IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `E', NEW DELHI
EFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
AND
SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA No. 2843/Del/2011
AY: 2005-06
ACIT, Circle 13(1) vs. OCL India Ltd.
Room No.406 B 47, C.P.
C.R.bdlg., IP Estate New Delhi 110 001
New Delhi
PAN: AAACO 1354 J
ITA No. 3202/Del/2011
AY: 2005-06
OCL India Ltd., New Delhi Vs. ACIT, New Delhi
ITA No. 3203/Del/2011
AY: 2006-07
OCL India Ltd. Vs. ACIT, N.Delhi
New Delhi
(Appellant) (Respondent)
Assessee by : Sh. Ram Mehta, Adv.
Dept. by : Sh. P.Damkanunja, Sr.D.R.
ORDER
PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA 2843/Del/11 and ITA 3202/Del/11 are Cross Appeals pertaining
to the A.Y. 2005-06 and ITA 3203/Del/11 is filed by the assessee for the
A.Y. 2006-07 against the order of Ld.CIT(A)-XVIII, New Delhi dated
24.2.2011.
ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
2. Facts in brief:- The assessee is a company engaged in the
manufacture and sale of cement, refractory and sponge iron. The issues
that arise for our consideration in the assessee's appeal are disallowances
made by the A.O. and confirmed by the First Appellate Authority. We shall
deal with them in seriatim.
3. We have heard Shri R.M.Mehta, the Ld.Counsel for the assessee and
Shri P.Dhamkanunjna, Ld.Sr.D.R. on behalf of the Revenue.
4. We have gone through the elaborate submissions furnished as well as
the papers referred to in the paper book filed before us. We have perused
the decisions cited by both the sides.
5. ITA 3202/Del/2011: This is assessee's appeal.
5.1. The first disallowance is of payment on account of technical know-
how. The facts are brought out in a note dt. 23rd January, 2008 which is at
page 3 of the assessee 's paper book which is extracted for ready reference.
" M/s OCL India Ltd. entered into an agreement with M/s. Glenn Ray Trapp
in November, 2005 for a period of 4 years i.e. upto Novernber 2009. Mr
Glenn Trapp has been engaged to have his knowledge in regard to
Continuous Casting refractories. This knowledge is being provided by him
purely from his memory and experience and not by way of any written
manual. The most important reason for engaging him was that he had
claimed to provide NIL rejection i.e. 100% recovery and there by increase in
throughput. But till date there has neither been any consistent decrease in
rejection rate nor increase in production using the knowledge provided by him
in tits and bits. Given below is the date of the month wise production and
recovery % starting from 1st April, 2005 to till date which will show that there
has been no improvement in recovery %. In fact, even the products that were
produced using the knowledge provided by him, have failed.
As there has been no commercial production from the knowledge shared by
him till date, hence the payments made to him has not resulted in any asset
of enduring nature for OCL India Ltd. and is revenue expenditure. We hope
you will agree that knowledge till becoming successful is of no use to the
company and will therefore be revenue expenditure.
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
As till date that knowledge shared by him has not resulted in any concrete
results, hence there has been no commercial exploitation of knowledge shared
by him.
We have not sub-licensed the knowledge shared by him with us till date."
5.2. The A.O. had held that the assessee has acquired additional assets in
the form of technical know-how, as the term `technical know-how' is
covered in Explanation 4 to Sec.32(1), which is an intangible asset and
depreciation @ 25% was allowed.
5.3. The First Appellate Authority had upheld the order of the A.O., on the
ground that the assessee would have enduring benefit.
5.4. The assessee submits that technical assistance is received for
regular upgradation and continuous improvement and that technology can
not remain constant and needs to be upgraded with time. Hence he argued
that there is no benefit of enduring nature. He relied on the following case
laws.
(i) Beam Global Spirite & Wine (India) vs. DIT (ITA no.393/Del/2012);
(ii) Goodyear India Ltd. Vs ITO (2000) 73 ITD 189 (Del.)
For the proposition that enduring nature is not a relevant test in
determining the nature of expenditure, he relied on the following case laws.
(i) CIT vs. Asahi India Safety Glass Ltd. (2012) 346 ITR 329 (Del.);
(ii) CIT vs. ACL Wireless Ltd. (2014) 361 ITR 0210(Del.)
He submitted that the expenditure did not result in the generation of any
capital asset and hence it cannot be classified as capital expenditure. For
this proposition he relied on the following case laws.
(i) CIT vs. T.E.L.Technologies P.Ltd. (2008) 304 ITR 262 (Del.);
(ii) Gannon Norton Metal Diamond Dies Ltd. vs. CIT (1987) 163 ITR 606
(Bom.)
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
He further submitted that a Clause of sub-licensing in the agreement does
not lead to absolute transfer. For this proposition he relied on the
judgement of Hon'ble Delhi High Court in the case of Shriram Pistons &
Rings Ltd. Vs. CIT (2008) 307 ITR 363 (Del.).
