DCIT, New Delhi v. M/s. Modi Mundipharma Pvt. Ltd., New Delhi

ITA 4189/DEL/2011 | 2008-2009
Pronouncement Date: 29-03-2012 | Result: Dismissed

Appeal Details

RSA Number 418920114 RSA 2011
Assessee PAN AAACM2303F
Bench Delhi
Appeal Number ITA 4189/DEL/2011
Duration Of Justice 6 month(s) 9 day(s)
Appellant DCIT, New Delhi
Respondent M/s. Modi Mundipharma Pvt. Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2012
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 29-03-2012
Date Of Final Hearing 28-03-2012
Next Hearing Date 28-03-2012
Assessment Year 2008-2009
Appeal Filed On 19-09-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE SHRI I.P. BANSAL JUDICIAL MEMBER AND SHRI B.C. MEENA ACCOUNTANT MEMBER ITA NO.3933/DEL./2011 (ASSESSMENT YEAR : 2008-09) M/S. MODI MUNDIPHARMA PVT. LTD. VS. ADDL.CIT RAN GE 5 1400 MODI TOWER 98 NEHRU PLACE NEW DELHI. NEW DELHI 110 019. (PAN : AAACM2303F) ITA NO.4189/DEL./2011 (ASSESSMENT YEAR : 2008-09) ADDL.CIT RANGE 5 VS. M/S. MODI MUNDIPHARMA PVT. LTD. NEW DELHI. 1400 MODI TOWER 98 NEHRU PLACE NEW DELHI 110 019. (PAN : AAACM2303F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIKAS JAIN ADVOCATE REVENUE BY : SHRI R.S. NEGI SENIOR DR ORDER PER B.C. MEENA ACCOUNTANT MEMBER : BOTH THE CROSS APPEALS EMANATE FROM THE ORDER OF TH E CIT (APPEALS)- VIII NEW DELHI DATED 12.07.2011 FOR THE ASSESSMENT YEAR 2008-09. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKET ING OF PHARMACEUTICAL ITA NOS.3933 & 4189/DEL./2011 2 FORMULATIONS. IN ORDER TO AVAIL OF TECHNICAL AID AN D TECHNICAL INFORMATION FOR MANUFACTURING VARIOUS PHARMACEUTICAL PREPARATIONS THE ASSESSEE COMPANY HAD ENTERED INTO A COLLABORATION AGREEMENT WITH MUN DIPHARMA AG SWITZERLAND (MAG) ON 14.11.1990 FOR A PERIOD OF TEN YEARS FROM THE COMMENCEMENT OF PRODUCTION. INITIALLY THE COLLABOR ATION WAS FOR A PERIOD OF TEN YEARS FROM THE EFFECTIVE DATE. HOWEVER IN THE MEAN TIME THE AFORESAID COLLABORATION DATED 14.11.1990 WAS AMENDED IN TERMS OF GOVERNMENT'S APPROVAL VIDE LETTER DATED 14.06.1999. THEREAFTER THE AGREEMENT WAS FURTHER AMENDED ON 19.05.2004 W.E.F. 01.4.2004. AS PER THE ORIGINAL AGREEMENT AND SUBSEQUENT AMENDMENTS THERETO THE ASSESSEE COMPANY WAS ALLOWED TO USE THE KNOW-HOW DEVELOPED PATENTED AND OWNED BY M/S. MUND IPHARMA AG SWITZERLAND (MAG) FOR MANUFACTURING THE PRODUCTS. I N ADDITION THE LICENSOR ALSO GRANTED EXCLUSIVE RIGHTS TO THE LICENSEE NAME LY THE ASSESSEE COMPANY TO MANUFACTURE AND SELL WITHIN THE TERRITORY THE PREPA RATIONS UTILIZING THE KNOW- HOW AND SCIENTIFIC AND TECHNICAL INFORMATION AND TH E TEACHING OF THE PATENTS AS PROVIDED IN THE AGREEMENT DATED 14.11.1990. IN L IEU OF MUNDIPHARMA AG SWITZERLAND (MAG) GRANTING LICENSE TO MANUFACTURE A ND SELL WITHIN THE TERRITORY THE PREPARATIONS UTILIZING THE KNOW-HOW A ND SCIENTIFIC AND TECHNICAL INFORMATION AND THE TEACHING OF THE PATENTS THE AP PELLANT COMPANY AGREED TO PAY DESIGN ENGINEERING AND CONSULTANCY FEES CALCUL ATED @1.5% OF THE NET SALES OF EACH PREPARATION FOR A PERIOD OF TEN YEARS FROM THE COMMENCEMENT OF ITA NOS.3933 & 4189/DEL./2011 3 PRODUCTION OF SUCH PREPARATIONS. IN ADDITION THE A SSESSEE COMPANY ALSO AGREED TO PAY TO THE LICENSOR A ROYALTY @3.5% OF TH E NET SALES IN RESPECT OF EACH PREPARATION OVER A PERIOD OF 5 YEARS