bgp bgp bgp IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION INCOME INCOME INCOME TAX APPEAL NO.378 OF 2000 TAX APPEAL NO.378 OF 2000 TAX APPEAL NO.378 OF 2000 Kirloskar Cummins Ltd. ..Appellant (now Cummins India Ltd.) (Original Kothrud, Pune. Respondent) Vs. Insp.Asstt.Commissioner of ..Respondent Income Tax, Asstt. Range-I, (Original Pune. Appellant) Mr.S.N.Inamdar for the Appellant. Mr.Vimal Gupta for the Respondent. CORAM CORAM CORAM :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & V.C.DAGA, V.C.DAGA, V.C.DAGA, JJ. JJ. JJ. DATE DATE DATE : 20TH OCTOBER, 2008 : 20TH OCTOBER, 2008 : 20TH OCTOBER, 2008 (JUDGMENT (JUDGMENT (JUDGMENT PER : V.C.DAGA,J.) PER : V.C.DAGA,J.) PER : V.C.DAGA,J.) 1. This Appeal has been preferred by the Assessee against the order of the Tribunal, Pune Bench, Pune dated 27th May, 1999 in ITA No.1094/PN/85 in respect of the A.Y.1981-82 proposing the following substantial questions of law: I) Whether on the facts & in the circumstances of the case, the payments of Rs.7,82,100 to Holset & Rs.22,036,90 to Gottlob respectively wholly or in part was in the nature of capital expenditure ? II) Whether there was any material before the Tribunal to hold that the activity of manufacture of diesel powered buses constituted an entirely different & new business from the existing business of manufacture of diesel engines which were fitted in the buses so manufactured ? :2: THE FACTS : 2. The Appellant is a Public Limited Company engaged in the business of manufacture of High Powered Internal Cumustion Engines ("The Diesel Engines" for short) for the last several years. 3. The Appellant on 27th February, 1980, entered into an agreement known as " technical collaboration agreement" ("the agreement" for short) with M/s.Gottlob Auburatar GmbH., a German Company to provide know-how to the Assessee for manufacture of Diesel Powered Integral Bus with the trade-mark ‘NEOPLAN’ ("the Bus" for short). 4. The area of technical services to be rendered by the German Company were as follows: a. Supply of technical drawings designs and other technical information relating to manufacture of diesel powered integral bus. b. training of KCL personnel in the manufacture of diesel powered integral bus i.e. body building assembly designing etc. c. information as to latest development of designs and manufacturing techniques including quality control technique. d. Supply of drawings design of jigs tools, and fixtures reality to various components and e. use of trade name of GA i.e. Neoplan during the currency of the agreement. :3: 5. The Assessee had filed a return of income and claimed sum of Rs.22,03,690/- paid under clause 11 of the agreement to the German Company as a revenue expenditure. 6. The Assessing Officer vide his order dated 21st September, 1984 disallowed the payment holding it to be a capital expenditure on the ground that it has resulted into acquisition of an asset or advantage of an enduring nature and that it was not a business expenditure. 7. Being aggrieved by the aforesaid order, an Appeal was carried to Commission of Income Tax (Appeals), who was pleased to hold that the subject payment was a revenue expenditure holding that the knowhow related to the manufacture of product which the Assessee company was already manufacturing. 8. Being aggrieved by the aforesaid order of the Commissioner of Income Tax (Appeals), Revenue carried an Appeal to the Tribunal. The Tribunal was pleased to set aside the order of the Commissioner of Income Tax (Appeals) and restored the order of the Assessing Officer holding it to be a capital expenditure. The Tribunal held that the expenditure can be allowed only if it relates to the existing business of which profits are being computed. The Tribunal further held that the production of Diesel Engines and Buses are :4: entirely different businesses as such the expenses incurred are not Revenue in nature. 9. Being aggrieved by the aforesaid order, the Assessee has invoked the Appellate jurisdiction of this Court under Section 260-A of the Income Tax Act contending that the view taken by the Tribunal is pulpably erroneous based on wrong assumption that the expenditure related to the acquisition of know-how for manufacturing Buses, which was not part of the same business of the assessee ignoring the tests of same business laid down by the Apex Court from time to time. SUBMISSIONS : 10. Mr.Inamdar, the learned Counsel appearing for the appellant-assessee submits that the findings recorded by the Tribunal that the manufacture of the Diesel Engine and Buses are an entirely different product or business has no basis. According to him the said finding is based on no evidence. 