5.5. The Ld.Sr.D.R. relied on the order of the First Appellate Authority as
well as the order of the A.O. He took this Bench through the agreement
entered by the assessee with Mr.Glenn Ray Trapp which is at pages 5 to 11
of the assessee 's paper book and submitted that there is transfer of know-
how and technology between Mr.Glenn Ray Trap and the assessee.
6. Rival contentions heard. On a careful consideration of the facts and
circumstances of the case, on perusal of material on record, orders of the
authorities below, case laws cited, we hold as follows.
7. The agreement for technical know-how transfer between Mr.Glenn Ray
Trapp and the assessee provides for transfer of technology and technical
know-how in addition to technical assistance. Clause no. 1.1 of the
agreement demonstrates the same. Clause no. 4 and 5 read as follows.
" Clause 4. Exclusivity :
4.1. Mr.Trapp hereby grants to OCL and exclusive right to manufacture, use
and sell in India and in overseas markets the CC Refractories manufactured
by application of technical know-how/technology transferred by him to OCL
and technical assistance provided by him in terms of and as contemplated
herein. The right so hereby granted in favour of OCL shall be perpetual and
shall not terminate with the expiry of this agreement.
4.2. During the term of this agreement, Mr.Trapp shall not collaborate in any
manner, with any other party for manufacture of CC Refractories in India.
Clause 5. Sub-Licensing:
OCL shall be free to sub-license the technical know-how/technology for the
manufacture of CC Refractories and bag manufacture to any of its associates
in India. In addition, OCL shall be free to sub-license such know-
how/technology to any other India party."
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
7.1. A perusal of these agreements clearly demonstrate that the assessee
has acquired technical know-how by way of transfer from Mr.Trapp. The
issue to be considered is whether the expenditure incurred for the
acquisition in question is in the capital filed or revenue filed. The agreement
with Mr.Glenn Trapp is for a period of 04 years. A perusal of this agreement
further demonstrates that the expenditure in question was incurred for
acquiring know-how with an object of improving the manufacturing
process of continuous casting activities. Thus, it is a case of improving the
manufacturing process, increasing efficiency and consequent profitability
by incurring expenditure for acquiring technical know-how and technical
assistance. As regards the issue as to whether there is enduring benefit, the
company represented before the A.O. that there was no positive results
consequent to this agreement and in fact the expenditure was infructuous
expenditure. On facts we are of the opinion that the assessee has not
acquired any capital asset nor any enduring benefit in this case. Thus, in
our view the expenditure in question is in the revenue field. Thus, we allow
this ground of the assessee.
8. Ground no.2 is against the disallowance of environmental study
expenses by treating the same as capital expenditure. The assessee in this
case has incurred an expenditure of Rs.12,10,000/- towards carrying out
Environmental Impact Assessment study for the proposed modernisation
cum expansion of its existing Rajgangpur Cement Plant. Both the A.O. as
well as the Ld.CIT(A) held that the expenditure was in the capital field.
8.1. After hearing rival contentions, we observe that the expenditure was
incurred for modernisation cum expansion of its existing Rajgangpur
Cement Plant. The assessee has to statutorily obtain certain environmental
clearances, for which the study has to be made as per the Guidelines of the
Ministry of Environment and the Orissa Pollution Control Board. Under
these circumstances, we are of the considered opinion, that the expenditure
in question is in the revenue field. While coming to such conclusion we rely
on the following decisions of the Jurisdictional High Court.
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
(i) CIT vs. Euro India Ltd. (2014) 45 Taxmann 173 (Del.)
(ii) CIT vs. Priya Village Road Shows Ltd. (2011) 332 ITR 0594 (Del.)
In the result this ground of the assessee is allowed.
9. Ground no.3 is against the partial disallowance of expenditure
incurred by the assessee on foreign travel. The A.O. disallowed 80% of the
expenses on ad-hoc basis on the ground that the assessee has not furnished
the requisite details. The Ld.CIT(A) restricted the disallowance to 20% on
ad-hoc basis, on the ground that personal component in the foreign travel
expenses cannot be ruled out.
9.1. Ld.Counsel for the assessee contends that all the persons who have
travelled are persons who are employed in the company and who are holding
senior positions. It was submitted that Mr.M.H.Dalmia was appointed on
1.1.1970, Mr.R.H.Dalmia was appointed on 19.9.1980, Mr.Gaurav Dalmia
was appointed on 21.8.1987 and Smt.Abha Dalmia was appointed on
17.9.1982. It was further submitted that there was substantial increase in
the exports from year to year from the A.Y. 2003-04 to 2008-09. It was
argued that the expenditure incurred by all the employees of the assessee
company, including these Senior Executives comes to only 5.9% of the value
of total exports during the year which is Rs.1660.59 lakhs. It was argued
that the A.O. has taken a very narrow view of the fact that during one of the
foreign visits Mr.R.H.Dalmia had to visit a Doctor at Boston, USA. It was
argued that no adverse inference can be drawn as a person could fall sick
during foreign tour and seek medical assistance. Reference was made to the
voluminous documents produced before the A.O. as well as the Ld.CIT(A) in
support of this expenditure. It was further argued that in all the earlier A.Ys
similar expenditure has been allowed except in the A.Y. 1986-87 wherein
the disallowance was made on expenditure incurred on foreign travel by
Mr.M.H.Dalmia and Smtl.Abha Dalmia. He filed copy of the order of the
Ld.CIT(A)-IX, New Delhi dt. 25.3.1992 and submitted that the First Appellate
Authority deleted this addition on merits and the Revenue has not gone on
appeal to the Tribunal. He relied on a number of case laws and argued that
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
the disallowance is bad in law. He submitted that Courts have held in the
case of UEM India P.Ltd. vs. ACIT (2015) 53 Taxmann.com 387 (Del.) that no
adhoc disallowance could be made when all the relevant documents have
been furnished by the assessee and no discrepancy has been found with
regard to the same.
