*THE HONB E SRI JUSTICE G. CHANDRAIAH AND HON BLE SRI JUSTICE CHALLA KODANDA RAM +I.T.T.A.No.153 OF 2004 %09.10.2015 # Commissioner of Income-tax, Hyderabad-I ..... APPELLANT AND M/s. Advanta India Ltd., Secunderabad .....RESPONDENT ! Counsel for appellant: Sri J.V. Prasad ^ Counsel for respondent : Sri Percy Pardivala < Gist: > Head Note: ? Cases referred: [1] 148 ITR 272 2.232 ITR 359 3. (1997) 224 ITR 342 4.(1989) 177 ITR 377 (SC) 5. (1998) 232 ITR 316 (SC) 6. (1989) 177 ITR 377 (SC) 7. (1994) 207 ITR 813 (Cal) 8. (1998) 231 ITR 849 (Mum) 9. 251 ITR 155 (Cal) HONB E SRI JUSTICE G. CHANDRAIAH AND HON BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.153 OF 2004 JUDGMENT: (per GC,J) This appeal is filed by Revenue under Section 260-A of Income Tax Act, 1961 (for short, Act ), questioning order dated 21.02.2003, passed by Income Tax Appellate Tribunal, Hyderabad Bench B , Hyderabad, in I.T.A.No.37/Hyd/99, for assessment year 1995-96, raising following substantial questions of law for consideration of this Court: i) Whether on facts and in circumstances of case Tribunal was correct in law in holding that payment of technical know-how fee was revenue expenditure and not capital in nature. ii) Whether on facts and in circumstances of case, Tribunal was correct in law in holding that expenditure on account of payment of royalty was revenue in nature. brief facts of case are that respondent/assessee was originally incorporated under name and style of M/s. I.T.C Zeneca Limited and its name was changed to M/s. Advanta India Limited on 30.09.1998. In course of its business during assessment year 1995-96, assessee paid amount of Rs.2,75,85,300/- to M/s. Zeneca Limited, U.K towards technical know-how fee and assessee had also paid amount of Rs.47,34,306/- towards royalty and claimed said payments as revenue expenditure. It is further stated that Assessing Officer observed that expenditure incurred by assessee towards technical know-how fee falls within ambit of Section 35AB of Act and allowed 1/6th of amount so claimed as deduction. Assessing Officer had also treated 1/4th of royalty paid as capital expenditure. On appeal filed by assessee, Commissioner of Income Tax (Appeals) (for short C.I.T Appeals ) treated 75% of technical know-how fees as revenue expenditure and 25% as being capital in nature, and thus allowing 75% of fees paid towards Technical know-how as deduction under Section 37 of Act. C.I.T (Appeals) had also held that disallowance of 1/4th royalty payment as capital in nature. Aggrieved thereby, assessee filed appeal before Income Tax Appellate Tribunal in I.T.A.No.37/Hyd/1999 and Department being aggrieved by order of C.I.T (Appeals) in treating only 25% of technical know-how fees as capital in nature, filed appeal in I.T.A.No.109/Hyd/1999 before Tribunal. Tribunal clubbed both appeals filed by assessee and department and disposed of same by common order dated 21.02.2003, partly allowing I.T.A.No.37/Hyd/1999 and dismissed I.T.A.No.109/Hyd/1999. Aggrieved order dated 21.02.2003, passed by Tribunal in I.T.A.No.37/Hyd/1999, present appeal is filed by department. Heard Sri J.V. Prasad, learned standing counsel for appellant/ department and Sri Percy Pardivala, learned senior counsel for respondent/assessee. facts are not in dispute. principal question which falls for consideration in present case and facts as found by Tribunal as to whether expenditure incurred by respondent-assessee is to be fully allowed as revenue expenditure or part of it is to be capitalized as capital expenditure . It is well recognized by various judicial pronouncements that particular expenditure is revenue or capital in nature is vexed question and same would have to be determined in each case on appreciation of facts of particular case. question as to whether amount paid for acquiring Germplasm and Technical know-how needs to be determined with particular reference to terms of contract and agreement between assessee and foreign company Zeneca Limited, U.K. Though, assessing authority sought to invoke Section 35AB of Act to expenditure, C.I.T Appeals after analyzing nature of transactions involved in agreement had categorically negatived same. It may be noted that revenue did not question about decision of C.I.T Appeals, so far as Section 35AB of Act, has no application. First Appellate Authority after analyzing agreement in detail and by placing reliance on judgment of Madras High Court in case of Commissioner of Income Tax, Tamil Nadu vs. Southern Switchgear [1] Limited as confirmed by Supreme Court in Southern Switchgear [2] Limited vs. Commissioner of Income Tax, Tamil Nadu , had disallowed 1/4th of expenditure paid as consideration for agreement dated 01.10.1994. Both revenue and assessee filed appeals separately against C.I.T Appeal s common order. Tribunal had analyzed agreement in detail and by applying principles laid down in various judgments held that expenditure incurred by assessee in obtaining Germplasm and technical know-how under agreement dated 01.10.1994, would qualify to be allowed fully as revenue expenditure. In process of discussion, Tribunal found that assessee came into existence by acquisition of existing business of Hyson India Limited and business commenced from 1.9.1994. Germplasm and Technical know-how were acquired by assessee after commencement of business by assessee. By applying six tests laid