DAI-ICHI KARKARIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2006-LL-0728-9]

Citation 2006-LL-0728-9
Appellant Name DAI-ICHI KARKARIA LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 28/07/2006
Assessment Year 1993-94, 1994-95
Judgment View Judgment
Keyword Tags technical collaboration agreement • fluctuation in rate of exchange • reassessment proceedings • income chargeable to tax • long-term capital gain • transfer of technology • technical information • commercial production • foreign exchange gain • exchange fluctuation • technical assistance • trading transaction • payment of interest • revenue expenditure • interest chargeable • licensing agreement • allowable deduction • capital expenditure • circulating capital • business promotion • promotion expenses • supply of know-how
Bot Summary: The AO noted that in the course of its business, the assessee entered into a technical collaboration agreement on 5th Dec., 1985 with DKS for supply of technical know-how to be used for manufacture of a chemical, known as Flocculates of non-tonic and Cationic type, at the assessee s factory located in Pune. In pursuance of this agreement, assessee paid to DKS a total sum of Japanese Yen 2,80,00,000 in the years 1986 and 1988, towards 2 instalments of 14 million Japanese Yen each on account of technical know-how fees as under : Date of Amount paid in Equivalent amount in Payment Japanese Yen Indian Rupees 29-8- 1,40,00,000 Rs. 11,67,640 1986 17-3- 1,40,00,000 Rs. 14,39,911 1988 2,80,00,000 Rs. 26,07,551 The above amount of Rs. 26,07,551, being rupee equivalent of 28 million Japanese Yen, was debited by the assessee as capital work-in-progress in the books of account. In the books of account, the assessee passed following entries at the end of the year : Rs. Debit KDS 76,19,048 Capital work-in- Rs. Credit progress 26,07,751 Capital Rs. Credit Reserve 50,11,297 Rs. Rs. 76,19,048 76,19,048 The above sum of Rs. 76,19,048 was shown as advances recoverable under the head Loans and advances and the difference was credited to capital revenue account. The AO in para 12.5 of his order discussed the subsequent events as under : ... On 28th June, 1993, the assessee debited bank account of DKS in pursuance of tripartite agreement and the payment was received towards advances recoverable from DKS. On 22nd June, 1993, assessee debited the account of DIGCIL and credited the bank account for a sum of Rs. 76,19,048 towards payment of advance by the assessee to DIGCIL against share application money. These facts show that the assessee received from DIGCIL the amount of Rs. 76,19,048 on account of advance receivable from DKS and the same amount was paid to DIGCIL towards assessee s contribution on account of share capital. The stand of the Revenue is that agreement between the parties was for obtaining the technology for use in assessee s business for a limited period and not for outsight acquisition and payment by assessee was on revenue account. The relevant portion of the judgment is extracted below : But in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee and royalty.


K.C. SINGHAL, J.M. ORDER Departmental appeals and cross-objection by assessee have been heard together and, therefore, are being disposed of by common order for sake of convenience. 2. major issue arising in these appeals and cross-objection is, whether amount of Rs. 50,11,297 received by assessee is assessable to tax either as capital gain or income under s. 28(iv) of IT Act, 1961 (Act) either in asst. yr. 1993-94 or 1994-95. 3. Briefly stated, facts are these : assessee is company engaged in business of manufacture and sale of chemicals. In balance sheet for year ending 31st March, 1993, sum of Rs. 50,11,297 was shown on liability side under head "Capital reserve", as accretions during year. Note 7 to Schedule 17 to balance sheet read as under : "Advance of Japanese Yen 2,80,00,000 paid to Dai-Ichi Kogyo Seiyaku Company Ltd., Japan, towards technical know-how fees has been valued at TT selling rate of Rs. 100 J.Y. 367.5 as on 31st March, 1993 and difference has been transferred to capital reserve account." In course of assessment proceedings for asst. yr. 1993-94, it was explained by assessee as under : "... that sum of 28 million Japanese Yen, equivalent to Rs. 26,07,751 was paid by assessee-company to M/s Dai-Ichi Kogyo Seiyaku Company Limited, Japan (hereinafter referred to as "DKS"), in year, 1986 and 1988 on account of technical know-how fees and same was shown in books of account as capital work-in-progress. ... said remittance was revalued at exchange rate prevailing as on 31st March, 1993 and revalued amount arrived at Rs. 76,19,048, which resulted into capital appreciation of Rs. 50,11,297. ... since there was only notional gain, amount has been credited as capital reserve in books of account. It was, accordingly, submitted that since there was no actual gain, amount cannot be brought to tax either as revenue income or as on capital account. assessee has also placed reliance on decisions in cases of Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC) and CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC)." 