ORDER SHEET IN HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax] ORIGINAL SIDE ITA No. 148 of 2006 M/S. TIMKEN INDIA LTIMTED (Previously known as TATA TIMKEN LIMITED) Versus COMMISSIONER OF INCOME TAX, KOLKATA - I & ANOTHER BEFORE: Hon'ble JUSTICE GIRISH CHANDRA GUPTA Hon'ble JUSTICE TAPABRATA CHAKRABORTY Date : 30th July, 2014. Appearance: Mr. Abhrotosh Majumdar with Ms. Nilanjana Pal (Banerjee) and Mr. S. Lahiri, Advocates. Ms. A. G. Gutgutia, Advocate Court : appeal is directed against judgment and order dated December 1, 2005 wherein learned Tribunal held that one time lump sum payment made by assessee for acquiring technical know-how for period of six years was capital expenditure. On that basis views to contrary expressed by CIT(A) were set aside and appeal preferred by revenue was allowed. 2 Aggrieved by aforesaid judgment and order, present appeal has been preferred by assessee. With joint efforts of Tata Iron & Steel Company Limited and Timken Company, existing company under laws of State of Ohio, United States of America, new company by name of Tata Timken Limited was incorporated under Companies Act, 1956. Tata Timken Limited (TTL for brevity) in order to expand its business agreed to take technological assistance from Timken Company on terms and conditions contained in agreement dated 10th September, 1998 which included payment of compensation as follows: ARTICLE V COMPENSATION FOR LICENSE OF TECHNICAL INFORMATION A. TTL agrees to pay to Timken lump sum amount of USD 300,000 net of taxes, according to following schedule: USD 100,000 within sixty (60) days after this Agreement is filed with Reserve Bank of India: USD 100,000 within sixty (60) days of delivery of Technical Documentation from Timken to TTL; and USD 100,000 within sixty (60) days of commencement of Commercial Production, or four years after this Agreement is filed with Reserve Bank of India, whichever is earlier. 3 Lump sum payments made hereunder by TTL to Timken shall be made without deduction of any present or future tax assessment or other governmental charge, statutory levy or cess imposed upon such payments by Government of India (or any political subdivision or taxing authority thereof or therein) and such taxes, assessments or charges, if any, shall be borne and paid by TTL. TTL shall send to Timken all certificates or other verification on such tax payments as may be required by Timken as soon as practical after such payment. B. In addition to lump sum payment under Article V(A) above, TTL agrees to pay to Timken royalty of three percent (%) of Net Ex- Factory Sales Price of Products sold in Republic of India and royalty of three percent (%) of F.O.B price invoiced and realised for Products exported, or sold for export, from or in, as case may be, Republic of India during six (6) years period commencing with start of Commercial Production. question arose as to whether amount of USD 200,000 paid by TTL to Timken during assessment year was to be treated as revenue expenditure ? assessee naturally was interested in contending that it is revenue expenditure whereas department was of opinion that it is capital expenditure. CIT(A) upheld contention of assessee which was challenged before learned Tribunal which restored views 4 expressed by assessing officer that expenditure was capital in nature. Mr. Majumdar, learned advocate appearing in support of appeal, submitted that facts and circumstances of present case are identical with those in case of Alemic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, Gujarat, reported in (1989) 3 SCC 329. assessee company, he contended, was already in existence and assessee was also engaged in business of ball bearings. assessee entered into agreement with foreign company for purpose of acquiring new technology. In identical situation in aforesaid case of Alembic Chemical (supra), Apex Court held that it appears to us that answer to questions referred should be on basis that financial outlay under agreement was for better conduct and improvement of existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to observations of this Court in CIT v. CIBA of India Ltd. Mr. Majumdar also relied upon judgment in case of Commissioner of Income Tax, Madras vs. I.A.E.C. (Pumps) Ltd., Madras, reported in (1998) 8 SCC 460, wherein Their Lordships of Supreme Court agreed with views of High Court holding that we are of opinion that above features clearly establish that what was obtained by 5 assessee is only licence and what was paid by assessee to Aturia is only licence fee and not price for acquisition of any capital asset. Mr. Majumdar submitted that considering fact that payment made by assessee is on account of license fee and considering that Supreme Court was considering identical question in case of I.A.E.C. (Pumps) Ltd. question should be answered in favour of assessee. Ms. Gutgutia, learned advocate appearing for revenue, drew our attention to judgment of apex Court in case of Jonas Woodhead & Sons (India) Ltd. vs. Commissioner of Income Tax, reported in 1997 (224) ITR 342 (SC). She submitted that moot question for consideration has been indicated in aforesaid judgment as follows: Whether expenditure or payment thus made makes accretion to capital asset and after court comes to conclusion that it does so, then it has to be held to be capital expenditure. She contended that vexed question has been made simpler by apex Court in aforesaid case. If payment made by assessee makes accretion to capital asset expenditure is capital in nature. She contended that assessee may have already had existing plant and machinery. It may also be true that assessee was pursuing 6 same line of business, but it cannot be denied that by paying sum of USD 200,000 assessee acquired new technology. There was as such accretion to capital of assessee in sense that company became better equipped to do its business with help of technology. Therefore, expenditure has to be treated as capital expenditure. On top of that, from agreement entered into between assessee and non-resident it would appear that benefit of such payment is of enduring nature which is to continue to benefit assessee for period of six years. It was, as such, plain case of capital expenditure on which assessee was entitled to claim depreciation. assessee has already been allowed depreciation at rate of 25%. Accordingly, more than just treatment was given to assessee and this court should refrain from interfering with order under challenge. We have considered rival submissions of learned advocates for parties. submissions advanced by Ms. Gutgutia are no doubt meritorious and certainly represent one way of looking at things. Sight cannot however be lost of fact that payment made by assessee is on account of license fee. By making such payment, assessee has got permission to use technology. money paid is irrecoverable. In case business of assessee for some reason or other is stopped, no benefit from such payment is likely to accrue to assessee. license is not transferable. Therefore, it cannot be said with any amount of certainty that there has been accretion to capital asset of 7 assessee. In case, assessee continues to do business and continues to exploit technology for agreed period of time, assessee will be entitled to take benefit thereof. But in case it does not do so, payment made is irrecoverable. It is in this sense that matter was looked into by High Court of Madras and was endorsed by apex Court in case of CIT vs. IAEC (Pumps) Ltd., Madras (supra). point as matter of fact is covered by aforesaid judgment. Nothing really is left for us to do in matter. We are, therefore, of opinion that question has to be answered in affirmative and in favour of assessee. appeal is, thus, allowed. (GIRISH CHANDRA GUPTA, J.) (TAPABRATA CHAKRABORTY, J.) sm AR[CR] M/s. Timken India Ltd. (Previously Known As Tata Timken Limited) v. Commissioner of Income-tax, Kolkata-I, & Another