN THIS YEAR. ACCORDINGLY IT IS HELD THAT THE AGREEMENT WITH GATES CORPORATION IS NOT FOR SETTING UP A NEW BUSINESS. THE RECITAL TO THE AGREEMENT STATES THAT IT IS IN CONTINUATION OF THE PRE EXISTING AGREEMENT DATED 03.02.1996 WHICH EXPIRED ON 14.05. 2003 AND THAT THE INSTANT AGREEMENT IS DRAWN SUBSTANTIALLY ON THE SAME TERMS AS AGREED UPON IN THE EARLIER AGREEMENT DATED 03.02.19 96. IN VIEW THEREOF IT CAN ALSO BE CONCLUDED THAT THE TECHNICAL KNOWLEDGE WHICH WAS BEING PROVIDED UNDER THE OLD AGREEMENT WILL BE P ROVIDED UNDER THE INSTANT AGREEMENT ALBEIT INCLUDING ASSISTANCE IN TH E AREAS NEWLY DISCOVERED BY THE GATES CORPORATION. SUCH UP GRADATI ON IS INHERENTLY NECESSARY IN VIEW OF RAPID INNOVATION IN EVERY FIELD OF TECHNOLOGY. BUT FOR SUCH INNOVATIONS THE BUSINESS WILL NOT SURVIVE. THIS BY ITSELF DOES NOT LEAD TO BENEFIT OF ENDURING NATURE AS EXPENSES LIK E PRODUCT INNOVATIONS ETC. IN THE EXISTING BUSINESS ARE REVENUE IN NATURE. THE AGREEMENT IS EXCLUSIVE IN TERMS OF MANUFACTURING IN TH E TERRITORIES OF INDIA BUT NON-EXCLUSIVE IN TERMS OF SALE ALL OVER THE WORLD. THE EXCLUSIVE LICENSE TO MANUFACTURE IN INDIA WITHOUT SUCH EXCLUSIVITY IN SALE TERRITORY BY ITSELF DOES NOT LEAD TO BENEFIT OF E NDURING NATURE. THE LEARNED DR WAS SPECIFICALLY REQUESTED TO POINT TOWARDS ANY ARTICLE IN THE AGREEMENT WHICH GRANTS BENEFIT TO THE ASSESSEE TO CO NTINUE TO USE 2534-2535-2011-GI 12 TECHNICAL INFORMATION TRADE MARK OR BRAND NAME AFT ER EXPIRY OF THE AGREEMENT. HE WAS NOT ABLE TO DO SO. THE AGREEMENT DOES NOT CONTAIN ANY ARTICLE REGARDING REVERSION OF DRAWINGS A ND DESIGN ETC. AFTER THE EXPIRY OF AGREEMENT. THE ASSESSEE HAS BEEN PR OHIBITED TO USE TRADE MARK AND BRAND NAME AFTER THE EXPIRY OF TH E PERIOD OF AGREEMENT. IN ANY CASE THE DRAWINGS AND DESIGNS ARE B OUND TO BECOME OBSOLETE AFTER THE EXPIRY OF THE PERIOD OF 10 YEARS WHICH IS A VERY LONG PERIOD OF TIME IN PRESENT ERA OF FAST CHANG ING TECHNOLOGIES. THEREFORE IT IS CLEAR THAT THE ASSESSEE HAS NOT ACQUIRED ANY NEW FIXED ASSET. ASSUMING THAT THE EXCLUSIVE RIGHT TO MANUFACTURE IN INDIA MAY GRANT SOME BENEFIT OF ENDURING NATURE IT IS CLEAR TH AT IT DOES NOT AFFECT THE CAPITAL STRUCTURE OF THE ASSESSEE-COMPANY. THEREFOR E IN THE LIGHT OF VARIOUS DECISIONS IN THE MATTER INCLUDING IN THE CA SE OF EMPIRE JUTE COMPANY LIMITED VS. CIT (1980) 124 ITR 1; NO ADVANT AGE IN CAPITAL FIELD HAS BEEN OBTAINED BY THE ASSESSEE. FROM ALL THE F IVE POINTS LISTED BY THE ASSESSING OFFICER FOR ROYALTY TO BE REVENUE EXPE NDITURE THE ONLY POINT SURVIVING AGAINST THE ASSESSEE IS THAT THE AGRE EMENT SUBSISTS OVER A LONG PERIOD OF 10 YEARS. ACCORDING TO U S THIS POINT BY ITSELF DOES NOT LEAD TO INFERENCE OF CAPITAL EXPENDIT URE BECAUSE NO ADVANTAGE HAS BEEN RECEIVED IN THE CAPITAL FIELD. O N THE OTHER HAND THE EXPENDITURE OR ANY PART THEREOF HAS NOT BEEN INC URRED FOR SETTING UP THE BUSINESS. THE ASSESSEE DOES NOT RETAIN ANY RESIDUAL RIGHT UNDER THE AGREEMENT. THEREFORE EXCLUSIVE RIGHT TO MANUFA CTURE GOODS IN INDIA FOR 10 YEARS DOES NOT LEAD TO INFERENCE OF BENE FIT OF ENDURING NATURE IN THE CAPITAL FIELD. AT THE SAME TIME IT IS SEEN THAT THE LICENSE FEE IS PAID ON THE BASIS OF NET TURN OVER AND IT HAS A DIRECT RELATIONSHIP WITH AN ITEM IN THE REVENUE FIELD. THEREFORE WE A RE OF THE VIEW THAT THE EXPENDITURE IS OF REVENUE IN NATURE. ACCORDINGL Y GROUND NO.2 OF THE APPEAL IS ALLOWED. SINCE THE EXPENDITURE HAS BEE N HELD TO BE REVENUE IN NATURE THERE WILL BE NO QUESTION OF GRAN T OF DEPRECIATION THEREON. 2534-2535-2011-GI 13 5. THE RESULT OF AFORESAID IS THAT BOTH THE APPEALS ARE PARTLY ALLOWED. THIS ORDER WAS PRONOUNCED IN OPEN COURT ON 29.07.2011 . SD/- SD/- ( C.L. SETHI ) ( K.G. BANSA L ) JUDICIAL MEMBER ACCOUNTANT ME MBER DT.29.07.2011. NS COPY FORWARDED TO:- 1. GATES INDIA LIMITED C-434 DEFENCE COLONY NEW D ELHI. 2. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 12(1) N EW DELHI. 3. THE CIT 4. THE CIT (A) NEW DELHI. 5. THE DR ITAT LOKNAYAK BHAWAN KHAN MARKET NEW DELHI. TRUE COPY BY ORDER (ITAT NEW DELHI).