4. AO noted that in course of its business, assessee entered into technical collaboration agreement on 5th Dec., 1985 with DKS for supply of technical know-how to be used for manufacture of chemical, known as Flocculates of non-tonic and Cationic type, at assessee s factory located in Pune. In pursuance of this agreement, assessee paid to DKS total sum of Japanese Yen 2,80,00,000 in years 1986 and 1988, towards 2 instalments of 14 million Japanese Yen each on account of technical know-how fees as under : Date of Amount paid in Equivalent amount in Payment Japanese Yen Indian Rupees 29-8- 1,40,00,000 Rs. 11,67,640 1986 17-3- 1,40,00,000 Rs. 14,39,911 1988 2,80,00,000 Rs. 26,07,551 above amount of Rs. 26,07,551, being rupee equivalent of 28 million Japanese Yen, was debited by assessee as capital work-in-progress in books of account. Subsequently, it was decided that manufacture of above chemical would be carried out in joint venture company named M/s Dai- Ichi Gosei Chemicals (India) Ltd. (hereinafter referred to as "DIGCIL") and for this purpose tripartite agreement was entered into among assessee, DKS and DIGCIL on 3rd April, 1992. Vide this agreement, original agreement dt. 5th Dec., 1985 was declared null and void. It was, inter alia, provided in tripartite agreement that amount paid by assessee to DKS under original agreement will be deemed to have been paid on account of "DIGCIL". It was further provided that DIGCIL, in turn, shall reimburse Japanese Yen 2,80,00,000 to assessee-company. Thus, during year amount became recoverable by assessee from DKS and same was to be disbursed by "DIGCIL". No actual payment could be received by assessee from DIGCIL till end of year. In books of account, assessee passed following entries at end of year : Rs. Debit KDS 76,19,048 Capital work-in- Rs. Credit progress 26,07,751 Capital Rs. Credit Reserve 50,11,297 Rs. Rs. 76,19,048 76,19,048 above sum of Rs. 76,19,048 was shown as advances recoverable under head "Loans and advances" and difference was credited to capital revenue account. 5 . AO in para 12.5 of his order discussed subsequent events as under : "... On 28th June, 1993, assessee debited bank account of DKS in pursuance of tripartite agreement and payment was received towards advances recoverable from DKS. On 22nd June, 1993, assessee debited account of DIGCIL and credited bank account for sum of Rs. 76,19,048 towards payment of advance by assessee to DIGCIL against share application money. It may be mentioned here that assessee-company was to invest in share capital of joint venture company, DIGCIL, as per agreement. Both persons, i.e., assessee company and DIGCIL have their Bank accounts in same bank, i.e., Bank of India, Bombay (Main) Branch, M.G. Road, Bombay. On perusal of copies of bank statements of assessee and DIGCIL, it is noticed that although in accounts, entries have been passed in June, 1993, cheques were actually cleared at later date on 15th Sept., 1993. On this date, there was simultaneous credits and debits in bank accounts of both companies i.e., assessee company and DIGCIL for above amount of Rs. 76,19,048. These facts show that assessee received from DIGCIL amount of Rs. 76,19,048 on account of advance receivable from DKS and same amount was paid to DIGCIL towards assessee s contribution on account of share capital. In result, sum of Rs. 76,19,048, which consists of original advance of Rs. 26,07,751 paid in 1986/1988 and actual gain during year of Rs. 50,11,297, has been actually utilised towards subscription for share capital in DIGCIL." 6. In view of above facts, AO was of view that sum of Rs. 50,11,297 was not notional gain but represented actual gain accruing and arising during year ending 31st March, 1993. It was further observed that gain did not arise on account of revaluation but on account of cancellation of agreement entered into originally on 5th Dec., 1985. assessee had given colour of revaluation to suppress true nature of transaction. Accordingly, theory of notional gain was rejected. AO further held that such gain amounted to benefit in course of carrying on business and, therefore, same was chargeable to tax under s. 28(iv) of Act in asst. yr. 1993-94 inasmuch as assessee was maintaining its books on mercantile basis. He further was of view that above sum was nothing but compensation for earlier period and may be treated as interest chargeable to tax. He also opined that entries in books of account were not relevant in determining nature of income. Accordingly, he included above sum in total income of assessee by assessing under head "Profits and gains of business". 7. On appeal, learned CIT(A) examined material on record and held as under : "1. original agreement dt. 5th Dec., 1985 also does not stipulate payment of interest or any compensation to appellant in case of DKS decides not to transfer technical know-how. It is, therefore, incorrect and also illogical to allege that excess amount of Rs. 50,11,237 represents interests on earlier payments of Rs. 26,07,751 made by appellant to DKS. 2. It cannot be said that appellant was holding, on capital account, sum of 28 million Japanese Yen in its bank account. appellant did not own any foreign currency abroad. appellant was owner of engineering documents which it had received as result of payments made to DKS and it also had right for specific performance under which DKS was bound to assist in manufacture of chemical for which agreement was entered into. Therefore, it is not correct to say that appellant had foreign currency abroad which had appreciated. 