Technical know-how fees falling under the royalty category and qualifying for an 80-O deduction
Fact and issue of the case
These cross appeals are directed against the order passed by Ld CIT(A)-27, Mumbai and they relate to the assessment year 1998-99.
The assessee company is engaged in the business of manufacture and sale of two wheelers and 3 wheeler vehicles under the brand name of “Bajaj”
We shall first take up the appeal filed by the assessee.
The Ground no.1 contested by the assessee relates to the taxability of Rs.1,03,55,590/-, being the surplus received on redemption of treasury bills. The assessee offered the same under the head “capital gains”, but appended a note to the Statement of total income claiming that the above said amount should be excluded from the total income as it is a case of extinguishment of asset and hence not taxable. The AO did not accept the claim of the assessee. However, the AO assessed the same as income under the head Income from other sources. The Ld CIT(A) directed the AO to assess the above said amount under the head “Capital gains”.
We heard the parties on this issue and perused the record. We notice that an identical issue has been examined by the co-ordinate bench in the assessee’s own case in AY 1995-96 in ITA No.3493/Mum/1999, vide its order dated 20-01-2021. In the above said year, the Ld CIT(A) had allowed the claim of the assessee and hence the revenue had filed appeal before the Tribunal. The co-ordinate bench, by following the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Grace Collis (2001)(248 ITR 323)(SC) has reversed the decision of Ld CIT(A). We notice that the surplus arising on redemption of treasury bills his held to be taxable under the head Capital gains in the assessee’s own case in AY 1996-97 also. Accordingly, we direct the AO to assess the above said amount as Capital gains in this year also. 5.0 The Ld A.R did not press ground no.2. Accordingly, it is dismissed as not pressed.
Ground no.3 urged by the assessee relates to the methodology to be adopted for computing “eligible profits” for the purpose of computing deduction u/s 80IA of the Act. The controversy is whether the depreciation is required to be deducted or not for computing “eligible profits” for the purposes of sec. 80IA of the Act. We notice that the co-ordinate benches are consistently holding that the depreciation is required to be deducted. Accordingly, we reject this ground of the assessee.
Ground No.4 and 5 urged by the assessee relate to the deduction claimed u/s 80IA of the Act, wherein the question is whether the duty drawback and interest income are eligible for deduction u/s 80IA of the Act. The co-ordinate bench has dealt with identical issues in the assessee’s own case in AY 1997-98 in ITA No.5030/Mum/2001 (Revenue’s appeal) and the Tribunal has held that the assessee is eligible for deduction u/s 80IA in respect of both the income referred above. In this regard, the co-ordinate bench has followed the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Meghalaya Steels Ltd (2016)(383 ITR 217)(SC). Following the order passed by the co-ordinate bench, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow deduction u/s 80IA of the Act in respect of duty draw and interest income.
Ground no.6 urged by the assessee relates to the issue whether the wealth tax payment is eligible for deduction while computing total income. We notice that this issue has been decided in favour of the assessee in the earlier years by the Tribunal, wherein the decision rendered by Delhi bench of Tribunal in the case of Punj Sons (P) Ltd vs. DCIT (2002)(74 TTJ 596)(Delhi) has been followed. The Delhi bench of Tribunal has taken the view that the tax chargeable with reference to the value of any particular asset of business or profession is not covered by the disallowable prescribed u/s 40(a)(iia) of the Act. In the present case, it is the submission of the assessee that the wealth tax is chargeable with reference to the value of certain business assets. The decision so rendered by Delhi bench of Tribunal has been followed in the assesee’s own case in AY 1995-96 in ITA No.3493/Mum/1999 dated 20-01-2021 and other years. Accordingly, consistent with the view taken by the co-ordinate benches, we hold that the wealth tax paid by the assessee is not liable to be disallowed. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance.
Ground no.7 and 8 urged by the assessee relates to the deduction claimed u/s 80HHC of the Act. At the time of hearing, the Ld A.R did not press these grounds and accordingly, they are dismissed as not pressed.