9.2. Ld.Sr.D.R. vehemently opposed the contentions of the assessee and
submitted that personal element cannot be ruled out in this case. He
argued that the travel was undertaken by the family members of Dalmia
family who have controlling interest in the company and who are also
employees of the assessee company. He referred to e-mails to point out Shri
RH Dalmia visited a Doctor at Boston, USA for medical check-up.
9.3. After hearing rival contentions we find that the First Appellate
Authority has recorded at page 23 of his order that the assessee had
furnished the details of business transacted by these persons, during the
above foreign travel. This factual finding of the First Appellate Authority
could not be controverted by the Ld.Sr.D.R. Thus the disallowance of 80%
made by the A.O. which is adhoc and arbitrary in our view cannot be
sustained in the facts and circumstances of the case. This brings us with
the issue whether the First Appellate Authority has right in making a
disallowance of 20% of the total foreign travel expenses on the ground that
there is a possibility of personal component in such expenditure. In our
view adhoc disallowances cannot be sustained, unless there is evidence.
The assessee has furnished trip wise details of its Sr.Executives and has
also furnished the business transacted in each trip, export details, customer
wise details of exports to various countries. Even copies of discussions held
and copies of tour reports were furnished. In the face of such overwhelming
evidences, to make an adhoc disallowance on surmises and conjectures
cannot countenanced. In the result this ground of the assessee is allowed
and the disallowance of 20% is deleted.
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
10. Ground no.4 is on disallowance made u/s 14A of the Act. In view of
the smallness of the disallowance, the Ld.Counsel for the assessee did not
press for the same on the condition that the finding of the A.O. as confirmed
by the Ld.CIT(A) would not be considered as a precedence, specifically in
view of the decisions of the Tribunal that no notional disallowance can be
made u/s 14A on estimate basis. Reliance was placed on the decision of
Jurisdictional High Court in the case of DCIT vs. Jindal Photo Ltd. (ITA
no.814 of 2011 (Del.)) and other case laws.
10.1. In view of the above submission of the Ld.Counsel for the assessee,
we dismiss this ground as `not pressed'. As we have not adjudicated the
issue on merits, this decision of ours on this ground shall not have any
precedence value.
11. Ground no.5 is dismissed as `not pressed' and ground no.6 is
consequential in nature.
12. In the result the appeal of the assessee is allowed in part.
13. The appeal in ITA 2843/Del/2011 by the Revenue is on the partial
deletion of disallowance of foreign travel expenses by the Ld.CIT(A). In view
of our decision while adjudicating ground no.3 of the assessee's appeal, we
dismiss this ground of Revenue.
13.1. In the result Revenue 's appeal stands dismissed.
14. ITA 3203/Del/2011: Ground no.1 is against disallowance of payment
on account of technical know-how fee to Mr.Glenn Ray Trapp. We have
discussed this issue while disposing of the assessee 's appeal for the A.Y.
2005-06. Consistent with the view taken while disposing of ground no.1 in
ITA 3202/Del/11 we allow this ground of the assessee.
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
15. Ground no.2 is on the disallowance on environmental study expenses.
Consistent with the view taken by us while disposing of ground no.2 for the
A.Y. 2005-06 we allow this ground of the assessee.
16. Ground no.3 is on the issue of disallowance u/s 14A of the Act. The
Ld.CIT(A) has set aside the issue to the file of the A.O. Hence the assessee
chose not to press this ground. Hence this ground is dismissed as not
pressed.
17. Ground no.5 is on the levy of interest and is consequential in nature.
In the result assessee's appeal is allowed in part.
18. In the result Assessee's appeals for both the A.Ys 2005-06 and 2006-
07 are partly allowed and Revenue's appeal is dismissed.
Order pronounced in the Open Court on 29th June, 2015.
Sd/- Sd/-
(I.C. SUDHIR) (J. SUDHAKAR REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:29th June, 2015
· Manga
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ITA 2843/Del/2011
ITA 3202 & 3203 /Del/2011
A.Y. 2005-06 and 2006-07
OCL India Ltd., New Delhi
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
ASSISTANT REGISTRAR
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