3. appellant voluntarily agreed to surrender its rights and to handover engineering documents to joint venture company and as consequence became entitled to 28 million Japanese Yen which it had paid to DKS in earlier years. Therefore, to my mind, decision of Supreme Court in case of Sutlej Cotton Mills does not apply to facts of appellant s case and excess amount of Rs. 50,11,297 cannot be held as capital receipt not liable to tax. 4. That no benefit accrued to assessee in terms of s. 28(iv) of Act, therefore, AO was not justified in assessing said sum as business income. 5. appellant had entered into agreement with DKS for supply of technical know-how for manufacture of specific chemical, and also paid 28 million Japanese Yen to DKS under terms and conditions of said agreement. sum of 14 million Japanese Yen was paid after approval of agreement by Indian Government and further sum of 14 million Japanese Y e n was paid after receiving engineering documents from DKS. appellant itself treated these payments as "capital work-in-progress" and indeed, they were in nature of capital expenditure on acquiring desired technical know-how. As result of these payments, appellant became entitled to technical know-how and assistance from DKS and also came to process engineering documents relating to manufacturing process. engineering documents as well as right for assistance in setting up of unit with technical know-how supplied by DKS was valuable right which was surrendered by appellant under agreement dt. 3rd April, 1992 on mutually agreed basis. Such surrender of right amounts to transfer within meaning of s. 2(47) of Act and, in my opinion, excess amount accruing to appellant as result of such surrender of rights is liable to tax as capital gains . I, therefore, hold that sum of Rs. 50,11,297 is chargeable in appellant s hands as capital gains and since right to technical know-how was with appellant for more than 36 months, same should be charged as long-term capital gains . 6. Since tripartite agreement dt. 3rd April, 1992 was taken on record by Indian Government on 10th May, 1993 and engineering documents were thereafter handed over by assessee, transfer became effective on 10th May, 1993 and, therefore, capital gain was chargeable to tax in asst. yr. 1994-95." In view of above findings, learned CIT(A) deleted addition vide order dt. 29th April, 1997. 8 . assessment for asst. yr. 1994-95 was originally made under s. 143(1)(a), but subsequently reopened under s. 148 by issue of notice under s. 148 on 25th July, 1997. AO again examined above issue and held that t h e amount received by assessee was taxable under s. 28(iv) of Act. However, this time he worked out income at Rs. 58,62,649 considering rate of exchange as on 31st March, 1994. On appeal, learned CIT(A) observed as under : "But, I would agree with Authorised Representative that when as measure of abundant caution AO had reopened assessment proceedings for asst. yr. 1994-95 to give effect to CIT(A) s order, he should not have deviated from conclusion reached by CIT(A) in course of appellate proceedings. In reassessment proceedings he should have only followed directions of CIT(A). I would accordingly annul assessment of business profit under s. 28(i) made by AO of Rs. 58,62,249 and directed AO to compute long-term capital gain as directed by CIT(A) during assessment year under consideration. appellant-company has furnished working of such capital gain to tune of Rs. 32,41,437 in accordance with provisions of s. 48. AO must verify same and determine long-term capital gain income of appellant-company during assessment year under consideration in accordance with directions of CIT(A). It may be noted here that avenues for Department to seek finding of higher judicial authority, namely, Tribunal would not be closed even in present situation and Department would be entitled to go in appeal for asst. yr. 1994-95 to plead that amount of foreign exchange gain earned by appellant- company should be assessed as revenue profit either in asst. yr. 1993-94 or in asst. yr. 1994-95." 9. Aggrieved by above orders of learned CIT(A), Revenue has filed appeals before Tribunal by raising following ground : Assessment year 1993-94 "On facts and circumstances of case and in law, learned CIT(A) has erred in deleting amount of Rs. 50,11,297 brought to tax under s. 28(iv) of IT Act and holding that said amount is taxable as long-term capital gain in asst. yr. 1994-95." Assessment year 1994-95 "1. On facts and in circumstances of case and in law, learned CIT(A) has erred in annulling assessment wherein addition of Rs. 58,62,249 was made on account of difference between foreign exchange rates earned on Rs. 28 million Yen towards non-fulfilment of agreement holding that assessment was reopened on basis of findings of learned CIT(A) in asst. yr. 1993-94 that amount in question was assessable in asst. yr. 1994-95." On other hand, assessee has filed cross-objection for assessment year 1993-94 raising following objections : "(A) On facts and in circumstances of case and in law, learned CIT(A) has erred in holding that sum of Rs. 50,11,297 be taxed as long-term capital gains in asst. yr. 1994-95. (B) learned CIT(A) has failed to appreciate that it was beyond his jurisdiction to give directions for previous year which was not before him and, therefore, directions so made be deleted. (C) Without prejudice to aforementioned, learned CIT(A) failed to appreciate that during relevant previous year, there was no transfer and, therefore, question of levying capital gains could not be determined either for relevant previous year and/or for any subsequent year. (D) Without prejudice to same, learned CIT(A) failed to appreciate that even if