down in case of [3] Jonas Woodhead & Sons (India) Limited vs. CIT , Tribunal came to conclusion that there was no new business which was started on basis of Technical know-how received from foreign firm. With regard to Test No.2, though Article 18 of agreement gives exclusive rights to assessee company, assessee is not entitled to sub license in whole or in part of licensee without consent from licensor and further licensor has right to assign or otherwise transfer agreement or any rights there-under. With regard to 3rd test, consideration for agreement was certain and definite except with respect to royalty which is to be computed based on production. Tribunal found consideration which was agreed to be paid under agreement is both for providing Germplasm as well as technical know-how. With regard to 4th test, it was found that assessee has to return Germplasm, but continue to use technical know-how. However, technical information can be continued to be used by them. Further, it was found that there is mutual obligations to exchange developments and improvements that may result on account of constant research on part of licensee and licensor and it is provided distinctly as to how improved property could be shared based on certain definitive parameters. With regard to 5th test considering nature of technology and rapid advancements taking place in filed of biotechnology, it was found that there is enduring benefit that is derived by assessee. So far as 6th test is concerned, same was not dealt with as in present case payment was one lump sum payment for acquiring Germplasm along with technical know-how and duration of agreement was five years. Before us, on behalf of revenue, it was emphatically canvassed that assessee had acquired Germplasm which itself is asset and further technical know-how for use to exploit same for purpose of assessee s business. technical know-how and Germplasm is asset of capable of giving enduring benefit to assessee and further considering facts on record had rightly apportioned expenditure in ratio 1/4th as capital in nature and 2/3rd in nature of revenue by applying legal tests laid down in judgment of Madras High Court in CIT vs. Southern Switchgear Limited (1 supra) which is approved by Supreme Court in Southern Switchgear Limited vs. CIT (2 supra). learned counsel for appellant/revenue also relied upon following judgments i) Southern Switch Gear Ltd. Vs. CIT and another (1998) 232 ITR 359 (SC) ii) Jones Woodhead and Sons (India) Ltd., vs. CIT (1997) 224 ITR 342 (SC) iii) CIT, Tamil Nadu-II vs. Southern Switch Gear Ltd (1984) 148 ITR 272 (Mad). iv) CIT vs. Shriram Bearings Ltd (2001) 251 ITR 155 (Cal) v) Jyothi Electric Motors Ltd. Vs. CIT (1999) 237 ITR 280 (Guj) vi) Fenner Woodroffe & Co. Ltd. Vs. CIT, Madras (1976) 102 ITR 665 (Mad. vii) Ram Kumar Pharmaceutical Works vs. CIT (1979) 119 ITR 33 (All.) apart from making submissions with regard to inapplicability of judgments cited on behalf of respondent/assessee. Likewise, learned senior counsel Sri Parsi Pardivala, on behalf of assessee, had also placed reliance on following judgments: i) CIT vs. CIBA of India Ltd (1968) 69 ITR 692 (SC) ii) Praga Tools Ltd vs. CIT (1980) 123 ITR 773 (AP) iii) Coromandal Fertilizers Ltd vs. CIT (1984) 148 ITR 546 (AP) iv) Alembic Chemicals Works Company Ltd vs. CIT (1989) 177 ITR 377 (SC) v) Veljan Hydrair Pvt Ltd vs. CIT (1989) 177 ITR 552 (AP) vi) CIT vs. Avery India Ltd (1994) 207 ITR 813 (Cal) vii) CIT vs. Kirloskar Tractors Ltd (1998) 231 ITR 849 (Mum) viii) CIT vs. I.A.E.C (Pumps) Ltd (1998) 232 ITR 316 (SC) ix) CIT vs. J.K Synthetics Ltd (2009) 309 ITR 371 (Delhi) x) CIT vs. Hero Honda Motors Ltd (2015) 372 ITR 481 (Del) We have heard elaborate arguments on both sides and perused record apart from going through various judgments relied upon by both counsel. Having given our anxious thought to matter in issue we do not find it necessary to extract or deal with large number of case law which has been cited before us by various Courts except making reference to judgments of Supreme Court wherein cases of this nature were considered. In this context, it is useful to refer to guidance provided by Supreme Court in cases of Alembic Chemicals Works Company vs. [4] CIT and Jonas Woodhead and sons India (3 supra), and Supreme Court had summarized tests by reference to various cases earlier. In context of guidance provided in those judgments, we may consider arguments advanced before us. At this stage, we may note that CIT Appeals itself did not agree with views of assessing officer in entirety and however found that only small portion of expenditure could be treated as capital in nature by applying principles laid down in case of Southern Switchgear Limited (2 supra) whereas assessee had relied [5] on judgment reported in case of CIT vs. I.A.E.C (Pumps) Ltd as more appropriate. All cases ultimately emphasis as rule, analysis and proper understanding of agreement between parties as providing correct picture with respect to aspect as to how particular expenditure is to be treated. In case on hand, we had set out findings as recorded by Tribunal in earlier paragraphs. In present case, there is no challenge to findings recorded by Tribunal by raising question of perversity of fact. In view of settled principles of law, questions raised before us are required to be considered and answered on facts as found and recorded by Tribunal. On analyses of agreement, we find that 1) it is termed as licensing agreement and parties contemplated same to be as licensing agreement. 