ACIT, New Delhi v. M/s. Power Plant Performance & Improvement Ltd, New Delhi

ITA 4317/DEL/2009 | 2001-2002
Pronouncement Date: 12-02-2010 | Result: Dismissed

Appeal Details

RSA Number 431720114 RSA 2009
Bench Delhi
Appeal Number ITA 4317/DEL/2009
Duration Of Justice 3 month(s)
Appellant ACIT, New Delhi
Respondent M/s. Power Plant Performance & Improvement Ltd, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 12-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted F
Tribunal Order Date 12-02-2010
Date Of Final Hearing 13-01-2010
Next Hearing Date 13-01-2010
Assessment Year 2001-2002
Appeal Filed On 11-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F: NEW DELHI BEFORE SHRI C.L. SETHI JUDICIAL MEMBER & SHRI SHAMIM YAHYA ACCOUNTANT MEMBER ITA NO. 4317/DEL/2009 ASSESSMENT YEAR : 2001-02 DCIT CIRCLE 14(1) NEW DELHI. VS. M/S. POWER PLANT PERFORMANCE & IMPROVEMENT LTD. 8-A RING ROAD I.P. ESTATE NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ISTIYAQUE AHMED SR. D.R. RESPONDENT BY : MS. MANJU BHARDWAJ C.A. O R D E R PER: C.L. SETHI J.M. THE REVENUE IS IN APPEAL AGAINST THE ORDER DATED 31.08.2009 PASSED BY THE LD. CIT(A) IN THE MATTER OF AN ASSESSMENT MADE BY T HE A.O. U/S 147/143(3) OF THE INCOME TAX ACT 1961 (THE ACT) FOR THE ASSESSMENT YEAR 2001-02. 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 34 45 250/- MADE BY THE ASSESSING OFFICER BY TREATING THE PAYMENT OF ROYALT Y FOR TECHNICAL KNOW- HOW AS CAPITAL EXPENDITURE. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO TREAT THE PAYMENT OF ROYALTY FOR TECHNICAL KNOW-HOW AS REVENUE EXPENDITU RE AND NOT APPRECIATING PROPERLY THAT THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. VS. CIT 232 IT R 359 RELIED UPON BY THE ASSESSING OFFICER IS SQUARELY APPLICABLE TO THE ASSESSEES CASE. ITA NO. 4317/DEL/2009 2 OF 16 3. IN THIS CASE ORIGINAL ASSESSMENT WAS COMPLETED ON 09.02.2004 U/S 143(3) BY THE A.O. DETERMINING TOTAL INCOME AT RS. 59 09 4 49/-. THEREAFTER THE CASE WAS REOPENED U/S 147 AND NOTICE U/S 148 DATED 27.0 3.2008 WAS ISSUED AND SERVED UPON THE ASSESSEE. IT WAS NOTICED BY THE A.O. THAT ASSESSEE COMPANY HAD DEBITED RS. 131.81 LAKHS IN THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF ROYALTY PAID TO A FOREIGN COMPANY. THE ASSESSEE WAS ASKED BY THE A.O . TO EXPLAIN AS TO WHY 25% OF THE ROYALTY PAID SHOULD NOT BE TREATED AS CAPITA L EXPENDITURE IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SO UTHERN SWITCH GEAR LTD. VS. CIT (1997) 232 ITR 359 (SC). IN REPLY THERETO THE ASSESSEE SUBMITTED THAT THE FACTS OF THE CASE OF SOUTHERN SWITCH GEAR LTD. VS. CIT (SUPRA) ARE DISTINGUISHABLE FROM THE ASSESSEES CASE. IN THE CASE OF SOUTHERN S WITCHGEAR LTD. (SUPRA) PAYMENT WAS MADE IN LUMP SUM OVER A PERIOD OF FIVE YEARS FOR THE USE OF TECHNICAL KNOW-HOW AND AID TO MANUFACTURE SWITCHGEA R FOR AUTOMOTIVES. THE AGREEMENT CLEARLY SPECIFIED THAT THE RIGHTS GIVEN T O THE ASSESSEE PURSUANT TO THE AGREEMENT WILL BE MADE AVAILABLE EVEN AFTER THE EXP IRY OF THE AGREEMENT. THE COMPANY WAS USING TECHNICAL DRAWINGS AND DESIGNS ET C IN THE FUTURE FOR MANUFACTURING EVEN AFTER TERMINATION OF THE AGREEME NT. THUS IT WAS HELD THAT RIGHT PROVIDED IN THE AGREEMENT WAS OF ENDURING NAT URE BENEFIT AND THEREFORE A PORTION OF IT WAS HELD TO BE CONSIDERED AS CAPITAL EXPENDITURE. IN CASE OF THE ASSESSEE COMPANY FACTS ARE CLEARLY DIFFERENT. THE ASSESSEE IS A JOINT VENTURE OF BHEL AND SIEMENS INC AND HAS BEEN SET UP TO PROVIDE RENOVATION AND IMPROVEMENT OF POWER