capital gains have to be computed after taking enhanced cost and indexation, assessee would have suffered loss and, therefore, observations or directions given for computing capital in asst. yr. 1994-95 was bad in law." 10. Both parties have been heard at length. first question to be considered is whether gain on account of exchange fluctuation accruing to assessee is revenue receipt chargeable to tax under s. 28(iv) of Act or capital receipt not chargeable to tax or capital receipt chargeable to tax as capital gain under s. 45 of Act. stand of Revenue has been that gain on account of fluctuation in exchange rate amounts to benefit arising from business and, therefore, is assessable under s. 28(iv) of Act. Further, it is case of Revenue that agreement was not for purchase of drawings, designs, etc., but for obtaining of technology for its use in its business of manufacturing of chemicals for certain period and, therefore, payment by assessee was on revenue account. Reliance has been placed on terms of agreement as well as on following judgments : (i) CIT vs. Indian Oxygen Ltd. (1996) 134 CTR (SC) 372 : (1996) 218 ITR 337 (SC); (ii) CIT vs. Metallurgical Engg. Consultants (India) Ltd. (1996) 135 CTR (Pat) 338 : (1996) 221 ITR 90 (Pat); (iii) CIT vs. Kirloskar Bros. Ltd. (1983) 37 CTR (Bom) 12 : (1990) 181 ITR 527 (Bom); (iv) CIT vs. BPL Systems & Projects Ltd. (1997) 137 CTR (Ker) 98 : (1997) 227 ITR 779 (Ker); (v) CIT vs. V.S. Dempo & Co. (P) Ltd. (1993) 115 CTR (Bom) 163 : (1994) 206 ITR 291 (Bom); (vi) CIT vs. Premier Automobiles Ltd. (1993) 114 CTR (Bom) 30 : (1994) 206 ITR 1 (Bom); and (vii) CIT vs. Tata Locomotive & Engg. Co. Ltd. (1966) 60 ITR 405 (SC). Revenue has also relied on judgment of Hon ble Bombay High Court in case of Protos Engineer Co. Ltd. vs. CIT (1995) 123 CTR (Bom) 510 : (1995) 211 ITR 919 (Bom) for proposition that benefit accruing on remittances from its customers is taxable under s. 28(iv) of Act. 11. On other hand, stand of assessee has been that payment was on capital account and same was debited as capital work-in-progress. Further, agreement was in fact for purchase of drawings, design, etc. and, therefore, amount paid was on capital account. Further, it has been submitted that cash receipts would be outside purview of s. 28(iv) of act in view of Bombay High Court judgment in case of Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom), Gujarat High Court judgment in case of CIT vs. Saurashtra Packaging (P) Ltd. (2002) 178 CTR (Guj) 83 : (2003) 259 ITR 520 (Guj) and judgment of apex Court in case of CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 132 CTR (SC) 248 : (1996) 219 ITR 644 (SC). Further, judgment of Bombay High Court in case of Protos Engineer Co. Ltd. (supra) relied by Revenue is distinguishable on facts since payment related to commission being on revenue account. Our attention was also drawn to terms of agreement to contend that assessee had acquired ownership rights in drawings, designs, documentation, etc. and, thus, payment was on capital account. It is pointed out that there is no clause for return of such documents and, therefore, it is wrong to contend that same were given to assessee only for use thereof. It is also submitted that on account of cancellation of earlier agreement, advance paid ceased to be advance for acquiring technical know-how and became loan simpliciter and, therefore, gain on account of fluctuation in exchange rate must be held to be on capital account. Reliance was also placed on judgment of apex Court in case of Scientific Engg. House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386 : (1986) 157 ITR 86 (SC) for proposition that acquisition of drawings, designs, etc., amount to acquisition of "plant" under s. 43 of Act and, therefore, assessee is entitled to depreciation. This itself shows that payment for acquiring such items is on capital account. Reliance was also placed on judgment of Supreme Court in case of Sutlej Cotton Mills Ltd. (supra), in support of proposition that if payment is made on capital account, then gain on account of fluctuation in exchange rate would be on capital account. Reliance was also placed on judgment of Bombay High Court in case of CIT vs. Shah Construction Co. Ltd. (1999) 153 CTR (Bom) 160 : (1999) 237 ITR 814 (Bom), for proposition that advance paid would continue to be on capital account till it is appropriated against running bill. Proceeding further, it is submitted that all expenses, even of revenue nature, are to be considered as part of cost of plant incurred upto erection of plant. Attention was also invited to Supreme Court judgment in case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). Finally, it was submitted that judgments relied upon by Revenue are distinguishable on facts. 