THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. WESTERN AGRI SEEDS LTD.
What did the High Court hold?
The High Court dismissed the appeal concerning questions [A] and [B] for reasons recorded in a related appeal (Tax Appeal No. 834 of 2019), which are not detailed here. Regarding question [C], concerning the deletion of Sub License Fee Expenses of Rs. 27,57,500, the Tribunal, concurring with the CIT(A), held that the expenses were revenue expenditure. The assessee had acquired a non-transferable sub-license for using Monsanto technology to test, produce, and sell genetically modified hybrid cotton plant seeds, which did not create an asset. The Tribunal relied on the Delhi High Court's decision in CIT vs. J K Synthetic Ltd. (309 ITR 371), which held that technical assistance and know-how acquired for a process of manufacture, without transfer of ownership, constitutes revenue expenditure. The Tribunal also noted a similar decision in Urja Products Ltd. The High Court agreed with the Tribunal's finding, confirming that the non-refundable upfront fee for acquiring a license used for business purposes is revenue expenditure. Therefore, the addition made by the AO was deleted. The question was answered in favor of the assessee.
What were the facts?
The Revenue has filed this Tax Appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad 'B' Bench, dated March 27, 2019, for Assessment Year 2011-12. The appeal pertains to the deletion of disallowances made by the Assessing Officer (AO). Specifically, the Revenue is aggrieved by the deletion of disallowances related to discount and rate difference (Rs. 2,31,95,051), disallowance under Section 40(A)(2) (Rs. 1,55,06,080), and addition of Sub License Fee Expenses (Rs. 27,57,500). The High Court considered the proposed questions of law.
What were the issues?
The Tribunal had to decide the following substantial questions of law proposed by the Revenue: 1. [A] Whether the Appellate Tribunal erred in upholding the deletion of disallowance on account of discount and rate difference amounting to Rs. 2,31,95,051? 2. [B] Whether the Appellate Tribunal erred in upholding the deletion of disallowance made under Section 40(A)(2) amounting to Rs. 1,55,06,080? 3. [C] Whether the Appellate Tribunal erred in upholding the deletion of addition of Sub License Fee Expenses of Rs. 27,57,500? Assessee's Contentions: The judgment does not explicitly record the assessee's contentions. However, the Tribunal's reasoning implies that the assessee argued that the sub-license fee was a revenue expenditure. The assessee relied on the Delhi High Court's decision in CIT vs. J K Synthetic Ltd. (309 ITR 371) and a coordinate bench decision in Urja Products Ltd. Revenue's Contentions: The Revenue contended that the disallowances made by the AO were justified and that the CIT(A) and the Tribunal erred in deleting them.
Which sections of the Income-tax Act were involved?
Section 260A,Section 40(A)(2)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1 This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short, 'the Act, 1961') is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad 'B' Bench, dated 27th March 2019 in the ITA No.2796/Ahd/2014 for A.Y. 201112. 2 The Revenue has proposed the following questions as the substantial questions of law involved in this appeal: “[A] Whether the Appellate Tribunal has erred considering the facts and circumstances of the case and in law, in upholding the order of the CIT(A) for deleting disallowance on account of discount and rate difference to Rs.2,31,95,051/? C/TAXAP/835/2019 ORDER [B] Whether the Appellate Tribunal has erred considering the facts and circumstances of the case and in law, in upholding the order of the CIT(A) for deleting disallowance made u/s 40(A)(2) to Rs.1,55,06,080/? [C] Whether the Appellate Tribunal has erred considering the facts and circumstances of the case and in law, in upholding the order of the CIT(A) for deleting addition of Sub License Free Expenses of Rs.27,57,500/?” 3 For the reasons recorded by us today, while dismissing the Tax No.834 of 2019, this Tax Appeal stands dismissed so far as the questions Nos.2[A] and 2[B] respectively, as proposed by the Revenue, is concerned. The question No.2[C], as proposed, is one relating to deletion of addition of Sub License Fee Expenses to the tune of Rs.27,57,500/. In this regard, the Tribunal, while concurring with the finding recorded by the CIT(Appeals) held as under: “Heard the respective parties, perused the relevant materials available on record. It appears that the appellant has acquired sublicense for using Monsanto technology and such sublicense is nontransferable. Such license is provided to the assessee to test produce and sell genetically modified hybrid cotton plant seeds in the territory of the appellant for effectively increasing its business; no asset, however, is created. While holding such expenses as revenue expenditure the Ld. CIT(A) relied upon the judgment passed by the Hon'ble Delhi High Court in the matter of CIT vs. J K Synthetic Ltd. reported at 309 ITR 371 wherein it was held that since under the agreement the assessee has obtained a technical assistance and acquired some technical information which was a knowhow related to process of manufacture, then it is not a transfer of the ownership of the knowhow and to be treated as revenue expenditure. The judgment passed by the Coordinate Bench, in the case of Urja Products Ltd. was also mentioned in the order passed by the Ld. CIT(A) wherein similar issue has been decided in favour of the appellant. The nonrefundable upfront fee itself does not mean a capital expenditure but the same is required to be paid for acquiring license from the main company which is used for the purposes of business and hence the entire expenditure incurred by the appellant is treated as revenue expenditure. We, therefore, find no infirmity in the order passed by the Ld. CIT(A) in deleting such addition of C/TAXAP/835/2019 ORDER Rs.27,57,500/ as made by the Ld. AO. We, therefore, do not hesitate to confirm the same. So, as to warrant inference. The question is accordingly answered in the affirmative that is in favour of the assessee and against the Revenue. Consequently the appeal fails and is accordingly dismissed.” 4 a knowhow related to process of manufacture, then it is not a transfer of the ownership of the knowhow and to be treated as revenue expenditure. 5 We are in complete agreement with the finding recorded by the Tribunal as regards the proposed question No.2[C] is concerned. 6 In the result, this appeal fails and is hereby dismissed so far as the third question, as proposed by the Revenue, is concerned. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH
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