11. He strongly relied on the judgment of the Apex Court in the case of Alembic Chemical Works Co.Ltd. Alembic Chemical Works Co.Ltd. Alembic Chemical Works Co.Ltd. Vs. Vs. Vs. Commissioner of Income Tax, Gujarat 1989 177 ITR Commissioner of Income Tax, Gujarat 1989 177 ITR Commissioner of Income Tax, Gujarat 1989 177 ITR 377 377 377 (SC) (SC) (SC), in support of his submission. :5: 12. Mr.Inamdar further submits that the know-how acquired related to the process of manufacture of the existing product as such payment made ought to be considered as revenue expenditure since the Assessee did not acquire any asset of enduring nature. In his submission, the expenditure is nothing but a payment towards consultation. A reliance is placed on the judgment of this Court in the case of Gannon Norton Gannon Norton Gannon Norton Metal Metal Metal Diamond Dies Ltd. Vs. Commissioner of Income Diamond Dies Ltd. Vs. Commissioner of Income Diamond Dies Ltd. Vs. Commissioner of Income Tax Tax Tax 1987 163 ITR 606 1987 163 ITR 606 1987 163 ITR 606 followed by Delhi High Court in the case of Commissioner of Income Tax Vs. Commissioner of Income Tax Vs. Commissioner of Income Tax Vs. T.E.I.Technologies T.E.I.Technologies T.E.I.Technologies Pvt.Ltd. (2008) 304 ITR 262 Pvt.Ltd. (2008) 304 ITR 262 Pvt.Ltd. (2008) 304 ITR 262 (Delhi) (Delhi) (Delhi). He also pressed into service the judgment of the Apex Court in the case of Commissioner of Income Commissioner of Income Commissioner of Income Tax Tax Tax Vs. I.A.E.C.(Pumps) Ltd. 1998 232 ITR 316 Vs. I.A.E.C.(Pumps) Ltd. 1998 232 ITR 316 Vs. I.A.E.C.(Pumps) Ltd. 1998 232 ITR 316 to buttress his submission. 13. Per contra, Mr.Gupta, the learned Counsel appearing for the Revenue submits that the technical know-how was obtained for establishing a business of manufacturing Bus, altogether a new commercially known product. He, thus submits that the subject expenditure was rightly treated as capital expenditure. He, thus, tried to support the order of the Assessing Officer as well as that of the Tribunal. :6: THE CORE ISSUE : 14. The core issue for consideration is: whether the expenses incurred would constitute capital or revenue expenditure ? CONSIDERATION : 15. It is not necessary to discuss all the cases cited at the bar as each case needs to be considered and decided on its own facts. The Tribunal while considering the case in hand, in paragraph No.22, observed as under: "22. Rival contentions of the parties have been considered carefully. In order to claim In order to claim In order to claim deduction deduction deduction u/s.37, it has to be established u/s.37, it has to be established u/s.37, it has to be established that that that (i) expenditure incurred by the assessee (i) expenditure incurred by the assessee (i) expenditure incurred by the assessee isisis not capital or personal expenditure and not capital or personal expenditure and not capital or personal expenditure and (ii) (ii) (ii) such expenditure is laid out or expended such expenditure is laid out or expended such expenditure is laid out or expended wholly wholly wholly or exclusively for the purpose of or exclusively for the purpose of or exclusively for the purpose of business. business. business. Section 28 provides that profits of Section 28 provides that profits of Section 28 provides that profits of a business which is carried on by an assessee business which is carried on by an assessee business which is carried on by an assessee atatat any time during the previous year shall be any time during the previous year shall be any time during the previous year shall be chargeable chargeable chargeable to to to tax. It is this profit which is tax. It is this profit which is tax. It is this profit which is toto to be computed in accordance with the be computed in accordance with the be computed in accordance with the provisions provisions provisions of of of Section 30 to 43D as per Section Section 30 to 43D as per Section Section 30 to 43D as per Section 29. 29. 29. A combined reading of these provisions A combined reading of these provisions A combined reading of these provisions clearly clearly clearly shows that expenditure under Section shows that expenditure under Section shows that expenditure under Section 37 37 37 should be that which relates to the should be that which relates to the should be that which relates to the business business business being carried on during the previous being carried on during the previous being carried on during the previous year. year. year. Impliedly it means that any expenditure Impliedly it means that any expenditure Impliedly it means that any expenditure relating relating relating to a business which is yet to be to a business which is yet to be to a business which is yet to be commenced commenced commenced in future cannot be allowed against in future cannot be allowed against in future cannot be allowed against the the the profits profits profits of the existing business. of the existing business. of the existing business. So, in our considered opinion, the expenditure on technical know-how can be allowed only if it is relatable to the existing business provided it is not a capital expenditure. Reference may be made to the decision of the Supreme Court in the case of Alembic Chemical Works, 177 ITR 377, which has also been relied upon by the ld.counsel for the assessee. In that case, it has been held that if the :7: expenditure is for acquisition of the know-how, it cannot be allowed. However, if the expenditure is for the use of the know-how to augment the production and profits of the existing business, it can be allowed as deduction u/s.37. In that case, the expenditure was allowed because know-how related to the existing business. . In the present case, the expenditure of Rs.29,85,719/- on technical know-how related to the manufacture of Bus under the trade mark ‘Neoplan’ which was not existing business of the assessee. The existing The existing The existing business business business of the assessee was the manufacturing of the assessee was the manufacturing of the assessee was the manufacturing of of of Diesel Engines. The