12. Rival submissions of parties have been considered carefully in light of materials placed before us and case law referred to. question for our consideration is whether fluctuation in rate of exchange related to capital/revenue account. In our opinion, no universal test can be applied and answer to question would depend on facts of each case. We shall first refer to some of judgments referred to. first judgment of apex Court available on this issue is Tata Locomotive & Engg. Co. Ltd. (supra). In that case, assessee sent 33,850 dollars to its agent in USA, after obtaining permission of Exchange Central Authorities for purchase of capital goods. assessee had also earned commission of 36,123 dollars on sale of goods of American company, Baldwin Locomotive Works. This amount was also retained with its US agent for purchase of goods. Later on, assessee found it more expensive to buy American goods and, therefore, repatriated 49,500 dollars to India after getting permission of Reserve Bank of India. This resulted in surplus on account of fluctuation in exchange rate. question arose whether such surplus was capital receipt or revenue receipt. apex Court held : "Held, that act of retaining monies in U.S.A. for capital purposes after obtaining sanction of Reserve Bank was not trading transaction in business of manufacture of locomotive boilers and locomotives; it was clearly transaction of accumulating dollars to pay for capital goods, first step to acquisition of capital goods. surplus attributable to $ 36,123 was capital accretion and not profit taxable in hands of assessee." perusal of above reveals that this judgment is authority for proposition that if foreign currency is held for purchase of capital goods, then surplus on account of fluctuation in exchange rate would be capital receipt. 13. next judgment of apex Court is Sutlej Cotton Mills Ltd. (supra). Their lordships, after referring to various judgments including one referred to in preceding para, held as under : "The law may, therefore, now be taken to be well-settled that where profit or loss arises to assessee on account of appreciation or depreciation in value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by assessee on revenue account or as trading aspect or as part of circulating capital embarked in business. But, if, on other hand, foreign currency is held as capital asset or as fixed capital, such profit or loss would be of capital nature." There is no dispute to such settled legal position. However, dispute has arisen because of different stand of parties. stand of Revenue is that agreement between parties was for obtaining technology for use in assessee s business for limited period and not for outsight acquisition and, therefore, payment by assessee was on revenue account. On other hand, stand of assessee is that payment was on capital account since it acquired drawings and designs which constitute capital goods. Let us now examine relevant terms of agreement between parties. 14. We have gone through agreement between parties entered into on 5th Dec., 1985, copy of which is placed in paper book at p. 101. assessee is described as DKI while foreign collaborator is described as DKS. preamble and relevant articles of agreement are being reproduced as under : "Preamble Whereas DKS represents that it has developed and has right to license process as hereinafter defined, that it is commercially operating process at its manufacturing facilities located in Chagta Town, Nilgata Pref., Japan, and is commercially selling PAAm produced therein, and Whereas DKS is willing and entitled to disclose to DIK DKS proprietary information on process, to provide DIK with process engineering documents together with complete technical assistance in use thereof (as hereinafter defined), and to grant license on terms and conditions as set forth herein, and Whereas DIK desires to obtain abovesaid information, engineering document, technical assistance and licence on said terms and conditions, Now therefore, in consideration of provisions hereof, parties mutually covenant and agree as follows : Article 1(11) Royalty period shall mean period of five years from date of commencement of commercial production, provided, however, that royalty period shall terminate at eighth anniversary of being taken on record of this agreement if commencement of commercial production is delayed beyond three years from date on which this agreement is taken on record. Article 2 Grant of license 2.1 DKS agrees to grant and hereby grants to DIK subject to Indian Government regulation: (1) non-exclusive right and license to use DKS proprietary information disclosed by DKS to DIK pursuant to art. 3, art. 4 and art. 6 hereof for construction and operation of DIK s plant in manufacturing territory. (2) non-exclusive license to sell PAAm, produced by DIK s plant in sales territory. 2.2 DIK should be free to sub-license DKS proprietary information to another Indian party, should it become necessary. terms of such sub- licensing will, however, be as mutually agreed to by all parties concerned including DKS and will be subject to approval of Indian Government. 2.3 DIK shall not use any trademark and/or trade name of DKS concerning PAAm. Article 3 Engineering document 3.1 Within 90 (ninety) days." combined reading of above provisions of agreement shows that it was not case of outright purchase of technology. gist of agreement shows that it was case of transfer of technology for use by assessee in setting up of unit as well as in process of manufacture. This inference is because of following facts in agreement : (i) preamble itself states that DKS only granted license to use technology; (ii) Art. 12 provides that agreement shall be in force till royalty period which as per art. 1(ii) is for 5 years only from date of commencement of commercial production; (iii) Art. 11 provides that assessee shall maintain secrecy with reference to any information given to assessee; (iv) Art. 10 provides that in case of expansion, assessee is required to get permission of DKS. (v) As per art. 14.2, agreement is not assignable by assessee. In our view, rights of DKS (foreign collaborator) are not diminished