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Payment by shares to acquire knowhow eligible for tax sops
June, 30th 2006

Payment by issue of shares, for the purpose of acquiring know-how, is eligible for tax deduction, according to a ruling by Income-Tax Appellate Tribunal (ITAT), Pune, in the case of Mercedes Benz India.

Payment for acquisition of know-how was eligible for tax deduction under Section 35 AB Income-Tax (I-T) Act. In many cases, such payments were made in kind, by issuing equity shares to the seller of the know-how. The tax department has often taken the stand that payment by shares for acquiring know-how is not entitled to deduction.

Mercedes Benz India (MBIL) was a joint venture between Telco and Daimler Benz, with the latter holding 51%. According to the agreement between the parties, Daimler Benz had the option to make its contribution partly or fully in shares.

The latter made a part contribution in shares and claimed the deduction under Section 35 AB of the I-T Act. The assessing officer (AO) allowed the claim but the I-T commissioner had set aside the order of the AO.

The tax authorities cited a Supreme Court order in the case of Eimco KCP which stated that allotting shares could not be construed as expenditure.

The Pune tribunal held that the facts of the Eimco KCP were different from the case of MBIL. In the former, the amount was not paid after the incorporation of the company. The logical inference then is that had the amount been paid after the incorporation, there was a possibility of a decision in favour of a deduction.

The tribunal pointed out that the payment in the case of MBIL was after the incorporation of the company. Therefore, the apex courts decision cannot be applied in this case. TP Ostwal, a senior chartered accountant, said: The ITAT decision just explained the position of the law .

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