Commissionerofincometax-Iii v. Smcc Construction India Limitedrespondentthrough:mr.abhimanyu Jhamba Andmr.vikrant Suri, Advocates

$~6 to 8 *IN THE HIGH COURTOF DELHI AT NEW DELHI +ITA 439/2014 COMMISSIONEROFINCOMETAX-III Appellant Through:Mr.Kamal Sawhney andMr.Raghvendra Singh, Advocates. versus SMCC CONSTRUCTION INDIA LIMITEDRespondentThrough:Mr.Abhimanyu Jhamba andMr.Vikrant Suri, Advocates. WITH + 511/2014 COMMISSIONER OF INCOME TAX-III Appellant Through:Ms.Suruchi Aggarwal, StandingCounsel. versus SMCC CONSTRUCTION INDIA LTD. Respondent Through:Mr.Abhimanyu Jhamba andMr.Vikrant Suri, Advocates. AND + ITA 526/2014 COMMISSIONER OF INCOME TAX-IIIThrough:Ms.Suruchi Aggarwal, StandingCounsel. Appellant versus SMCC CONSTRUCTIONINDIA LTD. ......Respondent ITA Nos. 439, 511 & 526 of2014 Page 1 of6 Through:Mr.Abhimanyu Jhamba andMr.Vikrant Suri, Advocates. CORAM:HON'BLE DR. JUSTICE S. MURALIDHARHON'BLE MR. JUSTICE I. S. MEHTA % ORDER 03.07.2015 1. The challenge in these appeals by the CIT is to the orders passed by theIncomeTaxAppellateTribunal('ITAT')in appealsarisingout ofassessment orders pertaining to the Respondent Assessee for the AssessmentYears (AYs), i.e., 2008-09, 2009-10 and 2010-11. 2. The common question that arose for determination in the aforesaid AYs was: (i)Whether the assessee was given excessive depreciation for theUPS and Inverters?UPS and Inverters? (ii)Whether it was justified in treating the fees and royalties fortechnical knowhow as revenue/business expenditure?technical knowhow as revenue/business expenditure? 3. As far as the first question is concerned,it is sought to be urged by theRevenue that under Section 32(1) of the Income Tax Act, 1961 unless theassessee was able to show that the concernedUPS and computerperipherals ITANos.439,511 &526of2014 have been used for more than 180 days in the previousyear, it could nothave claimed higher rate of depreciation@ 60%. The Court finds that theabove ground urged by the Revenue ought to have been based on the factualdeterminationas to whetherwith referenceto the actualdatesof purchaseofthe concernedUPS and computerperipherals,it could be demonstratedthatjthe assesseecould not have used such UPS and computerperipherals formore than 180 days in the relevant previous year. However, no such factualdetermination to have been undertaken either theappears by AssessingOfficer(AO) or, at the instanceofRevenue,at any ofthe subsequentstages.Consequently,the Courtfinds no meritin the contentionof the Appellantasregards the issue of depreciation. 4. As far as the second question is concerned, the Court's attention is drawnto the Technical CollaborationAgreement('TCA') entered into between theSumitomoMitsui ConstructionCo. Ltd. (SMCL) incorporatedin Japan andIthe Assessee on lO^'' December 1997 wherein SMCL is described as aLicensor and the Assesseeas the Licensee.The TCA notesthat there arethree broad kinds of servicesin which the Licensorand the Licenseeareengaged, i.e. provision of construction management services, turnkeycontractserviceand the consultancyservicesincludingprojectmanagement.ITA Nos. 439, 511 &526of2014Page3of6 Under Article 2 of the TCA, technicalassistanceis to be renderedby theLicensor to the Licensee. Under Article 3, the Licensor was to train theLicensee's personnel. Under Article 5, technical information was to betransmittedfrom the Licensorto the Licensee.UnderArticle6, the Licensorwas to be given exclusive selling/servicingrights. Under Article 7, theLicenseewas to pay the Licensora lump sumconsiderationof US Dollars1millionoveraperiodof 10 