FROM COMM ENCEMENT OF PRODUCTION. THE TERMS RELATING TO PAYMENT OF ROYALTY HAD BEEN M ODIFIED IN TERMS OF AMENDMENTS BROUGHT ABOUT IN1999 AND 2004. THE RET URN OF INCOME WAS SUBMITTED ON 29.09.2008 DECLARING INCOME AT RS.16 9 1 63 343/-. ASSESSMENT U/S 143(3) WAS FINALIZED ON 06.12.2010. TWO DISALL OWANCES WERE MADE I.E. (I) RS.51 026/- U/S 14A READ WITH RULE 8D AND RS.82 19 092/- IN RESPECT OF ROYALTY. CIT (A) SUSTAINED THE 14A ADDITION AND DE LETED THE DISALLOWANCE OF ROYALTY PAYMENT HENCE BOTH THE SIDES ARE IN APPEAL BEFORE US. 3. THE GROUNDS OF ASSESSEES APPEAL READ AS UNDER : - 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - VIII NEW DELHI [CIT (A)] HAS ERRED IN LAW AND ON FACTS I N UPHOLDING THE ADDITIONS OF RS.51 026 MADE BY THE LD. ASSESSIN G OFFICER (AO) UNDER SECTION 14A OF THE ACT. 1.1. THE LD. CIT (A) HAS ERRED ON THE FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW IN CONFIRMING THE ADHOC DIS ALLOWANCE UNDER SECTION 14A OF THE ACT ON THE BASIS THAT SOME EXPENDITURE WOULD HAVE BEEN INCURRED BY THE APPELLANT IN CONNEC TION WITH THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES IN EARLIER YEARS EVEN THOUGH THERE IS NO TRANSACTION OF PURCHASE OR SALE OF SHARES DURING THE YEAR. 1.2. THE LD. CIT(A) HAS ERRED ON THE FACTS AND CIR CUMSTANCES OF THE CASE AND IN LAW IN CONFIRMING THE DISALLOWA NCE UNDER THE PROVISIONS OF SECTION 14A OF THE ACT BY APPLYING RU LE 8D(2)(III) EVEN WHEN THERE IS NO FINDING BY THE AO THAT THE AP PELLANT HAS INCURRED ANY DIRECT OR PROXIMATE EXPENDITURE IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ITA NOS.3933 & 4189/DEL./2011 4 1.3. THE LD. CIT(A) HAS ERRED ON THE FACTS AND CIR CUMSTANCES OF THE CASE AND IN LAW IN CONFIRMING THE DISALLOWA NCE UNDER THE PROVISIONS OF SECTION 14A OF THE ACT EVEN ON THE FA CTS THAT THE APPELLANT HAS NOT CLAIMED ANY INCOME AS EXEMPT UNDE R THE ACT. 1.4 THE LD. CIT (A) HAS ERRED ON THE FACTS AND CIRC UMSTANCES OF THE CASE AND IN JAW IN RELYING THE JUDGEMENT OF HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE (APPE AL NO. 626 OF2010) WHICH IS NOT APPLICABLE ON THE FACTS OF THE APPELLANT'S CASE. 4. AT THE OUTSET OF THE HEARING THE LEARNED AR SUB MITTED THAT DUE TO SMALLNESS OF THE TAX AMOUNT INVOLVED IN THE ASSESSE ES APPEAL THE GROUNDS ARE NOT PRESSED. IN VIEW OF THIS THE APPEAL OF THE AS SESSEE IS DISMISSED FOR WANT OF PROSECUTION. 5. IN THE REVENUES APPEAL THE GROUNDS OF APPEAL R EAD AS UNDER :- 1. THE ORDER OF THE LEARNED CIT(APPEALS) IS ERRONE OUS & CONTRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF 25% OF ROYALTY PAYMENT MADE BY AO TREATING IT AS INTANGIBL E ASSET & THUS CAPITAL EXPENDITURE. 2.1. KEEPING IN VIEW THE VARIOUS CLAUSES OF THE AGR EEMENT AND THE SPIRIT BEHIND THAT LD. CIT(A) HAS ERRED IN HOLDING THAT RATIO LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SW ITCH GEARS LTD. WAS NOT APPLICABLE IN THIS CASE. 2.2. THE LD. CIT(A) HAS ERRED IN OBSERVING THAT NO DISALLOWANCE WAS CONSIDERED IN THE CASE OF THE ASSESSEE COMPANY IN EARLIER YEAR WHEN BY AN ORDER U/S 263 THE ASSESSMENT ORDER FOR A Y 2006-07 WAS SET ASIDE BY CIT DELHI-II ON THIS VERY ISSUE. 