PLANTS. THE ROYALTY IS PAID F OR USE OF NECESSARY TECHNICAL ITA NO. 4317/DEL/2009 3 OF 16 INFORMATION AND PROVIDE TECHNICAL ASSISTANCE TO UND ERTAKE POWER PLANT IMPROVEMENT SPECIFIC TO A PROJECT. ROYALTY PAID IS DEPENDENT ON NET SALES PRICE INVOICED BY THE COMPANY AND IS NOT FOR PROVI DING THE BENEFIT OF ENDURING NATURE TO THE ASSESSEE. BUT THE A.O. HAS NOT ACCEPT ED THE ASSESSEES CONTENTION IN THE LIGHT OF THE DECISION OF HONBLE APEX COURT AND HAD TAKEN A VIEW THAT 25% OF ROYALTY PAID FOR TECHNICAL KNOW HOW IS TO BE TREATE D AS CAPITAL EXPENDITURE. THE A.O.S ORDER IN THIS REGARD READS AS UNDER:- I HAVE CONSIDERED ASSESSEES REPLY AND THE SAME I S NOT ACCEPTABLE AS THE HONBLE APEX COURT HAS CLEARLY HELD THAT 25% OF ROY ALTY PAID FOR TECHNICAL KNOW-HOW TO BE CAPITAL EXPENDITURE AND HE NCE 25% ROYALTY PAYMENT OF RS. 34.45 LAKHS IS DISALLOWED BEING CAPI TAL EXPENDITURE. 4. BEING AGGRIEVED THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LD. CIT(A). 5. ON THE ISSUE ABOUT THE A.O.S ORDER IN CONSIDERI NG 25% OF THE ROYALTY AS CAPITAL EXPENDITURE THE ASSESSEE SUBMITTED THE FAC TS OF THE CASE AS WELL THEIR SUBMISSIONS BEFORE THE LD. CIT(A) AS NARRATED HEREI NAFTER. 6. THE ASSESSEE POINTED OUT DIFFERENCE BETWEEN THE FACTS OF THE ASSESSEES CASE WITH THAT OF THE CASE OF SOUTHERN SWITCH GEAR LTD. VS. CIT (SUPRA) BY POINTING OUT AS UNDER:- POINT OF DIFFERENCE FACTS OF SOUTHERN SWITCHGEAR FACTS OF ASSESSEES CASE 1. NATURE OF BUSINESS SSL A MANUFACTURING COMPANY WHICH REQUIRES TECHNOLOGY FOR ESTABLISHING STARTING AND OPERATING A FACTORY FOR MANUFACTURE OF TRANSFORMERS AND SWITCHGEARS. THE ASSESSEE OS S ASERVCE COMPAMY AND IS ENGAGED IN THE RENOVATION LIFE EXTENTSION AND MODERNIZATION OF THERMAL POWERPLANTS. THE COMPANY IS WORKING ON THE ITA NO. 4317/DEL/2009 4 OF 16 OLD POWER PLANTS WHOSE PERFORMANCE HAS GRADUALLY REDUCED OVER THE PERIOD OF TIME. EACH OLD PLANT HAS DIFFERENT WORKING PERFORMANCE PARAMETERS CONDITIONS AND STATUS. 2. NATURE OF ROYALTY PAYMENT THE PAYMENT WAS MADE IN LUMP SUM OVER A PERIOD OF FIVE YEARS FOR OBTAINING THE TECHNOLOGY TO SET UP A PLANT TO AID TO MANUFACTURE SWITCHGEAR FOR AUTOMOTIVES. THE PAYMENT IS BASED ON THE NET SALES PRICE @ 1.25% FOR SIEMENS AND 0.25% FOR BHEL. 3. TERMS OF AGREEMENT A) FOR SSL THE AGREEMENT CLEARLY SPECIFIED THAT THE RIGHTS GIVEN TO THE ASSESSEE PURSUANT TO THE AGREEMENT ARE EXCLUSIVE RIGHTS AND WOULD BE AVAILABLE EVEN AFTER THE TERMINATION OF THE AGREEMENT. A) PARA 3.1 & 3.2 CLEARLY STATES THAT THE LICENSE GRANTED BY SAG FOR USE OF INFORMATION IS NON- EXCLUSIVE AND NON- TRANSFERABLE AND THE LICENSE DOES NOT INCLUDE THE RIGHT TO GRANT SUB- LICENSE TO ANY THIRD PARTY. B) THE COMPANY COULD USE THE TECHNICAL DRAWINGS AND DESIGNS ETC. IN FUTURE FOR MANUFACTURING EVEN AFTER THE TERMINATION OF THE AGREEMENT. B) PARA 2.3 OF THE AGREEMENT CLEARLY STATES THAT NO INFORMATION OR DOCUMENTATION SHALL BE RENDERED ABOUT THE DESIGN AND THE MANUFACTURE OF COMPONENTS AND MATERIALS. 4. ENDURING BENEFIT AS PER THE TERMS OF THE AGREEMENT THE USE OF TECHNICAL KNOW-HOW WAS AVAILABLE TO THE COMPANY EVEN AFTER THE EXPIRY OF THE TERM OF THE AGREEMENT. HENCE IT WAS HELD THAT IT WAS FOR PROVIDING ENDURING BENEFIT TO THE COMPANY TO EXPLOIT THE TECHNICAL KNOW- HOW. THE TECHNOLOGY AND INFORMATION USED IS SPECIFIC TO A PARTICULAR POWERPLANT AND THAT TOO AT A PARTICULAR POINT OF TIME BASED ON THE RESIDUAL LIFE ASSESSMENT (RLA) AT THAT POINT OF TIME AND FOR THAT PARTICULAR POWERPLANT. THE FINDINGS OF RLA CANNOT BE APPLIED TO ANOTHER POWERPLANT AND ITA NO. 4317/DEL/2009 5 OF 16 THEREFORE TECHNOLOGY USED FOR A POWERPLANT CANNOT BE USED FOR ANOTHER POWERPLANT AND THEREFORE BENEFIT OF ENDURING NATURE IS DERIVED TO ASSESSEE. 