Advocate Akhilesh Kumar Sah
The issue that a particular expenditure incurred by assessee is a capital expenditure or a revenue one has remained controversial. The facts & circumstances of each case differ. However, the decisions of Hon’ble Supreme Court of India in this respect guide in resolving the issue.
It is between settled that the aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. If an expenditure is incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.
Recently, in Honda Siel Cars India Ltd. vs. CIT, Ghaziabad [Civil Appeal No. 4918 of 2017 with Civil Appeal Nos. 4919 to 4922 of 2017, decided on 9.06.2017], in brief, assessee in all these appeals was Honda SIEL Cars Ltd. (hereinafter referred to as the “Assessee”). Question of law that was raised was also identical. Five appeals were filed only because of the reason that same issue had occurred in different AYs, i.e., for the years 1999-2000, 2001-2002, 2002-2003, 2003-2004 and 2005-2006.
Honda Motors Company Limited, Japan (hereinafter referred to as “HMCL, Japan”) had entered into a joint venture dated 12.09.1995 with SEIL Ltd., a company incorporated under the Indian Companies Act. After getting necessary approval from the Government of India, a joint venture company in the name of the assessee was incorporated. After incorporation of the assessee as a joint venture, An agreement dated 21.05.1996 between HMCL, Japan and the assessee was entered into, known as ‘Technical Collaboration Agreement’ (for short, ‘TCA’). As per the TCA, HMCL, Japan which was engaged in the business of development, manufacture and sale of automobiles and their parts agreed to give ‘license’ and ‘technical assistance’ to the assessee. The TCA also stipulated different kinds of technical know-how and technical information which were to be provided by HMCL, Japan (as a licensor) to the assessee (as a licensee). For providing the aforesaid facilities, it was agreed that a consideration/ lump sum fee of 30.5 million US Dollars would be paid by the assessee to the HMCL, Japan in 5 continuous equal installments and payment thereof was to commence from third year after commencement of commercial production. Besides, assessee was also liable to pay royalty of 4%, both on internal and exports, subject to taxes.
The dispute which had arisen was as to whether the said technical fee of 30.5 million US Dollars payable in five equal installments on yearly basis was to be treated as revenue expenditure or capital expenditure.
The assessee had filed its first return for the AY 1999-2000 (in which year, first installment was paid) showing the said expenditure as revenue expenditure. Though, in the normal assessment, the expenditure was allowed as such, thereafter a notice was issued under Section 148 of the Income Tax Act 1961 (hereinafter referred to as the ‘Act’) stating that said expenditure was capital in nature and, therefore, installment towards royalty paid in the sum of Rs. 7,96,02,000 by the assessee to HMCL, Japan in that year had escaped assessment. Ultimately, orders were passed treating the same as capital expenditure. In the subsequent years, the AO again treated the royalty paid as capital expenditure. The assessee filed appeals before the CIT(A) which were dismissed. However, further appeals before the Income Tax Appellate Tribunal (ITAT) were allowed and the ITAT held that the expenditure is to be treated as the revenue expenditure. Against the order of the ITAT, the Department went in appeal before the High Court of Allahabad which had allowed these appeals thereby reversing the order of the ITAT and agreeing with the view taken by the AO the payments of royalty expenditure in-question are to be treated as capital expenditure. In the appeals before Supreme Court, the judgment dated 21.12. 2016 passed by the High Court was challenged.
The learned senior counsel appearing for the assessee submitted that on identical issue pertaining to this very assessee, Delhi High Court had held in the case of CIT vs. Hero Honda Motors [(2015) 327 ITR 481(Delhi)] that payment of technical know-how fee and royalty was in the nature of revenue expenditure. His further submission was that the very premise on which Allahabad High Court had given in the judgment, was contrary to record. In this behalf his submission was that the High Court had proceeded on the premise that the technical know-how fee and royalty was paid for setting up the plant for manufacture of automobiles which are contrary to the factual finding recorded by the Tribunal in this case. According to him, the know-how was provided to the assessee for the purpose of manufacturing of products in India. He also argued that the High Court was influenced by irrelevant factors like extent of share holding of HMCL, Japan in the assessee which was of no relevance. The learned counsel laid much emphasis that in terms of TCA, the appellant had only acquired the right to use the technical know-how provided by HMCL for manufacture of products, during the currency of the TCA, which was for an initial period of ten years from the date of agreement or seven years from the date of commercial production. The ownership rights in the know-how continued to remain with HMCL, Japan and the appellant was not authorized to transfer the know-how license to any other person or assign or convey the same to any third party. Thus, what the appellant acquired was only a limited right to use and exploit the know-how for manufacture of products and parts.
The learned counsel for the Revenue submitted that finding of fact was arrived at by the AO, which was confirmed by the CIT(A) as well that a new asset in the form of setting up of a new company had come into existence with the aid of technical know-how and, therefore, the expenditure in-question was capital expenditure. He further submitted that the view which was taken by ITAT was un-sustainable and, therefore, rejected by the High Court.
The learned Judges of the Hon’ble Supreme Court heard the rival submissions and took into account the TCA, some of the decisions of Supreme Court on the issue, facts & circumstances and the position of law. It was observed that there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lump sum royalty, though in five installments, was paid therefor.
In respect of the judgment of the Delhi High Court(supra) in the case of this very assessee, it was noticed that in that case, technical know-how was obtained for improvising scooter segment, which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for the first time to manufacture cars.
The Supreme Court held that the conclusion drawn by the Allahabad High Court that expenditure incurred was of capital nature was right. The appeals filed by assessee were dismissed.
Payment for technical know-how whether is a capital or a revenue expenditure has remained controversial. The latest ruling of Supreme Court has become an authority on the issue.