3. THE APPELLANT CRAVES LEAVE TO ADD TO ALTER OR AMEND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF H EARING. ITA NOS.3933 & 4189/DEL./2011 5 6. THE ONLY ISSUE INVOLVED IN THE APPEAL IS DELETIN G THE ADDITION OF 25% OF ROYALTY PAYMENT TREATING THE SAME AS INTANGIBLE ASS ET AND THUS CAPITAL EXPENDITURE. THE REVENUE RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEARS LTD.. THE CIT (A ) HELD THAT THE RATIO OF AFORESAID DECISION OF HON'BLE SUPREME COURT IS NOT APPLICABLE IN THE CASE OF ASSESSEE. THE REVENUE HAS ALSO OBJECTED TO THE OBS ERVATION OF THE CIT (A) THAT NO DISALLOWANCE WAS CONSIDERED IN THE LAY 2006-07 E VEN WHEN THE ORDER WAS SET ASIDE U/S 263 BY THE CIT DELHI-II ON THIS ISSU E. 7. LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFI CER. ON THE OTHER HAND LD. AR RELIED ON THE ORDER OF THE CIT (A) 8. CIT (A) HAS GRANTED THE RELIEF TO THE ASSESSEE B Y HOLDING AS UNDER :- 5. I HAVE CAREFULLY CONSIDERED THE FINDINGS RECORDE D BY THE LD. AO ARGUMENTS MADE BY THE ID. COUNSELS AND THE DOCUMENT S PLACED BEFORE ME IN THE COURSE OF APPELLATE PROCEEDINGS. ON CONSI DERATION I FIND THAT THE ISSUE INVOLVED HERE ESSENTIALLY RELATES TO THE NATURE OF BENEFITS/RIGHTS ACQUIRED BY THE APPELLANT COMPANY I N TERMS OF COLLABORATION AGREEMENT DATED 14.11.1990 WITH MUNDI PHARMA AG SWITZERLAND. THEREFORE BEFORE PROCEEDING AHEAD IT IS IMPORTANT TO HAVE A LOOK AT THE VARIOUS CLAUSES OF THE COLLABORA TION AGREEMENT DATED 14.11.1990 (SUPRA). A PERUSAL OF THE SAID AGR EEMENT SUGGESTS THAT THE LICENSOR NAMELY MUNDIPHARMA AG SWITZERL AND HAD AGREED TO MAKE AVAILABLE SUBJECT TO THE TERMS AND CONDITI ONS CONTAINED IN THE AGREEMENT TO MODI MUNDIPHARMA CERTAIN INFORMA TION DATA DOCUMENTATION DRAWINGS AND SPECIFICATIONS RELATING TO THE SECRET FORMULAE AND PROCESSES OF MANUFACTURE OF THE PREPAR ATIONS. AS PER CLAUSE 1.1.4 OF THE SAID AGREEMENT THE WORD 'KNOW-HOW' HAS BEEN DEFINED AS UNDER:- 'KNOW HOW' SHALL MEAN THE INFORMATION KNOWLEDGE E XPERIENCE DATA DESIGNS DOSSIERS FORMULAE AND TECHNOLOGY RELATING TO OR CONCERNING THE PREPARATIONS INCLUDING BUT NOT LIMITED TO TECHNICAL AND PROCESSING SPECIFICATIONS MANUFACTURING ASSAY AND QUALITY CO NTROL DOSSIERS PROCEDURES AND INSTRUCTIONS TOXICOLOGICAL PHARMAC OLOGICAL CLINICAL AND ITA NOS.3933 & 4189/DEL./2011 6 MEDICAL DATA HEALTH REGISTRATION DATA AND ALL OTHE R DATA WHETHER OF THE FOREGOING DESCRIPTION OR NOT WHICH IS IN POSSESSION OR CONTROL OF/OR OWNED BY AND/OR IS BEING PRACTICED BY MUNDIPHARMA AND ITS AFFILIATES FOR AND RELATING TO THE MANUFACTURE AND QUALITY CONTROL OF THE PREPARATIONS. SIMILARLY THE WORDS 'PLANT' AND 'SCIENTIFIC AND TE CHNICAL INFORMATION' HAVE BEEN DEFINED AS:- 'PLANT' SHALL MEAN THE FACILITY IN INDIA FOR THE MA NUFACTURE OF THE PREPARATIONS USING THE KNOWHOW TO BE MADE AVAILABLE BY MUNDIPHARMA. 'SCIENTIFIC AND TECHNICAL INFORMATION' SHALL MEAN A LL SCIENTIFIC AND TECHNICAL DATA POSSESSED BY MUNDIPHARMA RELATING TO THE PREPARATIONS INCLUDING ALL TECHNICAL AND ANALYTICAL PRECLINICAL AND CLINICAL DATA LITERATURE BULLETINS AND OTHER PERTINENT INFORMATI ON RELATED THERETO AND WHICH MAY BE NECESSARY TO MODI MUNDIPHARMA IN MARKE TING AND SELLING THE PREPARATIONS AND/OR IN MAINTAINING AND IN FILLI NG ANY NECESSARY GOVERNMENT AUTHORIZATION TO SELL THE PREPARATIONS I N THE TERRITORY. THEREAFTER THE RESPONSIBILITIES OBLIGATIONS AND D UTIES OF THE CONTRACTING PARTIES HAVE