7. IN SUPPORT OF THE ASSESSEES COMPANY THE ASSESS EE RELIED UPON FOLLOWING DECISIONS:- (I) CIT VS. CIBA OF INDIA LTD. (1968) 69 ITR 692 (S C) (II) CIT VS. GUJARAT CARBON LTD. (2002) 254 ITR 294 (GUJ) (III) CIT VS. JYOTI ELECTRIC MOTORS LTD. (2002) 255 ITR 245 (GUJ) (IV) CIT VS. J.K. SYNTHETIC 176 TAXMAN 355 = 309 IT R 371 (DEL) 8. AFTER CONSIDERING THE ASSESSEES SUBMISSION AND ANALYZING THE AFORESAID DECISIONS RELIED UPON BY THE ASSESSEE BEFORE THE LD . CIT(A) THE LD. CIT(A) DELETED THE DISALLOWANCE MADE BY THE A.O. BY TREATI NG THE PAYMENT OF ROYALTY TO BE OF REVENUE IN NATURE. 9. HENCE THE DEPARTMENT IS IN APPEAL BEFORE US. 10. THE LD. D.R. REITERATING THE A.O.S OBSERVATION HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHER N SWITCHGEAR LTD. VS. CIT (SUPRA) TO CONTEND THAT THE TOTAL PAYMENT MADE BY T HE ASSESSEE TOWARDS ROYALTY IS TO BE CONSIDERED IN THE NATURE OF CAPITAL EXPENDITU RE INASMUCH AS THERE WAS NO EMBARGO ON MANUFACTURING EVEN AFTER THE EXPIRY OF T HE AGREEMENT. HE FURTHER SUBMITTED THAT THE FACTS OF THE PRESENT CASE ARE QU ITE AKIN TO THE FACTS OF THE SOUTHERN SWITCHGEAR LTD. VS. CIT (SUPRA) WHERE HON BLE SUPREME COURT HAD TAKEN A VIEW THAT 25% OF THE TOTAL PAYMENT ARE TO B E CONSIDERED IN THE NATURE OF ITA NO. 4317/DEL/2009 6 OF 16 CAPITAL EXPENDITURE. HE THEREFORE SUBMITTED THAT THE A.O.S ORDER IS TO BE RESTORED. 11. THE LD. COUNSEL FOR THE ASSESSEE MS. MANJU BHA RDWAJ HAS REITERATED THE FACTS AND SUBMISSIONS AS WERE SUBMITTED BEFORE THE LD. CIT(A). THE ARGUMENTS OF THE ASSESSEE MADE BEFORE THE LD. CIT(A) HAS ALRE ADY BEEN REPRODUCED ABOVE AND THEREFORE THEY NEED NOT TO BE REPEATED HERE A GAIN. 12. WE HAVE CONSIDERED THE RIVAL CONTENTION OF BOTH THE PARTIES AND HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIE S BELOW. WE HAVE CAREFULLY PERUSED THE VARIOUS DOCUMENTS AND PAPERS PLACED IN THE PAPER BOOK FILED BY THE ASSESSEE. 13. VARIOUS DECISIONS CITED AT THE BAR HAVE BEEN DE LIBERATED UPON. 14. THE ASSESSEE COMPANY IS IN THE BUSINESS OF RENO VATION AND MODERNIZATION OF OLD POWER PLANTS SINCE ITS INCORPORATION IN MAY 1997. TILL FINANCIAL YEAR 2000-01 THE ASSESSEE PAID ROYALTY IN PURSUANCE OF THE FOREIGN COLLABORATION AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE COMPANY BHEL AND SIEMENS AKTENGESELLSCHAFT GERMANY. THE AGREEMENT WAS EFFEC TIVE FROM/ ON 1 ST SEPTEMBER 1997. THE ASSESSEE COMPANY DEBITED RS. 131.81 LAKHS IN THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF ROYALTY PAID ON THE BASIS OF NET SALES/ TURNOVER. THE COPY OF FOREIGN COLLABORATION AGREEMENT BETWEEN ASSESSEE BHEL AND SIEMENS GERMANY EFFECTIVE FROM 1 ST SEPTEMBER 1997 IS PLACED AT PAGES 12 TO 30 OF THE PAPER BOOK FILED BY THE ASSESSEE. AS PER THI S AGREEMENT THE ASSESSEE ITA NO. 4317/DEL/2009 7 OF 16 COMPANY IS A JOINT VENTURE OF BHEL AND SIEMENS. IT IS MENTIONED IN THE AGREEMENT THAT BHEL IS AMONGST OTHER THINGS ENGAG ED IN THE BUSINESS OF MANUFACTURING DEVELOPMENT AND SALE OF THERMAL TURB INE GENERATORS SETS AND BOILERS AND THEIR RELATED PARTS AND COMPONENTS BESI DES BEING INTERNATIONALLY RECOGNIZED AS A LEADING SUPPLIER OF QUALITY PRODUCT S AND SERVICES CAPABLE OF UNDERTAKING ENGINEERING AND CONSTRUCTION ON TURNKEY BASIS AS WELL AS PLANT PERFORMANCE IMPROVEMENT OF POWER PLANT AND THE SIE MENS IS AMONGST