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INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD
G.D. Agarwal, MUKUL KR. SHRAWAT, JJ.
FAG Bearing India Ltd. -Appellant
Versus
Deputy Commissioner of Income-tax -Respondent
IT APPEAL NOS. 792 AND 816 (AHD.) OF 2006, 792, 816 of 2006
Decided On : 30-09-2011
Mukul Kr. Shrawat, Judicial Member. - For the assessment year 2001-02, these are cross-appeals by the assessee as well as by the Revenue arising from the order of the Commissioner of Income-tax (Appeals)-III, Baroda, dated January 27, 2006. Both these appeals have been heard together and hereby decided through this common order. First, we shall take up the appeal of the assessee.
(A) The assessee's appeal, I.T.A. No. 792/Ahd/2006
2. Ground No. 1 reads as under :
1. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in considering lump sum payment of Rs. 43.10 lakhs on account of know-how fees as capital expenditure.
The learned Commissioner of Income-tax (Appeals) also erred in fact and in law in enhancing the disallowance on account of royalty by a sum of Rs. 4.90 lakhs in respect of applicable TDS paid on such amount of know-how fees as per the terms of agreement and treating the same as capital expenditure primarily on the ground that it is a capital expenditure.
3. The facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act, 1961 dated March 30, 2004 were that the assessee-company is in the business of manufacturing of ball-bearings. It was stated by the Assessing Officer that the assessee was in the said business since 1996. It was noted by the Assessing Officer that an agreement was entered into between the assessee and FAG Automobiltechnik AG dated March 30, 2000. That agreement was in respect of a know-how to be provided by the said collaborator to the assessee, called as Indian company. That know-how was in respect of manufacturing of certain kinds of ball-bearings listed therein. As per clause 2 the character of the know-how was as follows :
"2. The know-how shall :
(a) be in line with the process of manufacture of the products being followed by the Indian company ; and
(b) include :
(i) developments and improvements in the said process of manufacture ;
(ii) designs of the products ;
(iii) selection of machinery and equipment for the manufacture of the products ;
(iv) design(s) of the plant/s for the manufacture of the products as and when required in reasonable judgment of the collaborator ; and
(v) know-how for the validation and testing of the products."
4. In consideration to provide the said know-how the Indian company was required to pay the collaborator the amount as per the following terms :
"(1) A lump sum fee of DM 600 TDM net of Indian taxes as follows:
First one-third after the agreement has been filed with the Reserve Bank of India and the authorised dealer in foreign exchange.
Second one-third on delivery of know-how documentation ; and the third and final one-third on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the authorised dealer in foreign exchange, whichever is earlier.
(2) A sum equal to 5 per cent net of Indian taxes of the net ex-factory sale price of the products."
5. It was asked from the assessee to explain as to why the payment of royalty for know-how should not be considered as capital expenditure. In compliance, it was stated that the amount was paid in respect of rendering and on-going technical services. It was also explained that the character of the know-how was a recurring fees paid at specified percentage on net sales. It was also mentioned that the payment was revenue in nature as envisaged in section 40(a)(i), therefore, necessary TDS had also been deducted. The Assessing Officer was not convinced and in his opinion the know-how was for the purpose of introduction of a new product and for upgradation of quality of certain products. The know-how was to be applied for the purpose of design of a new product and also development and improvement of manufacturing of the product. The Assessing Officer has also observed that the provisions for deduction of TDS did no
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