BEEN DEFINED IN ARTICLES 2 3 & 4 OF T HE AGREEMENT AS UNDER:- ARTICLE 2: RESPONSIBILITIES OBLIGATIONS AND DUTIES OF MUNDIPHARMA 'MUNDI PHARMA HEREBY GRANTS THE EXCLUSIVE RIGHT TO MODI MUNDIPHARMA TO MANUFACTURE USE AND SELL WITHIN THE TERRITORY THE PREPARATIONS UTILIZING THE KNOWHOW AND SCIENTIFIC AND TECHNICAL INFORMATION AN D THE TEACHING OF THE PATENTS AS HEREINAFTER PROVIDED. MUNDIPHARMA SHALL:- PROVIDE MODI MUNDIPHARMA FOR THE MANUFACTURE OF THE PREPARATIONS WITH THE KNOWHOW IN SUFFICIENT DETAIL TO ENABLE MODI MUN DIPHARMA TO UNDERTAKE THE COMMERCIAL PRODUCTION OF THE PREPARATIONS ON AN EFFICIENT AND ECONOMIC BASIS AND OF THE STANDARD OF THE QUALITY AND SPECIF ICATIONS AS SET OUT IN ANNEX 1 HERETO AND CONFORMING TO PHARMACEUTICAL STA NDARDS RECOGNIZED IN INDIA; PROVIDE MODI MUNDIPHARMA FOR THE MANUFACTURE OF THE PREPARATIONS WITH THE SCIENTIFIC AND TECHNICAL INFORMATION IN SUFFICI ENT DETAIL TO ENABLE MODI. MUNDIPHARMA TO MANUFACTURE MARKET AND SELL THE PRE PARATIONS AND/OR TO MAINTAIN AND FILE ANY NECESSARY GOVERNMENTAL AUTHOR IZATION TO SELL THE PREPARATIONS IN THE TERRITORY; ADVISE MODI MUNDIPHA RMA IN THE IMPLEMENTATION OF THE KNOWHOW INCLUDING THE LATEST TECHNIQUES IN PRODUCTION AND QUALITY CONTROL; PROVIDE SERVICES OF TECHNICIANS ON MUTUALLY AGREED TERMS IF REQUIRED BY MODI MUNDIPHARMA TO SUPERVISE THE MANUFACTURE AND Q UALITY CONTROL OF THE PREPARATIONS; ITA NOS.3933 & 4189/DEL./2011 7 ARRANGE FOR TRAINING ON MUTUALLY AGREED TERMS OF RE ASONABLE NUMBER OF MODI MUNDIPHARMA'S TECHNICIANS AT ITS FACILITIES IN THE USE AND PRACTICE OF THE KNOWHOW; RENDER TECHNICAL ASSISTANCE ON MUTUALLY AGREED TERM S IN RESPECT OF PRACTICE OF THE KNOWHOW FOR THE MANUFACTURE OF THE PREPARATI ONS AT THE PLANT. THE DEPUTATION OF TECHNICIANS OF MUNDIPHARMA TO IND IA OR OF MODI MUNDIPHARMA OUTSIDE INDIA I.E. EITHER WAY SHALL BE SUBJECT TO APPROVAL OF THE GOVERNMENT OF INDIA/THE RESERVE BANK OF INDIA A S REGARDS THEIR TERMS NUMBERS DURATION OF STAY AND REMUNERATION OR SUCH OTHER MATTERS AS MAY BE SUBJECT TO SUCH APPROVAL. MUNDIPHARMA SHALL FROM TIME TO TIME CONVEY DISCLOS E AND MAKE AVAILABLE TO MODI MUNDIPHARMA DURING THE SUBSISTENCE OF THIS AGREEMENT ANY DEVELOPMENT AND IMPROVEMENTS (INCLUDING THE BENEFIT S OF ANY RESEARCH) THAT MAY BE MADE BY IT RELATING TO THE KNOWHOW OR T HE PREPARATIONS SUBJECT TO THIS AGREEMENT. MUNDIPHARMA OR ITS DESIGNEE WILL EXCLUSIVELY LICENS E TO MODI MUNDIPHARMA THE USE OF PATENTS FOR THE PURPOSES OF MANUFACTURE USE AND SALE OF THE PREPARATIONS DURING THE LIFE OF THE PAT ENTS. MODI MUNDIPHARMA SHALL IF PERMISSIBLE UNDER INDIA LAW AND WITH THE CONSENT OF MUNDIPHARMA APPLY FOR PATENTING OF MUNDIPHARMA KNO WHOW FOR PRODUCTION OF PREPARATIONS IN INDIA FOR AND ON BEHA LF OF MUNDIPHARMA OR ITS NOMINEE. 3. CONSIDERATION MODI MUNDIPHARMA'S RESPONSIBILITI ES OBLIGATIONS AND DUTIES. MODI MUNDIPHARMA WILL PAY A SUM BY WAY OF DESIGN E NGINEERING AND CONSULTANCY FEE CALCULATED AT THE RATE OF ONE AND H ALF PERCENT (1.5%) OF THE NET SALES IN RESPECT OF EACH PREPARATION OVER A PER IOD OFTEN (10) YEARS FROM COMMENCEMENT OF PRODUCTION OF SUCH PREPARATIONS. IN CONSIDERATION OF THE PROVISION OF KNOWHOW BY MUN DIPHARMA MODI MUNDIPHARMA WILL IN ADDITION ALSO PAY A ROYALTY TO MUNDIPHARMA AT TH E RATE OF