OTHER THINGS ENGAGED IN THE SIMILAR ACCOUNT OF BUSINESS. BHEL AND SIEMENS HAVE MORE THAN TWO DECADES OF SUCCESSFUL COOPERATION SER VING THE POWER GENERATION MARKET IN INDIA AS WELL AS IN OTHER MARKETS. THE PR ESENT ASSESSEE COMPANY HAS BEEN JOINTLY SET UP BY BHEL AND SIEMENS TO PROVIDE PLANT PERFORMANCE IMPROVEMENT IN THE AGREED MARKET. BOTH BHEL AND SI EMENS HAD AGREED TO CONTRIBUTE TO THE EQUITY CAPITAL OF ASSESSEES JVC. IT WAS ALSO AGREED THAT SIEMENS WOULD TRANSFER NECESSARY TECHNICAL INFORMAT ION AND PROVIDE TECHNICAL ASSISTANCE TO THE ASSESSEE JVC. THE NATURE OF ACTI VITY OF PLANT PERFORMANCE IMPROVEMENT HAS BEEN DESCRIBED IN CLAUSE 1.1 OF TH E AGREEMENT AS UNDER:- 1.1 PLANT PERFORMANCE IMPROVEMENT SUCH ACTIVITIES CARRIED OUT AT FOSSIL FUEL POWER P LANTS WHERE EITHER OVER THE YEARS THE OVERALL PERFORMANCE OF SUCH PLANTS HA S SHOWN A CONTINUOUSLY YEARS DECLINING TREND OR DOES NOT REPR ESENT THE LATEST STATE OF THE ART. SPECIFICALLY PLANT PERFORMANCE IMPROV EMENT ENVISAGES COST EFFECTIVE AND DESIGN ORIENTED STEPS FOR IMPROVING T HE PERFORMANCE OF THE PLANT BEYOND THE VALUES ACHIEVED PRIOR TO THE RENDE RING OF SUCH ACTIVITIES SUCH AS RESTORING THE LOST CAPACITY EFFICIENCY AND AVAILABILITY TO ITS ORIGINAL RATING OR BEYOND OR CAPACITY UPGRADATION A ND/ OR EXTENDING THE LIFE OF THE PLANT BASED ON IN-DEPTH EXAMINATIONS R ESIDUAL LIFE ASSESSMENT ITA NO. 4317/DEL/2009 8 OF 16 STUDIES AND PERFORMANCE EVALUATION TEST. PLANT PER FORMANCE IMPROVEMENT INCLUDES SUPPLY OF PARTS AND COMPONENTS ACCORDING TO ORIGINAL AND/OR NEW DESIGNS THE ERECTION AND COMMI SSIONING AS WELL AS ENGINEERING SERVICES CONNECTED WITH SUCH ACTIVITIES . 14.1 THE SCOPE OF TECHNICAL INFORMATION AGREED TO B E TRANSFERRED BY SIEMENS TO ASSESSEE JVC IS DESCRIBED IN CLAUSE 1.2 OF THE AGRE EMENT AS UNDER:- 1.2 INFORMATION : TECHNICAL INFORMATION PERTAIN ING TO PLANT PERFORMANCE IMPROVEMENT WHICH KWU FS TO SIEMENS USE S FOR THE BUSINESS OF PLANT PERFORMANCE IMPROVEMENT WHETHER ORAL OR IN RECORDED FORM WHETHER PATENTED OR NOT WHICH ARE AVAILABLE AT THE DEPARTMENT KWU FS OF THE KWU-GROUP OF SIEMENS AND WHICH SIEMEN S HAS THE RIGHT AND THE POWER TO DISPOSE OF. 14.2 THE NATURE OF THE SERVICES ARE TECHNOLOGY TRAN SFER TO BE RENDERED BY SIEMENS TO JVC AND GRANT OF LICENSE WHICH ARE DETA ILED IN CLAUSE 2 AND 3 OF THE AGREEMENT. IN CLAUSE 2 IT IS PROVIDED THAT SIEMEN S SHALL PROVIDE TRANSMISSION OF INFORMATION AND TRANSMISSION OF DOCUMENTATION TO JV C. IT IS ALSO PROVIDED THEREIN THAT SIEMENS SHALL TRAIN JOINT VENTURE COMP ANYS EXPERTS IN THEIR FACILITIES IN GERMANY AND AT SITES IN ORDER TO FAMILIARISE SUC H EXPERTS WITH THE INFORMATION AND WITH THE KNOW-HOW INCORPORATED IN THE DOCUMENTA TION. THE SIEMENS SHALL ALSO DELEGATE ITS EXPERTS TO THE FACILITIES OF JVC IN ORDER TO ASSET THE PERSONNEL OF JVC IN ACTIVITIES FOR PLANT PERFORMANCE IMPROVEMENT UPON REQUEST OF JVC AND SIEMENS IS ALSO PREPARED TO PROVIDE FURTHER TECHNIC AL ASSISTANCE AGAINST REASONABLE REMUNERATIONS TO BE PAID BY JVC AND UPON REQUEST OF JVC. IT WAS ALSO AGREED THAT SIEMENS SHALL GRANT TO JVC THE NON -EXCLUSIVE NON-TRANSFERABLE LICENSE TO USE INFORMATION AND DOCUMENTATION SUPPLI ED UNDER THE AGREEMENT INCLUDING THE RELATED PATENTS IF ANY FOR CARRYING OUT ON PLANT PERFORMANCE ITA NO. 4317/DEL/2009 9 OF 16 IMPROVEMENT IN THE AGREED MARKET AND TO SALE PLANT PERFORMANCE IMPROVEMENT IN THE AGREED MARKET. THE EXPORT OF PLANT PERFORMANCE IMPROVEMENT TO OTHER COUNTRIES OTHER THAN THE AGREED MARKED MAY ALSO BE