2) Under agreement, assessee (licensee) to get right and license to use technical information and Licensor Germplasm to research and develop, produce and sell products within India. 3) assessee gets immunity from legal proceedings with respect to patent rights, if any in India. assessee acquires documents relating to technical information and with genetic material for maize, sunflower, canola, mustard, sorghum, millet and cotton. Assessee also would get assistance in acquiring appropriate personal, facilities, plant, machinery and equipment for research, development, production and processing of products by licensee. Assessee gets right to use, produce and sell Germplasm in specified products by way of sub-license to its affiliates.) One of conclusions arrived at by Tribunal is with regard to whether there is any enduring benefit likely to accrue in favour of assessee on account of agreement. This question was answered in negative by Tribunal by reference to fast changing development in filed of biotechnology. Reliance was also placed on judgment of Supreme Court in case of Alembic Chemicals Works Company vs. [6] [7] CIT apart from judgments in cases of CIT vs. Avery India Ltd , [8] [9] CIT vs. Kirloskar Tractors Ltd and CIT vs. Shriram Bearings Ltd . One significant aspect of agreement is that assessee is not required to return licensee s Germplasm, except in case of termination of agreement in terms of Article 16 of Agreement. (Wrongly assumed by Tribunal as returnable). Article 16 provides for termination of agreement only in case of breach of agreement as set out therein. In other words, Germplasm which has been supplied to assessee and relevant material on multiplication of same is available for assessee s use even after currency of agreement. close reading of agreement in present case would disclose that consideration is paid for acquiring living organism Germplasm and also for technical know-how. C.I.T (Appeals) had apportioned same, 1/4th as on capital account and 2/3rd on revenue account. Under licensing agreement, products produced or developed with Germplasm and technical know-how provided under agreement are revenue earning products for assessee. In other words, they are material or tools in hands of assessee for generating revenue. agreement is valid for period of five years from date of commercial production and eight years from date of execution. In sense, Germplasm is revenue earning apparatus. technical knowledge which has been acquired in process of implementation particularly in bio-technology filed would certainly benefit assessee even after expiry of agreement period and there is no embargo on assessee for using expertise and knowledge acquired. Further, by clearly defining Licensee Germplasm and Licensor Germplasm and setting out right to access Licensor s improvements during currency of agreement agreement has ensured benefits of research, development and improvements to Licensee, assessee. Further, in terms of Article 8 of agreement, Licensor to have access to Licensee s improvements but subject to payment of consideration in terms of Article 5.1(d) of Agreement. These clauses viewed in context of intention of parties would certainly point out that both parties intended to benefit for considerable period of time out of relationship emanating from agreement. Even though in Bio-technology field changes are likely to happen in fast phase, assessee still has benefit of same in view of dynamic nature of agreement entered into between assessee and technology provider. This in our considered view is distinct and distinguishing factor, which would benefit assessee giving enduring benefit to assessee. In that view of matter, judgment of Supreme Court in Alembic Chemicals Case (5 supra) is distinguishable. In that view of matter, apportioning part of expenditure in nature of capital expenditure by CIT Appeals cannot be termed as erroneous. This single distinguishing factor is sufficient to answer Question No.1 in favour of revenue and against assessee. Accordingly, Question No.1 is answered in favour of revenue and against assessee. So far as Question No.2 that is amount of royalty is concerned, it is agreed to be paid by assessee and same needs to be treated as revenue expenditure particularly considering fact that same is linked to percentage of consideration received on sale of products produced by assessee by use of Germplasm and with help of technical know-how. Accordingly, Question No.2, is answered in favour of assessee and against revenue. With above observations, appeal is disposed of. No order as to costs. Miscellaneous petitions, if any pending in this appeal, shall stand closed. ____________________ G. CHANDRAIAH,J ____________________________ CHALLA KODANDA RAM, J Date:09.10.2015. Note: L.R. copy to be marked. B/o. Gk. HONB E SRI JUSTICE G. CHANDRAIAH AND HON BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.153 OF 2004 Date:09.10.2015. [1] 148 ITR 272 [2] 232 ITR 359 [3] (1997) 224 ITR 342 [4] (1989) 177 ITR 377 (SC) [5] (1998) 232 ITR 316 (SC) [6] (1989) 177 ITR 377 (SC) [7] (1994) 207 ITR 813 (Cal) [8] (1998) 231 ITR 849 (Mum) [9] 251 ITR 155 (Cal) Commissioner of Income-tax, Hyderabad-I v. M/s. Advanta India Ltd