THREE AND HALF PERCENT (3%) OF THE NET SALES IN RESPECT OF EACH PR EPARATION OVER A FIVE YEAR PERIOD FROM COMMENCEMENT OF PRODUCTION OF SUCH PREP ARATION. THE SUM OF THE AFORESAID ROYALTY AND DESIGN ENGINEE RING AND DESIGN FEES SHALL BE PAYABLE QUARTERLY FOR EACH FINANCIAL YEAR WITHIN THIRTY (30) DAYS OF OBTAINING THE RESERVE BANK OF INDIA'S APPROVAL FOR WHICH APPLICATION SHALL BE MADE BY MODI MUNDIPHARMA PROMPTLY FOR EACH CALEN DAR QUARTERLY NOT LATER THAN THIRTY (30) DAYS AFTER THE END OF EACH S UCH QUARTER. ITA NOS.3933 & 4189/DEL./2011 8 THE REMITTANCE OF ROYALTY AND DESIGN ENGINEERING AN D CONSULTANCY FEES SHALL BE ACCOMPANIED BY A STATEMENT WHICH SHALL SET FORTH THE UNITS OF EACH PREPARATION SOLD PER MONTH DURING THE FY AND THE PR ICE OF EACH PREPARATION AND THE QUANTITY AND LANDED COST OF RAW MATERIALS C ONSUMED DURING THE YEAR IN THE PREPARATION SOLD. 4.1 MODI MUNDIPHARMA HEREBY UNDERTAKES (IRRESPECTIV E OF HOW OR IN WHAT MANNER IT MAY HAVE ACQUIRED THE SAME) THAT KNO W- HOW OR SCIENTIFIC AND TECHNICAL INFORMATION OR ANY OTHER S ECRET INFORMATION FURNISHED BY MUNDIPHARMA TO IT AND ITS EMPLOYEES S HALL BE TREATED BY IT AT ALL TIMES AS SECRET AND CONFIDENTIAL AND MODI MUNDIPHARMA SHALL NOT DISCLOSED OR COMMUNICATE THE SAME TO ANY PARTY WHOMSOEVER SAVE AND EXCEPT OF THE PURPOSES OF MODI MUNDIPHARMA AND UNTIL THE SAME BECOMES PUBLIC KNOWLEDGE THROUGH NO FAULT OF M ODI MUNDIPHARMA. 5.1 FURTHER THE ARTICLE 4.7.3 PROVIDES THAT:- IN THE EVENT OF TERMINATION OF THIS AGREEMENT UNDER SUB CLAUSE 4.7.1 OR 4.7.2 THEREOF:- (A) MUNDIPHARMA SHALL BE RELIEVED OF ALL ITS OBLIG ATIONS AS FROM THE DATE OF TERMINATION; (B) MODI MUNDIPHARMA SHALL STOP USING THE PATENTS KNOWHOW SCIENTIFIC AND TECHNICAL INFORMATION AND OTHER PROPERTY RIGHTS GRANTED TO THEM BY MUNDIPHARMA OR ITS AFFILIATE(S). 5.2 AS ALREADY STATED THE AFORESAID AGREEMENT WAS VALID FOR 10 YEARS FROM THE EFFECTIVE DATE. HOWEVER IN THE MEAN TIME THE ABOVE COLLABORATION AGREEMENT WAS FURTHER AMENDED IN TERM S OF GOI MINISTRY OF INDUSTRY DELHI'S APPROVAL DATED 14.06. 1999 AND FOLLOWING AMENDMENTS WERE MADE TO THE ORIGINAL CLAU SES PERTAINING TO THE PAYMENT OF ROYALTY:- '(I) ROYALTY @ 3.5% (THREE POINT FIVE PERCENT) ON D OMESTIC SALES AND 8% (EIGHT PERCENT) ON EXPORT AND ENGINEERING CONSUL TANCY FEE OF 1.5% (ONE POINT FIVE PERCENT) SUBJECT TO TAXES FO R EXISTING PRODUCTS FOR A PERIOD OF 2 (TWO) YEARS FROM 1.12.97 TO 30.11 .99; (II) ROYALTY @ 3.5% (THREE POINT FIVE PERCENT) ON D OMESTIC SALES AND 8% (EIGHT PERCENT) ON EXPORT AND ENGINEERING CONSUL TANCY FEE OF 1.5% (ONE POINT FIVE PERCENT) SUBJECT TO TAXES FO R NEW PRODUCTS FOR A PERIOD OF 7 (SEVEN) YEARS FROM THE DATE OF COMMENCE MENT OF COMMERCIAL PRODUCTION.' THE ABOVE AGREEMENT WAS FURTHER AMENDED ON 1 9TH MA Y 2004 WITH EFFECT FROM 1 APRIL 2004. AS PER THE AMENDED AGREEMENT TH E APPELLANT WAS ITA NOS.3933 & 4189/DEL./2011 9 REQUIRED TO PAY ROYALTY @5% ON DOMESTIC SALE AND 8% OF EXPORT SALES. ALL OTHER CLAUSES OF THE EARLIER AGREEMENT REMAINED UNC HANGED. 