contention of the ld. Diesel Engines. The contention of the ld. Diesel Engines. The contention of the ld. counsel counsel counsel for the assessee was that manufacture for the assessee was that manufacture for the assessee was that manufacture of of of Buses is merely application of Diesel Buses is merely application of Diesel Buses is merely application of Diesel Engine Engine Engine produced by the assessee and therefore, produced by the assessee and therefore, produced by the assessee and therefore, the the the same could be considered part of the same could be considered part of the same could be considered part of the existing existing existing business. In our opinion, this business. In our opinion, this business. In our opinion, this cannot cannot cannot be accepted and is without force. The be accepted and is without force. The be accepted and is without force. The production production production of Diesel Engines and Buses are of Diesel Engines and Buses are of Diesel Engines and Buses are entirely entirely entirely different businesses. Merely because different businesses. Merely because different businesses. Merely because the the the Engines produced by the assessee would be Engines produced by the assessee would be Engines produced by the assessee would be fitted fitted fitted in the Buses to be manufactured by the in the Buses to be manufactured by the in the Buses to be manufactured by the assessee assessee assessee in future, it cannot be said that in future, it cannot be said that in future, it cannot be said that activity activity activity of manufacturing of Buses is part of of manufacturing of Buses is part of of manufacturing of Buses is part of existing existing existing business of manufacturing of Diesel business of manufacturing of Diesel business of manufacturing of Diesel Engines. Engines. Engines. If such plea is accepted, then all activities of manufacturing of Trucks, Buses, Cars, Tractors and Air-craft where the Diesel Engines manufactured by the assessee may be fitted would have to be considered as part of the business of manufacturing of Diesel Engine. We are unable to accept such an extreme view. Therefore, the expenditure related to the new product cannot be allowed irrespective of the nature of expenditure. It is, therefore, not necessary for us to decide whether the expenditure incurred by the assessee was for acquisition of the know-how or for the use thereof. The case-law referred by the assessee are distinguishable on facts since in all those cases, the know-how related to the existing business of the assessee. In the case of Kirloskar Brothers Ltd., the technical know-how related to the manufacture of Centrifugal Pumps which was the existing business of the assessee. In the case of the Kirloskar Cummins Ltd., there is a clear finding that agreement for technical assistance pertaining to a product already in the line of established businesses of the assessee. Similarly, in the case of Alembic Chemicals Works, the assessee was engaged in the manufacture of Antibiotics and Pharmaceuticals and the know-how related to :8: the existing business of the assessee i.e. manufacture of Antibiotics. . In view of the above discussion, we are unable to sustain the order of CIT(A). Accordingly, the order of CIT(A) is reversed on this issue and the order of AO is restored. (Emphasis supplied) 16. A payment made for the know-how in connection with the setting up of the plant and construction of factory building provided separately would normally be capital in nature. In other words, if the expenditure is incurred for acquiring know-how in the process of setting up of new business or for manufacture of new product that was not previously being manufactured, then such expenditure is treated as capital expenditure. 17. The Hon’ble Supreme Court in the case of Alembic Chemical Works Co.Ltd. (Supra) ruled that the technical know-how if acquired against a lumpsum payment once for all for the improvement of its existing line of manufacturing, the expenditure would be revenue in nature. It was reiterated that there was no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. :9: 18. Keeping the aforesaid law laid down by the Apex Court in mind, if one turns to the facts of the case in hand it is not in dispute that the Assessee was engaged in the business of manufacturing High Powered Internal Cumustion Engines (Diesel Engine) and the technical know-how sought to be acquired was for manufacture of Diesel Powered Integral Bus, which in our opinion is altogether a new line of business to manufacture altogether a new product. By way of illustration, a tyre manufacturer who acquires technical know-how to manufacture a bus or car, can hardly claim that he has acquired technical know-how for the expansion of his existing business or to improve the process and technology in some areas of the enterprise to supplement its existing business. The test applied by the Tribunal to decide the question cannot be faulted. 19. In the above view of the matter, the view taken by the Tribunal, cannot be said to be erroneous. In the result, the question of law framed is answered in favour of the Revenue and against the Assessee for the reasons recorded herein as well as by the Tribunal. The Appeal stands dismissed for the reasons recorded. (V.C.DAGA,J.) (V.C.DAGA,J.) (V.C.DAGA,J.) (DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.)