TMI Blog1986 (4) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... er of them was on capital account and, thus, the expenditure incurred in the regard could only be considered as capital expenditure. The full details for this sum were given in the assessment order. They could be categorised into two board heads one was expenditure of Rs. 1,04,710 incurred to go toKenyaand other in regard to either establishment of a cement factory abroad or for installation of a drought twisting machine involving expenditure of Rs. 73,730 and Rs. 59.025, respectively. We have already referred to how the ITO regarded the expenditure on all these three counts as capital expenditure but when the matter came on appeal before the Commissioner (Appeals), he analysed the reasons for this expenditure and found that no capital expenditure was at all involved. In Kenya a company called Africa Synthetics Fibre Ltd. Was incorporated, in which the assessee had to invest 49 per cent of the Capital, another 49 per cent was to be invested by the Government of Kenya through a public sector undertaken called ICDC and the balance 2 per cent was to be subscribed by the citizens of Kenya. The equity portion to be contributed by the assessee company was to be adjusted by the know how f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly distinguished this case but also pointed out that the ratio laid down in that case helps the assessee on the present facts. Against this decision of the Commissioner [Appeals] the department felt aggrieved and filed this appeal. The departmental representative reiterated the contention the ITO took in his order but the fact remains that the facts found by the Commissioner [Appeals] were not controverted or even shown to be either non existent or false. The assessee company was having a dual role. In these circumstances, we have no hesitation in saying that the ITO misjudged the purpose of the visit of the employees of the assessee company to Kenya and came to an erroneous conclusion that that expenditure was incurred for the purpose of establishing a factory there in Kenya treating the factory as if it is the assessee's own factory. He has evidently into with the Government of Kenya and how the assessee company got involved in that project, which is nothing but promoting the sales of the assessee's as well as earning technical fees. The most important thing to be noted is that the assessee company is engaged in the fabrication of plant for the manufacture of synthetic fibres. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal filed against this view of the commissioner [Appeals] noting was mentioned to us by way of finding fault with the facts found by the Commissioner [Appeals]. All that was urged was that the expenditure incurred on expansion of an existing plant was to be regarded as capital expenditure and should not have been regarded as revenue expenditure by importing into it the theory that for the purpose of grant of section 80J of the Income tax Act, 1961 ('the Act'), relief expansion of existing business was judicially noticed as amounting to establishment of new industrial undertaking and on the same analogy the expansion should also be considered as a new under taking. This argument overlooks the fact that the purpose of section 80J was different from the considerations to be kept in mind for treating the expenditure for the purpose of section 34 of the act as of capital or revenue. A revenue expenditure incurred could also be in the establishment of a new industrial undertaking. Those considerations are therefore, not to be improved here. We are of the view that the Commissioner [Appeals] is quite correct in his view and we do not find any occasion to interfere with that conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Smt. Veena Singhania 15,214 On travelling of Shri S. P. Satia 7,448 On travelling of Shri S. R. Singhania The reason for the disallowance of the amount incurred on Smt S. M. Lal and Smt. Veena Singhania was that they were ladies and that they had no business purpose to serve for the assessee company to plead that the expenses were incurred for the purpose of the business. Merely because they accompanied their husbands on foreign tours even though it is for the business purpose, their husbands on foreign tours even though it is for the business purpose. theirs [wives] did not become business tours. But the Commissioner [Appeals] found following the rule laid down by the Supreme court in the case of shahzada Nand and sons v. CIT [1977] 108 ITR 358 that the expenditure incurred by the company on the wife of its loyal employees to enable her to accompany him on foreign tour in order that the tour of the employee was successful could only be regarded as an expenditure incurred both by way of rewarding the loyal employee and thereby create goodwill amount the employees and to encourage other employees through them to work with greater loyalty and devotion. this vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, us. We are therefore, unable to disagree with the Commissioner [Appeals]. He has given very cogent reasons for the allowance of this claim. This ground is therefore, also not accepted. 