Case Law Details
ACIT Vs Voith Paper Fabrics India Ltd (ITAT Delhi)
Introduction: The recent case of ACIT vs. Voith Paper Fabrics India Ltd came under scrutiny during assessment proceedings, where the Assessing Officer (A.O.) questioned the nature of expenses related to ‘Technical Know-How Fees Royalty.’ The dispute revolves around whether these expenses, debited at Rs.3,60,48,535, should be considered as capital or revenue expenditure.
Detailed Analysis: The A.O. argued that the expenses were capital in nature, given the long-term benefits derived by the assessee from a “Technical Know-How Agreement” with Voith Paper Fabrics GmbH & Co. KG, Germany. The agreement required the payment of a 5% royalty on net export sale price. The A.O. considered the expenditure as enhancing the functional capacity and enduring benefits, classifying it as capital expenditure under the amended section 32 of the I.T. Act, 1961.
Conclusion: Displeased with the A.O.’s decision, the assessee appealed to the CIT(A), who, after considering the precedent set in earlier years and the Tribunal’s decisions, ruled in favor of the assessee. The Ld. CIT(A) found no justification for the A.O.’s disallowance of Rs.3,60,48,535 as revenue expenditure. The ITAT Delhi upheld this decision, concluding that the expenses in question were indeed revenue in nature. The case serves as a significant precedent in determining the tax treatment of similar expenditures.
During the course of assessment proceedings, A.O. noticed that assessee had debited Rs.3,60,48,535/- on account of ‘Technical know-How Fees Royalty’. According to A.O. the expenses appeared to be of capital in nature. The assessee was, therefore, show caused and asked to explain as to why the expenses should not be considered as capital expenditure. The assessee made detailed submissions which were not found acceptable to A.O. A.O. noted that assessee had entered into a “Technical Know-How Agreement” with M/s. ‘Voith Paper Fabrics GmbH & Co. KG, a company incorporated under the laws of Germany, whereby it provided know-how and technical assistance to the assessee for the manufacture of paper maker felts, paper and other industrial fabrics. As per the agreement assessee was required to pay to Voith Paper Fabrics GmbH for technical assistance and know-how, royalty @ 5% of the net export sale price. A.O. noted that the expenses incurred in the form of royalty was termed as “Technical Know-How Fees” in the P & L A/c and was claimed as deductible expenditure. A.O. was of the view that the expenditure in question was in relation to carrying on of the business of the assessee for running the business more profitably and the rights obtained by the assessee was absolute rights to use the know-how. He was of the view that assessee had derived benefits of enduring nature as well as increase in functional capacity of the manpower which ultimately increases the production of the company. He was further of the view that acquisition of know-how under a license was capital expenditure and it would fall within the ambit of amended section 32 of the I.T. Act, 1961. He further noted that identical expenditure was disallowed by the A.O. in A.Y. 2010-11 to 2014-15. He, therefore, held the expenditure incurred by the assessee on technical know-how fees be not a revenue expenditure. He, therefore, made a net disallowance of Rs.3,60,48,535/- after allowing the claim of depreciation.
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