in In our view, rights of DKS (foreign collaborator) are not diminished in any manner by virtue of above agreement. DKS continues to be owner of technology even after transferring of designs, drawings, etc. view of ours is justified by judgment of apex Court in case of Indian Oxygen Ltd. (supra). In that case, question was whether payment on account of use of technology was revenue expenditure or capital expenditure. Hon ble High Court, after considering terms of agreement, held as under : "The English company did not sell any information, processes and inventions to Indian company. Under cl. 22 of agreement, Indian company is not entitled to sue them after termination of this agreement. Indian company is prohibited from disclosing these information processes and inventions during currency and also after determination of this agreement in view of its cl. 11. Though this agreement is for period of ten years, it can be terminated earlier as provided in cl. 23. Therefore, it cannot be said that Indian company has incurred expenditure for purposes of bringing into existence any asset or advantage of enduring nature. It must also be held that this expenditure is not capital but revenue expenditure, for it was incurred by Indian company for running its business or working it with view to produce profits." On appeal, apex Court upheld above finding of High Court. facts of present case are almost similar. Accordingly, it is held that payment was not for acquiring any capital asset but for use or technology for specified period. 15. However, above finding, in our opinion, still does not resolve controversy before us since payment for use of technology is not always on revenue account. This aspect of matter can be explained with reference to two judgments of apex Court. first judgment is reported as Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC). In that case, company was engaged in business of manufacturing o f antibiotics and pharmaceuticals. company, with view to increase yield, entered into agreement with Japanese company for supply of know- how for its use in manufacturing process against lump sum payment. question arose whether payment was on revenue account or capital account. Their Lordships held that since use of know-how was in course of existing business of manufacturing of medicines, payment was on revenue account. other judgment is reported as Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 138 CTR (SC) 275 : (1997) 224 ITR 342 (SC). In that case also, technical know-how was obtained for use by assessee but it was to be used in setting up of plant. Their Lordships of apex Court, after considering various judgments including in case of Alembic Chemical Works Co. Ltd. (supra), held that payment was on capital account. relevant portion of judgment is extracted below : "But in case in hand High Court having considered different clauses of agreement and having come to conclusion that under agreement with foreign firm what was set up by assessee was new business and foreign firm had not only furnished information and technical know-how but rendered valuable services in setting up of factory itself and even after expiry of agreement there is no embargo on assessee to continue to manufacture product in question, it is difficult to hold that entire payment made is revenue expenditure merely because payment is required to be made at certain percentage of rates of gross turnover of products of assessee and royalty. In our considered opinion, in facts and circumstances, of case High Court was fully justified in answering reference in favour of Revenue and against assessee. These appeals are, accordingly, dismissed but in circumstances without any order as to costs." Therefore, it is clear that payment for use of technology may be on both accounts. If it is used in capital field, then it would be not allowable as deduction. On contrary, if it is to be used in course of existing business, then it would be allowable deduction being on revenue account. On similar analogy, we are of view that if payment is made for use of technology for setting up of unit but agreement is not materialised due to some reasons, then refund of such amount would be on capital account and consequently, gain on account of fluctuation in exchange rate would also be on capital account. On other hand, if payment was intended for use of technology for manufacturing activity relating to existing business, it would be on revenue account. activity relating to existing business, it would be on revenue account. 16. In present case, we find that payment was required to be made on three accounts (i) 28 million Japanese Yens for supply of drawings, designs and documentation, (ii) 15 million Yens for rendering services by DKS to assessee, and (iii) 5 per cent of net sales for period of 5 years from date of production. Article 3 provides for transfer of such drawings and designs. perusal of art. 4 of agreement reveals that such designs, drawings, etc. were meant for setting up of plant and DKS was to render all services/assistance in setting up of such plant. Art. 5 of agreement is guarantee clause wherein DKS is to ensure that plant has been designed, erected and commissioned as per specification. (All articles mentioned above have already been reproduced in earlier part of order). combined reading of above articles shows that payments for drawings, designs, etc., as well as for services rendered related to setting up of plant. Only royalty based on net sales could be said to be related to technology for manufacturing process. Hence, we are of view that payment of 28 million Yens was intended for setting up of plant and, therefore, was on capital account. Thus, income arising on account of fluctuation in exchange rate, in our humble opinion, was capital receipt in view of Supreme Court judgment in case of Jonas Woodhead & Sons (India) Ltd. (supra). 