Ground no.9 urged by the assessee relates to the deduction claimed by the assessee u/s 80-O of the Act. The assessee claimed a deduction u/s 80-O of the Act a sum of Rs.1,96,608/- calculated @ 50% of royalty amount of Rs.3,93,216/- received by the assessee from a Columbian company. The AO rejected the above said claim with the following observations:-
“The agreement filed only talks about import of CKD Kits into Columbia. Further the amended provisions of section 80-O only provide for deduction u/s 80-O in respect of the drawing, design, invention, patent and trade mark outside India. In the circumstances, it would appear clear that the amount received is not for any of these purposes. Therefore the deduction claimed is not allowable.” The Ld CIT(A) confirmed the disallowance without much discussion.
We heard the parties on this issue and perused the record. A deduction u/s 80-O is allowed in respect of income received, inter alia, from a foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark……
The facts prevailing in the instant case are that the assessee has entered into a “Technical Knowhow agreement” with M/s Autotecnicia Columbiana, S.A, a foreign enterprises domiciled at Columbia. The assessee herein has appointed the above said foreign company as exclusive LICENSEE within the territory of Columbia for assembly and progressive manufacture and sale of Bajaj Chetak, Bajaj Chetak Classic, Bajaj Super and Bajaj Super FE scooters and derivatives of these scooters. As per clause 4 of the agreement, assessee shall supply completely knocked down packs of products in primered condition consisting of standard configuration of the production in the production at Bajaj plants (referred as ‘CKD Packs’). As per clause 5 of the agreement, the LICENSEE can request the assessee to delete any part from CKD pack, meaning thereby the LICENSEE shall manufacture those parts by itself. In that case, the assessee shall provide the LICENSEE a set of drawings for such parts/components and characteristics of materials to be use in the manufacture of such parts/components. For supplying the drawings, the assessee has collected technical knowhow fee from the above said licensee, on which the deduction u/s 80-O has been claimed.
The case of tax authorities is that the payment so received by the assessee was not in respect of the drawing, design, invention, patent and trade mark outside India. However, we notice that the Agreement entered between both the parties clearly provides that the technical knowhow fee is received for supplying the drawings. The relevant clause 5 reads as under:-
It is further agreed that should the LICENSEE request BAJAJ to delete any part, component or process from such CKD packs, BAJAJ will provide the LICENSEE as part of Engineering Services a set of drawings for such parts/components and characteristics of materials to be used in the manufacture of such parts/components. For such deletion/s from CKD packs the LICENSEE shall pay to BAJAJ a lump sum technical knowhow fee of US Dollars Five Hundred Thousand (USD 500,000) in installments as under:-…”
A careful perusal of the above said clause would show that the assessee has received technical knowhow fee for supplying a set of drawings for such parts/components and also for providing information about characteristics of material to be used in the manufacture of such parts/components. In the instant case, the assessee has given license to assemble its scooter models. When the Licensee prefers to manufacture certain parts/components on its own, the assessee permits the same and accordingly supplies the drawings relating to those parts and collects technical know how fee. The Licensee is bound to manufacture those parts/components in accordance with those designs only. Otherwise, the same will not fit into Scooter when the scooter is assembled. Hence, we are unable to find any reason to say that the said payment will not fall under the category of “consideration received for the use of patent, invention, design” mentioned in sec. 80-O of the Act. Accordingly, we are of the view that the technical knowhow fee received by the assessee would fall under the category of “royalty”, as defined in sec.80-O of the Act and it is eligible for deduction u/s 80-O. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of the assessee.
Observation of the court
We heard the parties on this issue and perused the record. We notice that the Hon’ble jurisdictional High Court in the case of Alfa Laval (I) Ltd has upheld the deletion of disallowance of expenses incurred on the foreign trips of company’s President only for the reason that there was concurrent finding of both Ld CIT(A) and the Tribunal that it has been incurred for the purposes of business. However, the jurisdictional high court has clarified that the case needs to be decided on its own facts primarily considering the business expediency. It was further held that this kind of claim is to be allowed only if it is connected with the business of the assessee.