4. Before we go to the next ground, we must dispose of a departments contention based upon the decision of the Delhi High court in Addl. CIT v. Delhi Cloth and General Mills co. ltd. [1983] 144 ITR 280. In this case, the Delhi High court held that an expenditure incurred on foreign tours of directors and officers for selection and purchases of machinery and plant for new project formed part of the actual cost of the machinery and plant and not revenue expenditure. This decision was relied upon to show that the view taken by the ITO was correct but this decision is distinguishable because unlike in that case here the expenditure was incurred not for the selection and purchase of machinery for a new project but for an existing project and this fact makes all the difference. 5. The next ground relates to the allowance of payment of Rs. 30,57,499 paid to a company called Tecnimont, SPA Italy relating to technical know how and another sum of Rs. 3,48,033 paid to IWKA, west Germany. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern known as Chatillion. 2. Montefibre while owing the know how and patent rights had transferred the right to license to another concern known as Tecnimont. 3. Tecnimont had the experience and capability for providing basic design and technical services for the design, erection and operation of the plant for manufacturing acrylic fibre. 4. Technimont agreed to grant the know how and patent right and to offer these services to J. K. Synthetics. 5. The consideration for the use of Know how, basic design engineering and technical assistance was fixed at 623 million Italian lire, consisting of : [a] 186.5 million lire for grant of process and know how license for manufacturing acrylic fibre. [b] 250 million lire for supply of know how and basic design engineering for setting up the plant. [c] 186.5 million lire for supply of technical assistance and continuous know how including training of J. K.'s personnel for running the plant. After referring to the ratio of the several decided case the Commissioner (Appeals) posed the question whether what was acquired under the agreement was merely a license for the user of the technical knowledge of the foreign collaborator. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Germany of Rs. 3,48,033 the Commissioner (Appeals) found that this was towards know-how fees for the manufacture of take-up machines FEM of the company, that the company entered into collaboration agreement with IWKA, West Germany for the manufacture of these machines in Ghaziabad, that the plant had already gone into production and that the payment of Rs. 3,48,033 was for supply of technical know-how for the manufacture of these machines. He examined the agreement entered into by the assessee-company with IWKA,West Germanyand found that the assessee-company was granted exclusive manufacturing license for the Indian Union and that the assessee was not permitted to use any knowledge or experience gained under this contract for any other purpose. IWKA were to provide to the assessee-company the following services : (a) Assistance inGermanyin planning, construction and installation of J. K.'s engineering workshop; (b) Delivery inGermanyof drawings and technical data; (c) Transfer inGermanyof the use IWKA manufacturing Know-how; (d) Transfer in Germany IWKA sales know-how; (e) Training of specialists for JK inGermanyandIndia; (f) Delegation of IWKA staff members for techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot hold water. The right of the assessee to use the technical know-how was strictly confined to its business needs. It can only be used for the existing business, not even for expansion or for a new project. Thus, when the rights of user were strictly circumscribed, it cannot be said that the assessee purchased the rights and became the owner thereof. Another point made out by Shri Unni was that any improvement that the assessee-company makes over the technical know-how, that improvement must belong to Montefibre. This situation is inconsistent with the theory of outright sale. It was further pointed out that it is wrong to suggest that user was for an unlimited period while the period was limited to 7 years or in some case 12 years. Any technical know how after a period to 7 years or for that matter even earlier might became obsolete and may become useless more particularly when sweeping changes are taking place so rapidly in technological world. Nothing can therefore be said to be permanent in the sense conferring a permanent and enduring benefit by reason of the technical know-how. By placing very strong reliance upon a decision of the Delhi High Court in the case of Shriram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to Montefibre an exclusive royalty-free licence with the right to sub-licence anywhere in the world any improvements developed by the assessee-company. Tecnimont is to work out the basic design of the plant on the basis of Montefibre technical knowledge to the assessee-company. In case of delay in the delivery of the technical documentation Tecnimont has to competent the assessee-company by paying stipulated liquidator's damages. There is also a provision for the association of the assessee-company's engineers with Tecnimont. Tecnimont shall furnish the assessee-company with technical assistance and advice from the process point