1 7 . Having held that payment was on capital account and gain on account of fluctuation in exchange rate was capital receipt, question of assessing same as benefit arising from business under s. 28(iv) of Act does not arise. Unless benefit, if any, is on revenue account, same cannot be assessed as business income under s. 28. Apart from above discussion, payment received in cash would not fall within ambit of word "benefit" as held by Hon ble Supreme Court in case of Mafatlal Gangabhai & Co. (P) Ltd. (supra). There is no dispute that entire amount has been received in cash by assessee which is also apparent from p. 14 of assessment order where it has been stated that bank account was credited on 15th Sept., 1993. Thus, s. 28(iv) would not apply. Hence, learned CIT(A) was justified in holding that such income could not be assessed under s. 28 of Act. 18. Now, question arises whether such capital receipt can be assessed under head "Capital gain" as held by learned CIT(A) in para 12.10 of his order. reason given by him is that, assessee acquired valuable right to technical know-how and assistance from DIK by making part payment to DKS which was surrendered under agreement dt. 3rd April, 1992. According to him, such surrender amounted to transfer of such valuable right within scope of s. 2(47) of Act. We are unable to accept such reasoning. perusal of tripartite agreement clearly shows that original agreement could not be acted upon for certain reasons and same was cancelled ab initio and had to be treated as null and void. This is apparent from preamble of tripartite agreement which has been approved by Government of India in May 1993, reads as under : "Whereas DKS and DIK entered into licensing agreement regarding Polyacrylamide dt. 5 Dec., 1985 (hereinafter referred to as original licensing agreement ), and DKS disclosed technical information regarding Polyacrylamide to DIK and DIK paid to DKS certain amount of lump sum, thereunder; and Whereas, DKS, in meantime, has been proceeding development of new manufacturing technology of Polyacrylamide and has completed it recently; and Whereas, taking advantage and profitability of new technology into consideration, DKS and DIK agreed to pursue Polyacrylamide business in India by utilising new technology in joint venture company to be formed by them and they have formed licensee thereunder; and Whereas, DKS agreed to license new technology to licensee and they entered into new licensing agreement dt. 1992 (hereinafter referred to as new licensing agreement ); and Whereas, DKS and DIK agree and confirm that original licensing agreement between DKS and DKI now stands null and void; and Whereas, DKS, DIK and Licensee desire to determine treatment of technical information disclosed to DIK by DKS under original licensing agreement and above-said lump sum paid to DKS by DIK thereunder." 1 9 . In view of above, all rights and obligations under original agreement got vanished and in turn assessee was required to return design and drawings and DKS was required to refund 28 million Japanese Yen. It was only case of refund of same amount in Japanese currency which on conversion resulted in gain to assessee. Thus, in our opinion, there was no transfer of any capital asset and consequently refund of original amount was simply capital receipt not chargeable to tax. 2 0 . In view of above finding, question regarding year of taxability does not survive. answer to such question is merely academic one. However, to avoid future litigation, we proceed to answer same. original agreement was cancelled on 3rd April, 1992 by new agreement which is in two parts. first part cancels original agreement between DKS n d assessee. second part is between DKS and newly formed company-DIGCIL for supply of know-how and technical assistance. It is second part which requires approval by Government. If original agreement itself requires to be cancelled, no approval is required. No provisions have been brought to our knowledge which require such approval. Agreement for know-how requires approval because it involves remittance of foreign exchange. Since cancellation of original agreement did not require any approval, first part of agreement became effective on 3rd April, 1992 itself, irrespective of its approval. Thus, had there been any income chargeable to tax, it would have been assessable in asst. yr. 1993-94. At one stage of hearing, learned counsel for assessee tried to argue that original agreement was decided to be cancelled in 1988 itself and, therefore, original agreement got cancelled in that year. We reject plea firstly, no such ground was raised in cross- objection, secondly, no additional ground has been raised in this regard and thirdly, mere understanding between parties is not enough to terminate contract. contract can be terminated by another contract or by virtue of terms contained in agreement itself. Since original agreement was terminated and declared as null and void by tripartite agreement on 3rd April, 1992, year of taxability would have arisen only in asst. yr. 1993-94. 