TAKEN PLACE ON CASE BY CASE BASED UPON THE PRIOR WRITTEN APPROVAL OF SIEMENS. CLAUSE 3.2 PROVIDES THAT THE LICENSE GRANTED UNDER 3.1 SHALL NOT INCLUDE THE RIG HT TO GRANT SUB-LICENSE TO ANY THIRD PARTY AND NO RIGHTS ARE GRANTED TO JVC UNDER THE SAID AGREEMENT CONCERNING THE TRADE NAME AND TRADE MARKETS OF SIEMENS. CLAUS E 3.3 PROVIDES THAT JVC SHALL INFORM SIEMENS OF ALL IMPROVEMENTS OF PLANT PERFORM ANCE IMPROVEMENT MADE BY JVC UNDER THE AGREEMENT AND SHALL GRANT TO SIEMENS AND THEIR MAJORITY CONTROL SUBSIDIARIES A NON-EXCLUSIVE NON-TRANSFERABLE AND ROYALTY FREE LICENSE OF SUCH IMPROVEMENTS AND RELATED PATENTS THEREON IF ANY I NCLUDING A RIGHT TO GRANT SUB- LICENSE THEREON. THE JVC WAS ALLOWED TO USE ANY IT S LEAFLETS OFFERS AND OTHER RECORDS DESIGNATION EQUIVALENT TO THE TEXT CARRIED OUT IN INDIA BY POWER PLANT PERFORMANCE IMPROVEMENT LTD. UNDER LICENSE OF SIEME NS AND BHEL. IT WAS FURTHER PROVIDED IN THE AGREEMENT THAT UPON TERMINA TION OF THIS AGREEMENT JVC SHALL FORTHWITH CEASE USING ANY NAME MARKETING OR OTHER TERM OR DESIGNATION INDICATING THAT PLANT PERFORMANCE IMPROVEMENT CARRI ED OUT BY JVC ARE MADE ACCORDING TO SIEMENS INFORMATION UNLESS OTHERWISE AGREED UPON BY THE PARTIES CONCERNED IN WRITING. 14.3 CLAUSE 3.4.3 PROVIDES THAT JVC SHALL MAINTAIN THE QUALITY OF PLANT PERFORMANCE IMPROVEMENT CARRIED OUT BY JVC AS REQUI RED BY SIEMENS AND ITA NO. 4317/DEL/2009 10 OF 16 ACCORDING TO THE INFORMATION PROVIDED BY SIEMENS AN D SHALL ONLY DEVIATE FROM SUCH INFORMATION WITH THE PRIOR WRITTEN CONSENT OF SIEMENS. 14.4 CLAUSE 3.4.4 PROVIDES THAT SIEMENS SHALL HAVE THE RIGHT TO INSPECT PLANT PERFORMANCE IMPROVEMENT CARRIED OUT BY JVC AT JVCS FACILITIES AND/OR AT SITE. JVC SHALL TAKE IMMEDIATE ACTION TO REMEDY ANY QUALI TY PROBLEMS. 14.5 CLAUSE 3.4.5 PROVIDES THAT SIEMENS RESERVES TH E RIGHT TO REVOKE ITS CONSENT PROVIDED FOR UNDER CLAUSE 3.4.1 ABOVE IF JVC FAILS TO COMPLY WITH ANY PROVISION OF CLAUSES 3.4.3 AND 3.4.4 ABOVE. 14.6 IN CONSIDERATION OF THE SUPPLY OF INFORMATION AND DOCUMENTATION UNDER THE AGREEMENT AND IN CONSIDERATION OF THE RIGHT GRANTED BY SIEMENS THE JOINT VENTURE COMPANY SHALL PAID TO SIEMENS ROYALTY AT 1.25% OF T HE NET SALE PRICE BUT IN NO EVENT EXCEEDING RS. 2.5 CRORES IN A YEAR DURING THE FIRST FOUR YEARS AND AT THE RATE OF 1% OF THE NET SALE PRICE BUT IN NO EVENT EXCEEDI NG RS. 3 CRORES IN A YEAR AFTER THE FIRST FOUR YEARS. CLAUSE 7 OF THE AGREEMENT PR OVIDES THAT FOR THE TERM OF THE AGREEMENT AND FIVE YEARS THEREAFTER JVC SHALL KEEP CONFIDENTIAL ALL INFORMATION AND DOCUMENTATION FURNISHED BY SIEMENS UNDER THE AG REEMENT SUBJECT TO THE CERTAIN EXCEPTIONS ABOUT ANY INFORMATION OF PUBLIC KNOWLEDGE OR ANY INFORMATION RECEIVED FROM THIRD PARTY WITHOUT ANY SECRECY INFOR MATION. THE AGREEMENT WAS TERMINABLE FORTHWITH IF OTHER PARTY FAILS TO PERFOR M HIS OBLIGATION PROVIDE UNDER THE AGREEMENT. ITA NO. 4317/DEL/2009 11 OF 16 14.7 AFTER EXPIRATION OF THE AGREEMENT JVC WILL BE FREE TO CARRY OUT PLANT PERFORMANCE IMPROVEMENT IN THE AGREED MARKET WITHOU T PAYMENT OF ANY REMUNERATION AND FEES WHATSOEVER USING THE INFORMAT ION AND PATENT OF SIEMENS WHICH ARE FURNISHED/ GRANTED UNDER THE AGREEMENT. 15. IN THE LIGHT OF THE AFORESAID CONDITIONS OF THE AGREEMENT WE ARE REQUIRED TO DECIDE THIS ISSUE WHETHER PAYMENT OF ROYALTY UNDER THE AGREEMENT TO THE EXTENT OF 25% THEREOF IS OF CAPITAL IN NATURE AS SO HELD BY T HE A.O. IT IS WELL KNOWN THAT EACH CASE DECIDED BY THE COURT TIME AND AGAIN ON TH IS ISSUE ARE TURN ON ITS OWN CONSPECTUS OF FACTS. IT IS THUS USEFUL TO NOTE I MPORTANT ASPECTS OF THE FOREIGN COLLABORATION AGREEMENT ENTERED INTO BETWEEN ASSESS EE BHEL AND SIEMENS WHICH IS RELEVANT TO DECIDE THE ISSUE. 16. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CA SE OF CIT VS. J.K. SYNTHETIC LTD. 309 ITR 371 (DELHI) HAS ELABORATELY DISCUSSED THE ENTIRE CASE LAWS ON THE SUBJECT. 17. AFTER ANALYZING VARIOUS DECISIONS THE HONBLE DELHI HIGH COURT CULLED OUT THE BROAD PRINCIPLES TO DETERMINE AS TO WHETHER EXP ENDITURE IN A PARTICULAR CASE WOULD BE CAPITAL OR REVENUE EXPENDITURE. THESE BRO AD PRINCIPLES LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE AFORESAID CASE HAS BEEN TAKEN NOTE OF BY THE SAME COURT IN THE DECISION RENDERED IN THE CASE OF CIT VS. SHARDA MOTORS INDUSTRIES LTD. (2009) 309 ITR 109 (DELHI) WHICH S HALL BE REFERRED TO LITTLE LATER HEREIN. ITA NO. 4317/DEL/2009 12 OF 16 18. THE AFORESAID DECISION IN THE CASE OF LD. CIT(A ) VS. J.K. SYNTHETIC (SUPRA) WERE LATER CONSIDERED IN THE RECENT JUDGMENT OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHARDA MOTORS INDUSTRIAL LTD. (2009 ) 319 ITR 109 (DELHI) AND WAS ALSO CONSIDERED IN THE DECISION DATED 9 TH OCTOBER 2009 IN CASE OF CLIMATE SYSTEMS INDIA LTD. VS. CIT (2009) 319 ITR 113. 19. AFTER MAKING REFERENCE TO THE DECISION OF HONB LE DELHI HIGH COURT IN THE CASE OF CIT VS. J.K. SYNTHETIC LTD. (SUPRA) AND DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. VS. C IT (SUPRA) THE HONBLE HIGH COURT IN THE CASE OF CIT VS. SHARDA MOTORS INDUSTRI AL LTD. (2009) 319 ITR 109 (DELHI) HAS HELD AND OBSERVED AS UNDER:- 3. IN SO FAR AS LUMP SUM PAYMENT AGAINST TRANSFER OF TECHNICAL KNOW- HOW PROVIDED BY THE KOREAN COMPANY IS CONCERNED TH E ASSESSEE HAD ADMITTEDLY SHOWN THESE EXPENSES AS CAPITAL EXPENDIT URE. IT WAS THE ROYALTY PAID DURING THE YEAR IN QUESTION WHICH WAS TREATED AS REVENUE EXPENDITURE BY THE ASSESSEE. THE COMMISSIONER OF I NCOME-TAX (APPEALS) FOUND THAT AS PER THE AGREEMENT THIS ROYALTY WAS R UNNING ROYALTY PAYABLE EVERY YEAR WHICH DEPENDED UPON THE NUMBER OF PIECE S PRODUCED OF THE AFORESAID PRODUCTS NAMELY CATALYTIC CONVERTER AND EXHAUST MUFFLER. 4. WE ARE OF THE OPINION THAT THIS FINDING OF THE C OMMISSIONER OF INCOME-TAX (APPEALS) AS APPROVED BY THE INCOME-TAX APPELLATE TRIBUNAL IS A FINDING OF THE FACT WHICH IS RIGHTLY ARRIVED A T AS EXPENDITURE IS PURELY A REVENUE EXPENDITURE WHICH IS ANNUAL EXPENDITURE DEPENDING UPON THE QUANTUM OF PRODUCTION IN THE RELEVANT YEAR. 5. IN CIT VS. J.K. SYNTHETICS LTD. (2009) 309 ITR 3 71 (DELHI) AFTER ELABORATELY DISCUSSING THE ENTIRE CASE LAW ON THE S UBJECT THE COURT CULLED OUT THE BROAD PRINCIPLES TO DETERMINE AS TO WHETHER EXPENDITURE IN A PARTICULAR CASE WOULD BE CAPITAL OR REVENUE EXPENDI TURE. ONE OF THE PRINCIPLES ENUMERATED THEREIN READS AS UNDER : (V) EXPENDITURE INCURRED FOR GRANT OF LICENCE WHIC H ACCORDS ACCESS TO TECHNICAL KNOWLEDGE AS AGAINST ABSOL UTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION WOULD ORDINARIL Y BE TREATED AS ITA NO. 4317/DEL/2009 13 OF 16 REVENUE EXPENDITURE. IN ORDER TO SIFT IN A MANNER OF SPEAKING THE GRAIN FROM THE CHAFF ONE WOULD HAVE TO CLOSELY LOOK AT T HE ATTENDANT CIRCUMSTANCES SUCH AS: (A) THE TENURE OF THE LICENSE (B) THE RIGHT IF ANY IN THE LICENSEE TO CREATE FU RTHER RIGHTS IN FAVOUR OF THIRD PARTIES (C) THE PROHIBITION IF ANY IN PARTING WITH A CONF IDENTIAL INFORMATION RECEIVED UNDER THE LICENCE TO THIRD PARTIES WITHOUT THE CONSENT OF THE LICENSOR (D) WHETHER THE LICENCE