5.3 FROM A PERUSAL OF THE ABOVE CLAUSES OF THE AGRE EMENT IT WOULD BE OBSERVED THAT THE AMOUNT PAID TO THE COLLABORATOR I S ONLY TOWARDS USE OF KNOW-HOW FOR MANUFACTURING THE PRODUCTS AND NOT TOWARDS THE PRICE FOR ACQUIRING CAPITAL ASSETS. FURTHER THE AP PELLANT IS LIABLE TO PAY ROYALTY TILL THE TIME IT IS USING THE KNOW-HOW AND ON TERMINATION OF THE CONTRACT THE APPELLANT WILL NOT BE ELIGIBLE TO USE THE KNOW-HOW. IT IS A MATTER OF RECORD THAT THE KNOW-HOW AND OTHE R TECHNICAL INFORMATION WAS NEVER SOLD TO THE APPELLANT COMPANY AND THE SAME HAD REMAINED THE EXCLUSIVE PROPERTY OF THE LICENSOR . EVEN THE RIGHT TO USE KNOW-HOW WAS LIMITED TO THE PERIOD DURING WHICH THE COLLABORATION AGREEMENT WAS IN FORCE AND THE APPELL ANT WAS PROHIBITED FROM USING THE SAME AFTER TERMINATION OF THE AGREEMENT. 5.4 AS STATED EARLIER THE LD. AO HAS TREATED 25% O F THE PAYMENT OF ROYALTY PAID BY THE APPELLANT AS INTANGIBLE ASSET A ND CAPITAL EXPENDITURE ON THE BASIS OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR. I N ORDER TO DRAW A COMPARATIVE ANALYSIS OF THE COLLABORATION AGREEMENT IN THE CASE OF THE APPELLANT COMPANY AND IN THE CASE OF SOUTHERN SWITC HGEAR THE APPELLANT COMPANY WAS REQUIRED TO FILED CLARIFICATI ONS AS TO HOW THE FACTS OF THE CASE OF THE APPELLANT COMPANY WERE DIF FERENT FROM THE FACTS OF M/S SOUTHERN SWITCHGEAR LTD. IN RESPONSE T O THE AFORESAID A DETAILED REPLY HAS BEEN FILED BY THE ID. COUNSELS F OR THE APPELLANT COMPANY VIDE LETTER DATED 08.07.2011 AS UNDER:- THE RULING OF SOUTHERN SWITCHGEAR LTD. -IS NOT APPL ICABLE ON THE FACTS OF THE CASE. THE FACTS OF THE RULING ARE AS UNDER: THE ASSESSEE ENTERED INTO A COLLABORATION AGREEMENT WITH A FOREIGN COMPANY BY NAME MESSRS. BRUSH ELECTRICAL ENGINEERI NG CO. LTD. U.K. UNDER THE SAID AGREEMENT THE FOREIGN COMPANY AGREED TO PROVIDE THE ASSESSEE TECHNICAL AID AND INFORMATION IN THE MANUFACTURE OF LOW TENSION SWITCHGEAR HIGH TENSION SWITCHGEAR ETC. AND THE RIGHT TO SELL SUCH PRODUCTS. THE TERM S OF THE AGREEMENT SPECIFICALLY PROVIDED THAT THE FOREIGN COMPANY DUR ING THE TERM OF THE AGREEMENT WILL NOT UNDERTAKE MANUFACTURE OF AN Y OF THE PRODUCTS IN INDIA IN RESPECT OF WHICH LICENCE HAS B EEN PROVIDED AND ALSO PROVIDED THAT IT WILL NOT GIVE SIMILAR LICENCE TO ANY OTHER PERSON IN INDIA. THUS THE LICENSE WAS EXCLUSIVE IN NATURE . THE TECHNICAL AID PROVIDED BY THE FOREIGN COMPANY I NCLUDED ASSISTANCE IN RELATION TO ESTABLISHMENT OF FACTORY AND OPERATIONS THEREOF OF THE ASSESSEE. THE FOREIGN COMPANY ALSO A GREED TO KEEP THE INDIAN COMPANY POSTED WITH THE LATEST AND MODEM DEVELOPMENTS IN THE FIELD OF MANUFACTURE OF SWITCHG EARS AND TRANSFORMERS AND TO TRAIN THE NECESSARY PERSONNEL A T THE U.K. ITA NOS.3933 & 4189/DEL./2011 10 FACTORY ETC. THE SAID AGREEMENT WAS ENTERED INTO F OR A PERIOD OF 10 YEARS AND WAS EXTENDABLE UNTIL TERMINATED BY EITHER OF THE PARTIES. FURTHER THE SAID AGREEMENT PERMITTED THE ASSESSEE TO CONTINUE USE ALL THE INFORMATION METHODS PROCESSES AND FORMULA E ACQUIRED IN PURSUANCE OF THIS AGREEMENT EVEN AFTER EXPIRY OF TH E AGREEMENT. THE ASSESSEE-COMPANY AGREED TO PAY A LUMP SUM CONSIDERA TION FOR TECHNICAL COLLABORATION FEE AND ALSO A RUNNING ROYA LTY ON VARIOUS SWITCHGEAR PRODUCTS AND PARTS SOLD. BASED ON THE FACTS OF SOUTHERN SWITCHGEAR AND THE F ACTS IN THE CASE OF ASSESSEE WE HAVE DISTINGUISHED IN THE TABULAR FORM AT AS BELOW: S.NO. FACTS OF SOUTHERN SWITCH GEAR FACTS OF MMPL ROYALTY AGREEMENT 1. THE FACTORY WAS BEING SET UP IT IS A RUNNING FACTORY FOR A NUMBER OF YEARS. 