21. In view of above discussion, it is held that amount declared by assessee on account of exchange rate fluctuation was capital receipt not chargeable to tax. Consequently, order of learned CIT(A) for asst. yr. 1993-94 is set aside to extent it holds that assessee is liable to tax under head "Capital gains" as well as direction that it is taxable in asst. yr. 1994-95. order of learned CIT(A) for asst. yr. 1994-95 is quashed. 2 2 . Now, we proceed to dispose of other grounds raised by Revenue in Departmental appeal pertaining to asst. yr. 1993-94, which reads as under : Assessment year 1993-94 : 1. On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to allow deduction for guest-house expenditure amounting to Rs. 48,000 being expenditure on rent and maintenance. 2. On facts and circumstances of case and in law, learned CIT(A) has erred in directing AO to tally business promotion expenses of Rs. 3,55,468 in full without restricting them to limit prescribed under s. 37(2A). 3. On facts and in circumstances of case and in law, learned CIT(A) has erred in deleting addition of Rs. 7,83,013 made to closing stock on account of unutilised Modvat credit. 4. On facts and circumstances of case and in law, learned CIT(A) has erred in holding that AO should allow assessee s claim of royalty of Rs. 29,79,784. 5. On facts and circumstances of case and in law, learned CIT(A) has erred in deleting disallowance of loans advanced by assessee to its sister-concerns out of interest-bearing borrowings. 6. On facts and circumstances of case and in law, learned CIT(A) has erred in allowing assessee s claim for deduction of bad debt of Rs. 3,34,915 ignoring fact that substantial part of loan amounting to Rs. 3,28,373 was recovered in asst. yr. 1994-95 proving fact that bad debt claimed during year had not actually become bad in said year. 7. On facts and circumstances of case and in law, learned CIT(A) has erred in holding that in order to allow claim of bad debt, it is sufficient if bad debt in question is written off in assessee s books of account. 23. Both parties are agreed that ground No. 1 is covered against assessee by Supreme Court judgment in case of Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). Following same, order of learned CIT(A) is set aside on this issue and consequently, order of AO on this issue is restored. 24. Both parties are further agreed that ground Nos. 2, 3 and 5 are covered in favour of assessee by decisions of Tribunal in assessee s own case pertaining to various asst. yrs., i.e., 1990-91 to 1992-93, 1995-96 and 1996-97, dt. 7th June., 2005, copy of which is placed on record. Following same, these grounds are dismissed. 25. Ground No. 4 relates to disallowance of royalty of Rs. 29,79,784. disallowance was initially made under s. 40(a)(i) of Act relating to asst. yr. 1992-93 on ground that TDS amount had not been deposited within prescribed period. On appeal, it was contended by assessee before learned CIT(A) that AO should allow this claim in asst. yr. 1993-94 since tax was paid in month of December, 1992 and, therefore, necessary directions be issued. learned CIT(A), considering provisions of s. 40(a)(i) of Act, held that disallowance was justified in assessment year 1992- 93, but it is allowable in asst. yr. 1993-94 on basis of payment made by assessee. Accordingly, learned CIT(A), while disposing appeal for asst. yr. 1992-93, directed AO to allow same in asst. yr. 1993-94. Therefore, following earlier decision, it was held by learned CIT(A) that such deduction is allowable in year under consideration. Consequently, he deleted disallowance made by AO in this year. Aggrieved by same, Revenue is in appeal before Tribunal. 26. After hearing both parties, we do not find any merit in ground raised by Revenue. There is no dispute that expenditure on account of royalty was incurred in asst. yr. 1992-93, but same was disallowed under s. 40(a)(i) on ground that TDS had not been deposited either in previous year relevant to asst. yr. 1992-93 nor within prescribed period under s. 200 of Act. It is also admitted fact that TDS was deposited in December, 1992 relevant to asst. yr. 1993-94. proviso to cl. (i) of s. 40(a) clearly provides that such deduction shall be allowable in subsequent year in which it is paid. Therefore, in our opinion, learned CIT(A) was fully justified in allowing deduction in asst. yr. 1993-94. Accordingly, order of learned CIT(A) is upheld on this issue. 27. Ground Nos. 6 and 7 relate to disallowance of bad debt written off by assessee in books of account. This issue is now covered by decision of Special Bench of Tribunal, Mumbai "H" Bench, in case of Dy. CIT vs. Oman International Bank SAOG (ITA No. 7431/Mum/1997, order dt. 17th May., 2006)[reported at (2006) 102 TTJ (Mumbai)(SB) 207 Ed.], wherein it has been held that for deduction under s. 36(1)(vii) of Act, it is enough if assessee has written off debt in books of account and it is not obligatory for assessee to prove that debt has become bad. There is no dispute that debt has been written off in year under consideration. Therefore, following same, order of learned CIT(A) is upheld on this issue. 28. In result, Revenue s appeal for asst. yr. 1993-94 is partly allowed. Revenue s appeal for asst. yr. 1994-95 stands dismissed, while cross- objection filed by assessee for asst. yr. 1993-94 stands allowed. *** DAI-ICHI KARKARIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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