TRANSFERS THE FRUITS OF RE SEARCH OF THE LICENSOR ONCE FOR ALL. (E) WHETHER ON EXPIRY OF THE LICENCE THE LICENCEE I S REQUIRED TO RETURN BACK THE PLANS AND DESIGNS OBTAINED UNDER THE LICEN CE TO THE LICENSOR EVEN THOUGH THE LICENSEE MAY CONTINUE TO MANUFACTUR E THE PRODUCT IN RESPECT OF WHICH ACCESS TO KNOWLEDGE WAS OBTAINED DURING THE SUBSISTENCE OF THE LICENCE. (F) WHETHER ANY SECRET OR PROCESS OF MANUFACTURE WA S SOLD BY THE LICENSOR TO THE LICENSEE. EXPENDITURE ON OBTAINING ACCESS TO SUCH SECRET PROCESS WOULD ORDINARILY BE CONSTRUED AS CAPITAL IN NATURE; 6. IN THE PRESENT CASE ON FACTS IT WAS INTER ALI A FOUND AS FOLLOWS: (A) IN THAT CASE THE GRANT OF TECHNICAL AID WAS F OR SETTING UP OF THE FACTORY COMBINED WITH THE RIGHT TO SELL PRODUCTS WH ILE IN OUR CASE OUR COMPANY IS ALREADY PRODUCING EXHAUST SYSTEMS AND TH E TECHNOLOGY AGREEMENT WAS NOT FOR SETTING UP OF THE FACTORY. (B) IN THE CITED CASE THE FOREIGN COMPANY WHO GAVE THE TECHNOLOGY AGREED NOT TO MANUFACTURE SIMILAR PRODUCTS IN INDIA WHILE THERE IS NO SUCH REGULATION IN OUR AGREEMENT. (C) IN THE CITED CASE THE TECHNICAL KNOWLEDGE OBTAI NED WAS HELD TO GIVE AN ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE-COM PANY AND AS IT HAD THE RIGHT TO CONTINUE TO MANUFACTURE THE PRODUCT EV EN AFTER TERMINATION OF THE AGREEMENT. WHILE IN OUR CASE THE DESIGN PATENT APPLIES TO THE FOREIGN COMPANY AND WE ARE ONLY LICENSED TO PRODUCE THE GOO DS FOR HYUNDAI CAR AND WE CANNOT CONTINUE TO PRODUCE THE GOODS IF THE AGREEMENT IS TERMINATED. THIS ITSELF IS A MAJOR DIFFERENCE BETW EEN THE CASE CITED BY YOUR HONOUR AND THE FACTS OF OUR CASE. 7. ON THE FACTS AND AFTER APPLYING THE AFORESAID PR INCIPLE IT BECOMES CRYSTAL CLEAR THAT THE EXPENDITURE IS OF REVENUE NA TURE. 8. LD. COUNSEL FOR THE REVENUE SUBMITS THAT THE TRI BUNAL HAS NOT CONSIDERED THE EFFECT OF THE JUDGMENT OF THE SUPREM E COURT IN SOUTHERN SWITCHGEARS LTD. VS. CIT (1998) 232 ITR 359 INASMU CH AS IN THAT CASE THE ITA NO. 4317/DEL/2009 14 OF 16 PAYMENT OF ROYALTY WAS TREATED AS CAPITAL EXPENDITU RE. HOWEVER WHAT IS GLOSSED OVER IS THAT UNDER THE TERMS OF THE AGREEME NT IN THAT CASE THE ASSESSEE COMPANY THEREIN HAD AGREED TO PAY THE FORE IGN COMPANY LUMP SUM OF ROYALTY AND IT WAS IN THESE CIRCUMSTANCES TH E SAME WAS TREATED AS CAPITAL EXPENDITURE AND THE TRIBUNAL HAD DISALLOWED 25 PER CENT THEREOF. IN THE PRESENT CASE AS POINTED OUT ABOVE ROYALTY IS TO BE PAID ON THE QUANTITY OF THE GOODS PRODUCED CALCULATING PER PIE CE OF THE SAID GOODS PRODUCED. THEREFORE THE TRIBUNAL RIGHTLY HELD THA T THE AFORESAID JUDGMENT NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 20. THE AFORESAID DECISION OF DELHI HIGH COURT IN T HE CASE OF CIT VS. SHARDA MOTORS INDUSTRIAL LTD. (SUPRA) HAS BEEN FOLLOWED BY THE SAME HIGH COURT IN THE LATER DECISION IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. VS. CIT (2009) 319 ITR 113 (DELHI) WHERE IT HAS BEEN HELD AS UNDER:- (EXTRACTED FROM HEAD NOTE) HELD ALLOWING THE APPEAL THAT UNDER THE AGREEMENT PAYMENTS WERE TO BE MADE BY THE ASSESSEE IN TWO PARTS : A LUMP SUM F EE FOR TRANSFER OF TECHNOLOGY (WHICH THE ASSESSEE HAD ADMITTED AS BEIN G OF CAPITAL NATURE) AND ROYALTY PAYMENT IN CONSIDERATION OF PROVIDING T ECHNOLOGY SERVICES. THE PAYMENT OF ROYALTY DEPENDED ON THE QUANTUM OF D OMESTIC AS WELL AS EXPORT SALES WHICH WOULD DECREASE OR INCREASE EVERY YEAR DEPENDING UPON THE DECREASE OR INCREASE IN THE SALES. THIS PA YMENT WAS NOT BECAUSE OF TRANSFER OF TECHNOLOGY BUT FOR PROVIDING TEC HNICAL SERVICES. IN SUCH CIRCUMSTANCES THE PAYMENT OF ROYALTY WHICH W AS A CONTINUOUS PROCESS SHOULD HAVE BEEN TREATED AS REVENUE EXPEND ITURE. 