2. THE PAYEE WILL PUT ITS OWN STAFF TO SUPERVISE THE ERECTION OF FACTORY PREMISES LAYOUT OF MACHINE TOOLS & THE ORGANIZATION OF ALL WORK.THEREIN NO SUCH CONDITION IS IMPOSED. 3. THE PAYEE WILL HAVE UNDISPUTED CONTROL FOR A PERIOD OF FIRST 3 YEARS OR LESS AT ITS DISCRETION OF AL/ MANUFACTURING PROCESSES AND ACTIVITIES NO SUCH CONDITION IS IMPOSED 4. THE PAYEE HAS THE RIGHT TO RECOMMEND OR DISMISSAL OF ANY EMPLOYEE CONCERNED WITH THE MANUFACTURING NO SUCH CONDITION IS IMPOSED 5. THE PAYEE CAN MAINTAIN ITS TECHNICAL STAFF PREMISES OF SOUTHERN SWITCH GEAR (SS) AND THE RECOMMENDATION OF SUCH STAFF WILL BE BINDING ON SS NO SUCH CONDITION IS IMPOSED 6. EVEN AFTER THE TERMINATION OF THE AGREEMENT TECHNOLOGY CONTINUES TO BE AVAILABLE TO SS THE AGREEMENT DOES NOT ENTITLE THE APPELLANT TO USE MAG'S INDUSTRIAL PROPERTIES AND KNOW- HOW AFTER THE TERMINATION OF THE AGREEMENT. 7. THE RIGHT TO MANUFACTURE IS EXCLUSIVE IN INDIA IN THE APPELLANT'S CASE ALSO IT IS SO. ITA NOS.3933 & 4189/DEL./2011 11 BASED ON THE AFORESAID FACTS THE SUPREME COURT HEL D THAT: AN ASSET OF ENDURING NATURE HAS BEEN ACQUIRED BY TH E ASSESSEE AS BENEFIT WILL CONTINUE BEYOND TERMINATION OF THE AGR EEMENT; AND PART OF TECHNICAL PLAN WAS ALSO RELATED TO SETTING UP OF THE FACTORY ACCORDINGLY 25% OF THE TECHNICAL FEE AND 25% OF TH E ROYALTY PAYMENTS WERE DISALLOWED. THE PRIMARY REASONS WHICH LED TO T HE JUDGMENT AS PRONOUNCED IN THE RULING HAVE BEEN HIGHLIGHTED BEL OW. ' ... A PERUSAL OF THE ABOVE CLAUSES CLEARLY INDICA TES THAT THE TECHNICAL KNOWLEDGE 'LIE ASSESSEE- COMPANY OBTAINED THROUGH THIS AGREEMENT FROM THE FOREIGN COMPANY SECURED TO THE A SSESSEE AN ENDURING ADVANTAGE AND BENEFIT IN THAT THE SAME WAS AVAILABLE TO THE ASSESSEE FOR ITS MANUFACTURING AND INDUSTRIAL PROCE SSES EVEN AFTER THE TERMINATION OF THE AGREEMENT '. THE FOREIGN COMPANY ALSO MAKES AVAILABLE TO THE AS SESSEE ITS PROCEDURES DESIGNS EXPERIENCE AND TECHNICAL KNOW- HOW IN RESPECT OF THE SAME. THOUGH THE DURATION OF THE AGREEMENT I S FIVE YEARS THE ASSESSEE EVEN AFTER THE EXPIRY OF THE PERIOD COULD USE THE METHODS OF PRODUCTION PROCEDURE EXPERIMENTS IMPROVEMENTS WHICH HAD BEEN MADE AVAILABLE TO THEM IN PURSUANCE OF THE AGR EEMENT. THUS THE ASSESSEE HAD ACQUIRED KNOWLEDGE OF ENDURING NAT URE '. 'THE TECHNICAL ASSISTANCE CONTEMPLATED IN THE AGREE MENT COVERS THE ESTABLISHMENT OF THE FACTORY AND THE OPERATION THER EOF FOR THE MANUFACTURE OF TRANSFORMERS OF ALL KINDS AND TYPES '. THE FACTS OF THE ABOVE RULING ARE COMPLETELY DIFFER ENT FROM THE FACTS OF THE ASSESSEE AND THEREFORE THE ABOVE STATED JUDGMENT I S NOT APPLICABLE IN THE ASSESSEE'S CASE. IN THE FOLLOWING MENTIONED POINTS WE HAVE BRIEFLY STALED EXPLANATIONS WHICH SUPPORT THIS CONTENTION OF THE A SSESSEE: NO ASSISTANCE TO THE ASSESSEE FOR THE PURPOSES OF E STABLISHING ANY FACTORY. THE AGREEMENT ONLY PROVIDES FOR GRANT OF K NOW-HOW 1 0 MANUFACTURE THE PRODUCTS. THE ASSESSEE IS NOT ENTITLED TO USE THE 'KNOW-HOW' AFTER THE TERMINATION OF THE AGREEMENT. SIMILARLY IN REGARD TO THE FACTS OF M/S. FENNER WO ODROFFE AND COMPANY LTD. IT HAS BEEN ARGUED BY THE ID. COUNSELS THAT I N THE SAID CASE THE COMPANY WAS PERMITTED TO USE THE TECHNICAL DATA AND KNOWLEDGE ACQUIRED UNDER THE AGREEMENT EVEN AFTER THE PERIOD OF CONTRA CT OF 10 