of view in conduction with the erection of the plant and make available a team of experts for erection, etc. There is also elaborate provision for the training of the personnel by Tecnimont. Articles 5.5.1 and 5.5.2 provided that the agreement was to last for a period of 7 year. The advice to be given by Tecnimont was also to last for a period of 7 years. Everything that is undertaken by Tecnimont to the assessee was to last only a period of 7 years (see in this context 5.5.1 and 5.5.2). Article 6.8 provided that in case the trial runs after the erection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by Montefibre to Tecnimont was non-exclusive and irrevocable and permanent, i.e., to say Tecnimont can sub-lease or sub-licence those right to any one it like it is to enable it to do so, the grant of licence by Montefibre to Tecnimont had to be permanent and irrevocable. When article 2.12 states that Tecnimont grant J. K. a non-exclusive non-transferable, permanent and irrevocable licence to uss the process and the know-how to us it appeared that it was only describing the nature of the licence which the Tecnimont obtained from Montefibre which Tecnimont was awarding to the assessee-company. Thus, when it was Montefibre which was the owner of these patent rights and know-how, when all that Tecnimont had only a right to sub-lease it, and when Tecnimont retained to itself the exclusive right to sub-licence it to others, it cannot be said that it had sold those rights to the assessee-company. This is in our opinion not borne out by the agreements nor can that statement be a valid statement in law. In this context not has to turn one's attention to clause 3 of the preamble which provided that because Tecnimont owned the experience and the capability for providing basic design and te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely entitled to use it so long as it continued to pay the royalty. The Allahabad High Court held that the assessee acquired ownership rights without any limit of the time and that was not a case where the assessee's entitlement was only to use it as long as payment of royalty is continued. This was the case strongly relied upon by the departmental representative in support of the department's view. But as we have pointed out above, the assessee before us did not acquire ownership right over the Know-how or the patent right for the simple reason that Tecnimont with which the assessee entered into the agreement did not itself posses those rights except that it acquired a licence to use the experience to impart to others for a fee. Secondly unlike in that agreement, the agreement here has set a time limit. These two fractures distinguish the Allahabad High Court case from the case before us. We may also point out that the Bombay High Court in a very recent decision in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1985] 157 ITR 751 held that if know-how has been acquired unrelated to secret or patent processes or the right to use a trade name or trade mark then the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee cannot be said to be a such a nature as to bring in an enduring advantage. On a consideration of the above we have come to the conclusion that the view taken by the Commissioner (Appeals) on all accounts is correct and reserves to be upheld. The Commissioner (Appeals) pointed out that the payment could be regarded as a payment made foe the extension of the existing business. This point was fairly conceded on behalf of the departmental representative because no arguments were addressed to us on that issue. On the contrary, the records show that those products were already being manufactured by the assessee. If this is the situation the payment made by the assessee to increase its profitability by applying a new method of manufacture of process of manufacture, could not be said to be on capital account. Nor is it the case of the revenue that the liability to pay this amount did not arise in this actuating year. Judged from these consideration and the provisions in the agreement, we have to the view that the assessee did not purchase any right in the patent right or technical know-how except that it acquired the right to use the information for the user of which it paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CBDT in this connection on16-7-1976is very relevant and is reproduced below : "1. Reference is invited to Board's Circular No. 200, dated28-6-1976by which it was clarified that no distinction need be drawn between expenditure on advertisement in souvenirs and other types of advertisement. 