HIGH COURT OF MADRAS
Commissioner of Income-tax, Chennai
TTG Industries Ltd.
Tax Case (Appeal) No. 1274 of 2005
June 8, 2012
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Mrs. Chitra Venkataraman, J.
The following is the question of law raised in this tax case appeal filed by the Revenue against the order of the Income Tax Appellate Tribunal relating to the assessment year 1996-97.
Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment for know-how is deductible under Section 37 as a Revenue expenditure, when there is a specific section i.e., Section 35AB covering the same ?
2. The assessee herein is engaged in the manufacture of Pollution Control Equipment, High Pressure Cleaning system and Wind Electric Generators and also undertakes Turn-key Engineering Projects. As seen from the facts narrated, the assessee had an agreement to execute the turn-key project with Sterlite Industries (I) Ltd., and at its request the assessee procured technical know-how from M/s.Swemco USA and Joy Environmental Technologies, USA., and Heem Host Machines, Netherlands. The technical know-how, thus obtained was used for carrying out detailed engineering to suit the requirements of M/s. Sterlite Industries (I) Ltd., Tuticorin. Thus, the engineering work done by the assessee was customised to meet the needs of the particular customer. The agreement dated 24.3.1995 entered into between the assessee and Sterlite Industries (I) Ltd., dealt with the technical know-how obtained from the other countries. Clause 3.1 of the agreement, which is extracted in the order of the Tribunal pointed out that the Architect has an exclusive right over the information and the Architect’s document shall not be used by the customer for completion of the project by others. Admittedly, based on the technical know-how obtained from the person identified by the Customer the assessee used it in connection with the contract. Thus, in respect of the expenditure incurred in obtaining the technical know-how, the assessee claimed the same as revenue expenditure. The Assessing Officer, however, pointed out that the claim could only be considered under Section 35AB. Thus, the claim of the assessee for deduction of the expenditure towards technical know-how as revenue expenditure was rejected. Aggrieved by the said order, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who pointed out that as a matter of fact the requirements of technical know-how varied from customers to customers and contracts to contracts and each contract had been customised for setting up the plants to suit the requirements of the customers and the assessee did not carry on any particular manufacturing activity which was general in nature. Having said so, the Commissioner of Income Tax (Appeals) held that the expenditure on technical know-how was allowable only under Section 35AB. Aggrieved by the same, the assessee went on appeal before the Income Tax Appellate Tribunal which upheld the claim of the assessee however, holding that the claim was allowable as revenue expenditure under Section 37. Aggrieved by that, the Revenue is on appeal before this court.
3. Learned Standing Counsel appearing for the Revenue contended that the expenditure incurred in obtaining the technical know-how was not eligible for consideration as revenue expenditure and that the same was eligible to be assessed only as per Section 35AB.
4. Per contra, learned counsel appearing for the assessee placed reliance on the decision of the Apex Court in CIT v. Swaraj Engines Ltd.  309 ITR 443/ 171 Taxman 495 wherein the Apex Court pointed out that even for the applicability of Section 35AB, the nature of the expenditure is required to be decided at the threshold itself. If the expenditure is found to be revenue in nature, then Section 35AB may not be applicable to the case. Thus, the applicability of Section 35AB would arise, only if the expenditure is found to be other than the Revenue in nature. Placing further reliance on the decision of the Bombay High Court in CIT v. Kirloskar Tractors Ltd.  231 ITR 849/98 Taxman 112, learned counsel submitted that when the expenditure incurred is for the purpose of manufacturing activity in pursuance of a turn-key project, and thus the expenditure solely related to carrying on or conduct of the business, the same has to be regarded as integral part of the profit making process and not for acquisition of an asset or a right of permanent character. Thus, even applying the decision of the Apex Court in Alembic Chemical Works Co., Ltd. v. CIT  177 ITR 377/43 Taxman 312, the expenditure could be considered only as a revenue expenditure.
5. Heard the learned counsel appearing on either side.
6. As rightly submitted by the learned counsel for the assessee, the question as to whether the expenditure would fall for consideration under Section 35AB or the question as to whether the expenditure is on account of revenue or capital has to be decided by taking note of the facts and circumstances leading to the said expenditure. As pointed out by the Bombay High Court in the decision in Kirloskar Tractors Ltd. (supra), a decision relied on by the assessee, in order to arrive at a just and proper conclusion, one must look at the nature and character of the advantage in a commercial sense having regard to the purpose of the outlay and its intended object and effect. As pointed out by the Bombay High Court, if the expenditure is for carrying on or conduct of the business, then it may be regarded as an integral part of the profit making process, and the expenditure qualifies for being considered as a revenue expenditure.
7. Referring to the decisions of the Apex Court in Alembic Chemical Works Co., Ltd. (supra) the Bombay High Court held that the expenditure incurred to carry on the business of the assessee was clearly a revenue expenditure. A perusal of the facts therein would show that technical collaboration agreement executed between the assessee’s company and West German company enabled the assessee to have full and correct technical and other confidential information and know-how. The agreement also guaranteed the period during which the German Company supplies the latest technical developments in connection with the manufacture of tractors and diesel engines. The assessee was obliged to maintain secrecy about the technical documents and in consideration of the use of the technical know-how, the assessee was to pay to the German Company certain sums of money at fixed intervals. Thus, on an overall consideration of the facts, the Bombay High Court held that the payment was for for various services under the agreement for efficient running of the business of the assessee and better profitability. There was no acquisition of the know-how by the assessee. The expenditure incurred by the assessee for getting the technical know-how and other assistance was on account of revenue expenditure, which was allowable as a deduction in the computation of the income of the assessee.
8. Going by the facts and the law declared on a consideration of the facts therein, the decision of the Bombay High Court in Kirloskar Tractors Ltd. (cited supra) squarely applies to the facts of the case herein. As already pointed out, the assessee having entered into an agreement for execution of the turn-key project for M/s. Sterlite Industries (I) Ltd., at the request of the said client acquired technical know-how to be used in its engineering activity. As pointed out by the Tribunal and the Commissioner of Income Tax (Appeals) the technical know-how was relevant only as regards the technical know-how procured for M/s. Sterlite Industries (I) Ltd., Given the above said facts, the confidentiality that has to be maintained on the technical know-how obtained, it is clear that the entire expenditure incurred by the assessee was towards its profit making process qualifying for deduction as revenue expenditure. That being so, going by the provisions under Section 37 of the Act, the said expenditure qualifies for deduction under Section 37 and hence Section 35AB has no application to the facts of the case.
9. In the circumstances, the tax case appeal stands dismissed and the order of the Tribunal stands confirmed. No costs.