YEARS AND THE ASSESSEE COULD DEAL WITH THE SAME AS IF IT WERE THE IR OWN ASSET. THUS THERE WAS NO LIMITATION IN THE AGREEMENT AS TO ITS ENDURA BILITY WHICH IS NOT THE CASE WITH THE APPELLANT COMPANY. ITA NOS.3933 & 4189/DEL./2011 12 5.5 IN VIEW OF THE AFORESAID DISCUSSION AND HAVING REGARD TO THE SPECIFIC CLAUSES OF THE COLLABORATION AGREEMENT BETWEEN THE APPELLANT AND MUNDIPHARMA AG SWITZERLAND DEALING WITH GRANTING O F LICENSE I RIGHTS TO USE TECHNICAL KNOW-HOW AND TECHNICAL INFO RMATION AND THE PERIOD OF OPERATION OF CONTRACT AND CONSEQUENCES OF TERMINATION/EXPIRATION OF AGREEMENT I HAVE NO HESI TATION IN HOLDING THAT THE APPELLANT COMPANY HAD NOT ACQUIRED ANY OWN ERSHIP OF TECHNICAL KNOW-HOW INFORMATION PATENTS AND OTHER DATA AS THE RIGHTS GRANTED TO THE APPELLANT WERE LIMITED TO USER OF TH E AFORESAID INFORMATION FOR MANUFACTURING THE VARIOUS FORMULATI ONS. THE AFORESAID TECHNICAL KNOW-HOW AND INFORMATION ETC. W ERE NEVER TRANSFERRED TO/ACQUIRED BY THE APPELLANT COMPANY AN D THE SAME REMAINED THE PROPERTY OF M/S. MUNDIPHARMA AG SWITZ ERLAND. FURTHER THERE IS NO STIPULATION IN THE COLLABORATI ON AGREEMENT FOR PROVIDING ANY ASSISTANCE OR ASSETS TO THE APPELLANT COMPANY FOR ESTABLISHING ANY FACTORY AS IT WAS IN THE CASE OF M /S SOUTHERN SWITCHGEAR LTD. THE INFORMATION TECHNICAL KNOW-HOW AND OTHER RIGHTS GRANTED TO THE APPELLANT COMPANY WERE AVAILA BLE TO THE APPELLANT COMPANY FOR MANUFACTURING PURPOSES ONLY D URING THE PERIOD OF AGREEMENT AND THE APPELLANT WAS NOT ENTITLED TO USE THE SAME ON TERMINATION/EXPIRY OF THE AGREEMENT . THUS THE FAC TS OF THE APPELLANT CASE ARE NOT COMPARABLE EVEN WITH THE FACTS OF M/S. FENNER WOODROFFE AND COMPANY LTD. AND THEREFORE RELIANCE PLACED BY THE ID. AO ON THE AFORESAID CASE IS ALSO MISPLACED. 5.6 IN VIEW OF THE AFORESAID FACT SITUATION I HAVE NO HESITATION IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN TREATING THE 25% O F THE ROYALTY PAYMENT AS CAPITAL IN TOTAL DISREGARD OF THE FACT T HAT IN ALL THE EARLIER A YS NO SUCH DISALLOWANCE WAS CONSIDERED IN THE CASE OF THE APPELLANT COMPANY AS ALSO THE FACT THAT NO TANGIBLE OR INTANG IBLE ASSET WAS ACQUIRED BY THE APPELLANT COMPANY IN LIEU OF PAYMEN T OF ROYALTY TO MUNDIPHARMA AG SWITZERLAND. ACCORDINGLY THE DISA LLOWANCE OF RS. 8219092/- IS BEING DELETED. 9. AFTER HEARING BOTH THE SIDES WE HOLD THAT THE C IT (A) HAS RIGHTLY DELETED THE ADDITION MADE. THE PAYMENT OF THE AMOU NT WAS AS A PERCENTAGE OF THE SALES. THE ASSESSEE WAS NOT ENTITLED TO USE TH E MAG INDUSTRIAL PROPERTIES AND KNOW-HOW AFTER THE TERMINATION OF THE AGREEMENT . THE ASSESSEE WAS A RUNNING FACTORY AT THE TIME OF COLLABORATION ENTERE D INTO. NO SUCH DISALLOWANCES HAVE BEEN MADE IN THE PAST YEARS ALTH OUGH THE AGREEMENT WAS ITA NOS.3933 & 4189/DEL./2011 13 ENFORCED SINCE 1990. KEEPING ALL THESE FACTS IN VI EW WE FIND NO MERITS IN THE APPEAL OF THE REVENUE HENCE THE SAME IS DISMIS SED. 10. IN THE RESULT BOTH THE CROSS APPEALS FILED BY ASSESSEE AND REVENUE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 29 TH DAY OF MARCH 2012. SD/- SD/- (I.P. BANSAL) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 29 TH DAY OF MARCH 2012 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XVII NEW DELHI. 5.CIT(ITAT) NEW DELHI AR ITAT NEW DELHI.