2. A question has been raised as to whether an assessee can resort to publicity in more that one souvenir published by the same institution/organisation. Souvenirs are one of the recognized media of publicity. A businessman can advertise in more than one newspaper or magazine and also in more than one issue of the same newspaper or magazine. Expenditure on such advertisement will qualify for deduction under section 37(3) read with rule 6B of the Income-tax Rules. Similarly, if advertisement have been released in more than one souvenir published by the same organisation, deduction in respect of such publicity will be admissible provided aforesaid conditions are satisfied." - Circular No. 203 - See Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., page 385. This circular issued by the CBDT makes it clear that advertisement inserted in souvenirs are recognized modes of publicity and that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isit of officials of the RBI to Kenya and Rs. 1,000 incurred by one Shri Dwarka Nath for the purpose of the company's business. The finding recorded by the Commissioner (Appeals) was that this expenditure was incurred by the employees of the company for the purpose of company's business and as full details were available and as the purpose was proved, there was no reason to disallow it. Though the department filed appeal against this allowance, nothing is pointed out to us to enable us to take a view different from the view expressed by the Commissioner (Appeals). In view of the categorical finding given by the Commissioner (Appeals) that this expenditure was for the purpose of the business we confirm his view on this point. 9. The next item is to the allowance of 50 per cent depreciation on machinery installed in the premises of J. K. Cotton Mfg. Spg. Mills Ltd. and Plastic Products Ltd. The facts relating to the allowance of this depreciation were all mentioned by the Commissioner (Appeals) in his order and it is not necessary for us to repeat them except to state that the Commissioner (Appeals) has followed an order of the Tribunal in the assessee's own case and allowed 50 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing before any income-tax authority. This is also the view expressed by several Benches of the Tribunal and we do not wish to burden this order with the citation of all those cases. We therefore express our agreement with the view expressed by the Commissioner (Appeals) and decline to interfere. 11. The next ground relates to the allowance of excise duty liability of Rs. 12,72,762. The facts relating to this claim are succinctly put by the Commissioner (Appeals) in his order and they are not in dispute. The assessee obtained method as a bye-product in the process of manufacture of synthetic staple fibre. The excise department levied excise duty on this bye-product at the rate of 50 paise per litre with effect from26-4-1972. This impost was made by the Rajasthan state Government. The total amount came to Rs. 12,72,762. The assessee-company challenged the validity of the levy through a writ petition filed in the Rajasthan High Court. The Rajasthan High Court allowed the assessee's writ petition on14-5-1976but the State Government filed a special leave petition in the Supreme Court. In the meantime the assessee claimed this sum as a liability by debiting in the accounts as excise du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner (Appeals) following his earlier order for the assessment year 1975-76 held that the cash payments to the employees are not to be treated as perquisites but only as part of salary. He directed the ITO to recompute the perquisites in the light of this direction. The department is in appeal against this direction. But we find that this matter stands concluded by the order of the Tribunal for the immediately preceding assessment year in Income-tax Appeal No. 4548 of 1980 dated19-4-1985, which the Commissioner (Appeals) had only followed. We are also given to understand that the department did not file any reference application against this point. We, therefore, following with respect the order of the Tribunal hold that the view taken by the Commissioner (Appeals) is correct. We may also add that in the case of CIT v. Otis Elvators Ltd. a special leave petition filed in the Supreme Court on identical point was also dismissed. This point is, therefore, decided against the revenue and the order of the Commissioner (Appeals) is confirmed. 13. The next item is in regard to the allowance of development rebate in respect of plant and machinery installed in FEM division of Rs. 96,290. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 dated8-7-1975for the assessment year 1972-73. Respectfully following the view expressed by the Tribunal, we hold that the view taken by the Commissioner (Appeals) cannot be said to be incorrect. We, therefore, confirm it. 15. The next objection is whether the deficiency of section 80J of the Act relating to the assessment year 1973-74 and 1974-75 is to be set off or not. In those two years the profits of those two divisions was not sufficient to absorb the relief under section 80J though it was admissible. In the year under consideration as there was enough profit, the assessee claimed that the deficiency of the earlier years should be carried forward and set off. The ITO did not accept the assessee's claim mainly on the ground that for the assessment years 1973-74 and 1974-75 the assessments not having been finalised, the assessee would not be entitled to carry forward the deficiency but now we find that this point also has been decided by the Tribunal in the assessment year 1975-76 in Income-tax Appeal No. 4548 of 1980 dated 19-4-1985 in favour of the assessee and against the department. Respectfully following the view expressed by the Tribunal we hold that the Commissioner ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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