In the instant case, we notice that the Managing director Shri Rahul Bajaj has visited Netherland & UK for attending India Growth fund Board Meeting. The Board resolution with regard to the expenses to be incurred on wife of Shri Rahul Bajaj reads as under:-
“Further Resolved that air-fare and other expenses in connection with the above visit (including those of Smt. Bajaj) be and are hereby authorized to be borne by the Company.”
We notice that the Board resolution did not bring out any business expediency. Further, the assessee has also not proved existence of any commercial or business expediency in incurring the foreign travel expenses of wife of M D except producing copy of Board resolution, in which also, no reason was given. There should not be any doubt that this is a factual aspect and the facts prevailing in each foreign trip has to be examined. Accordingly, the decision taken by the Tribunal in AY 1986-87 may not be relevant. We notice that the Ld CIT(A) has also not brought out the business or commercial expediency in incurring expenses on foreign trips of wife of M D, but deleted the addition on the basis of quantum of expenditure, status of the M D and approval by Board. These are not the proper reasons for allowing this type of expenditure, as held by the jurisdictional High Court. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and confirm the disallowance made by the AO.
Ground No.13 urged by the revenue relates to partial relief granted in respect of Repairs to buildings. The AO had disallowed a sum of Rs.1,65,87,602/- treating it as capital in nature and had allowed depreciation @ 10% thereon. The Ld CIT(A) granted partial relief by confirming addition to the tune of Rs.28,60,480/-. In the appeal filed by the assessee, we have adjudicated earlier in respect of addition confirmed by Ld CIT(A). The revenue is in appeal challenging the relief granted by the first appellate authority. The details of expenditure, which have been deleted by Ld CIT(A) is available at page 19 of the assessment order. A perusal of those expenditure would show that, all those expenses have been incurred on existing structures only, i.e., no new civil structure seems to have come into existence on incurring these expenses. The nature of expenses is false ceiling, road surfacing, fencing, tiles replacement, aluminum partition expenses. In our view, essentially these expenses are in the nature of repairs and maintenance expenses only. Accordingly, we are of the view that the Ld CIT(A) was justified in granting partial relief to the assessee.
Ground no.14 raised by the revenue relates to the disallowance of Rs.7,42,136/- relating to proportionate amount of lease premium paid for leasehold land written off. This is a recurring issue. The Tribunal had deleted this disallowance in AY 1995-96 by following the decision rendered by Hon’ble Gujarat High Court in the case of DCIT vs. Sun Pharmaceuticals Ind. Ltd. (2010)(329 ITR 479)(Guj) and other two decisions. The above said decision was followed in AY 1996-97 and 1998-99. Accordingly, consistent with the view taken by the co-ordinate benches in the assessee’s own case in the earlier years, we hold that the Ld CIT(A) was justified in deleting this disallowance.
Ground no.15 raised by the revenue relates to the disallowance of Rs.17,25,631/- relating to expenses incurred on issue of bonus shares. The assessee disallowed the above said amount in the return of income, but appended a note to the same stating that this is allowable as deduction. The AO did not make any comment on it. Before Ld CIT(A), the assessee raised a claim for deduction of above expenses. The first appellate authority allowed the same by following the decision rendered by the Tribunal in the assessee’s own case in AY 1995-96. We notice from the order passed in AY 1995-96 by the co-ordinate bench that the Tribunal has followed the decision rendered by Hon’ble Supreme Court in the case of CIT vs. General insurance Corporation (2006)(286 ITR 232) is allowable as deduction, since the issue of bonus shares is mere reallocation of company’s funds from Reserves to Capital. Accordingly, we uphold the order passed by Ld CIT(A).
Ground no.16 & 17 raised by the revenue are general in nature.
In the result, the appeals filed by the assessee and revenue are partly allowed. Order pronounced in on 22.8.2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from hereDCIT-Vs-Bajaj-Holdings-Investment-Ltd.-ITAT-Mumbai2