21. APPLYING THE AFORESAID PRINCIPLE CULLED OUT BY THE HONBLE DELHI HIGH COURT TO THE FACTS OF THE PRESENT CASE THE POSITIO N WHICH IS EMERGING WOULD BE THAT THE AMOUNT OF ROYALTY PAID BY THE ASSESSEE ON TURNOVER BASIS FOR USE OF TECHNICAL INFORMATION AND ASSISTANCE IS INVARIABLY ON REVENUE FIELD. 22. THE PRESENT CASE IS NOT THE CASE WHERE ANY LUMP SUM PAYMENT IN MADE AGAINST TRANSFER OF TECHNICAL KNOW-HOW PROVIDED BY SIEMENS. THE ROYALTY PAYMENT IS RUNNING ROYALTY PAYABLE EVERY YEAR WHIC H DEPEND UPON THE TURNOVER ITA NO. 4317/DEL/2009 15 OF 16 OF THE PRODUCTS PRODUCED BY THE ASSESSEE COMPANY. AS PER CLAUSE 3 OF THE AGREEMENT M/S. SIEMENS HAS GRANTED TO THE ASSESSEE THE NON-EXCLUSIVE AND NON- TRANSFERABLE LICENSE TO USE INFORMATION AND DOCUMEN TATION SUPPLIED BY SIEMENS FOR CARRYING OUT ALL ACTIVITIES OF PLANT PERFORMANC E IMPROVEMENT IN THE AGREED MARKET AND TO SALE PLANT PERFORMANCE IMPROVEMENT IN THE AGREED MARKET OR TO SOME OTHER COUNTRIES AS MAY BE AGREED TO BETWEEN TH E PARTIES. IN THE AGREEMENT IT IS ALSO MENTIONED THAT THE AFORESAID LICENSE GRA NTED TO THE ASSESSEE COMPANY TO USE INFORMATION AND DOCUMENTATION FOR CARRYING OUT PLANT PERFORMANCE IMPROVEMENT AND TO SALE PLANT PERFORMANCE IMPROVEME NT IN THE AGREED MARKET SHALL NOT INCLUDE THE RIGHT TO GRANT SUB-LICENSE TO ANY THIRD PARTY. THE ASSESSEE WAS UNDER OBLIGATION TO KEEP CONFIDENTIAL OF INFORM ATION AND DOCUMENTATION FURNISHED BY SIEMENS. THE ASSESSEE WAS ONLY ALLOWE D TO CARRY OUT PLANT PERFORMANCE IMPROVEMENT IN THE AGREED MARKET AFTER EXPIRATION OF THE AGREEMENT BY USING THE INFORMATION AND PATENTS ALREADY FURNIS HED AND GRANTED TO THE ASSESSEE. IN OTHER WORDS THE ASSESSEE WAS ALLOWED TO USE THE INFORMATION AND DOCUMENTATION IN RESPECT OF WHICH A NON-EXCLUSIVE AND NON-TRANSFERABLE LICENSE WAS GRANTED BY THE SIEMENS DURING THE TERM OF THE A GREEMENT. THEREFORE THIS RIGHT GIVEN TO THE ASSESSEE TO CARRY OUT PLANT PERF ORMANCE AGREEMENT IN THE AGREED MARKET AFTER TERMINATION OF THE AGREEMENT CANNOT BE SUFFICIENT BASIS TO HOLD THAT NON-EXCLUSIVE AND NON-TRANSFERABLE LICENSE TO USE I NFORMATION AND DOCUMENTATION SUPPLIED BY SIEMENS WERE ON CAPITAL FIELD. THEREFO RE THE PRESENT CASE IS DISTINGUISHABLE ON FACTS FROM THE CASE OF SOUTHERN SWITCHGEAR LTD. VS. CIT ITA NO. 4317/DEL/2009 16 OF 16 (SUPRA) WHERE UNDER THE TERMS OF THE AGREEMENT THE ASSESSEE COMPANY THEREIN HAD AGREED TO PAY THE FOREIGN COMPANY LUMP SUM OF R OYALTY. 23. THEREFORE IN THE LIGHT OF THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF J.K. SYNTHETIC (SUPRA) CIT VS. SHARDA MOTO RS INDUSTRIAL LTD. (SUPRA) AND CLIMATE SYSTEMS INDIA LTD. VS. CIT (SUPRA) WHERE T HE FACTS OF THE CASE ARE IDENTICAL TO THE FACTS OF THE PRESENT CASE BEFORE U S WE UPHOLD THE ORDER OF LD. CIT(A) IN HOLDING THAT THE PAYMENT OF ROYALTY BASED ON THE TURNOVER OF EVERY YEAR AT CERTAIN PERCENTAGE ON ACCOUNT OF PROVIDING TECHNICAL KNOW-HOW INFORMATIONS AND DOCUMENTATIONS IS OF REVENUE IN CH ARACTER. THUS THE GROUNDS RAISED BY THE REVENUE ARE REJECTED. 24. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. 25. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 12 TH FEBRUARY 2010. SD/- SD/- (SHAMIM YAHYA) ACCOUNTANT MEMBER (C.L. SETHI) JUDICIAL MEMBER DATED: 12 TH FEBRUARY 2010. MAMTA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT NEW DELHI. BY ORDER DEPUTY REGISTRAR