years.UnderArticle7.2, the Licenseewas to payroyalty @ 5% for the contractservicesprovidedby the Licensee for thedomesticmarketand 8% for exportmarkets. Under Article 2 of the TCA, technicalassistanceis to be renderedby theLicensor to the Licensee. Under Article 3, the Licensor was to train theLicensee's personnel. Under Article 5, technical information was to betransmittedfrom the Licensorto the Licensee.UnderArticle6, the Licensorwas to be given exclusive selling/servicingrights. Under Article 7, theLicenseewas to pay the Licensora lump sumconsiderationof US Dollars1millionoveraperiodof 10 years.UnderArticle7.2, the Licenseewas to payroyalty @ 5% for the contractservicesprovidedby the Licensee for thedomesticmarketand 8% for exportmarkets. 5. The questionbeforethe AO was whetherthe expenditureincurredby theAssesseein terms ofthe aforesaidTCA wasor revenue capitalexpenditure.The questionwas answeredby the AO againstthe Assessee.Aggrievedbythe said order,the Assesseeappealedto the CIT (Appeals).A specificissuebeforethe CIT (Appeals)was the justificationfor the AO havingaddedtheamountpaid by the Assesseeto SMCL on accountof royaltyand fees fortechnicalassistance.CIT (Appeals)came tothe conclusionthatby incurringthe saidno benefitwas obtainedthe Assesseefor the expenditure,by periodthe relevantassessment It was alinkedtobeyondyears. periodicalpaymentthe annualturnoverand did not constitutecapitalexpenditurefor the reasonITA Nos. 439, 511 &526of2014Page4of6 that it was incurredfor obtainingselHng/servicingrights under Clause 6 ofthe Agreementand, therefore,did not provideany benefitofenduringnatureto the Assessee.the of the AssesseewasandConsequently, plea acceptedthe appeal was allowed as far as this issue was concerned. 6. The ITAT has in the impugned order, while rejectingthe plea of theRevenue,whichwas in appealbeforeit, cometo a similarconclusionthatbymaking payment in terms of TCA, the Assessee did not become the ownerofthetechnicalknowhow.The benefitto it was notofannature. enduring 7. Learnedcounselfor the Appellantsubmittedthat in comingto the aboveconclusion,theITATmainlyreliedonthedecisionsin PremierAutomobiles Ltd. vs. CIT, (1984) 150 ITR 28 (Bom) and TravancoreSugars and Chemicals Ltd. vs. CIT (1966) 62 ITR 566 (SC), which dealtwith Assessees which were manufacturing units and therefore differentconsiderations would apply. He urged that inasmuch as the essentialbusinessof the Assesseewas entirelydependenton the technicalknowhow SMCL and the benefit to the Assessee was of anprovided by enduringnature,the expenditureincurredshouldbetreatedas capitalexpenditure. 8. We are unable to agree with the submissions of learned counsel for theITA Nos. 439, 511 &526of2014Page5of6 Appellant. A perusal of the TCA shows that the payment by the Assessee toSMCL is for the technical knowhow given to the Assessee as a Licensee.Although the payment is spread over a period of 10 years, it does not makethe Assessee the owner of the technical knowhow. The very nature of thelicense agreement is that it is not of a permanent nature. The view taken bytheCIT(Appeals),and concurredwith by theITAT,cannotin thecircumstancesbe said to be improbable or contrary to the settled legalposition. The Court, therefore, concurs with the view of the CIT (A) and theITAT that the benefit to the Assessee as a result of payment of royalty fortechnical knowhow was not of an enduring nature, and therefore cannot beconstrued to be a capital expenditure. 9. The appeals are accordingly dismissed. S. MURALIDHAR,J JULY 03,2015'dc' I. S. MEHTA, J ITA Nos. 439, 511 & 526 of2014