TMI Blog1991 (3) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of section 263, considered that these assessments made by the Income-tax Officer accepting the assessee's claim are erroneous and prejudicial to the interests of the revenue inasmuch as the Income-tax Officer had not considered all aspects of the case in their proper perspective. Therefore, he set aside the assessments once again and remitted the matter back to the file of the Income-tax Officer to re-consider the matter and arrive at a proper conclusion. Ultimately, the Income-tax Officer made re-assessments in this case on 29-1-1987 rejecting the assessee's claim for deduction of the amounts paid by the assessee for acquisition of know-how as revenue expenditure. Similarly, for the assessment years 1979-80 and 1980-81 also, in the original assessments made by the Income-tax Officer, he accepted the assessee's claim for deduction of these amounts. However, the Commissioner of Income-tax passed similar orders under section 263 as was done for the earlier years and remitted the matter back to the file of the Income-tax Officer. Thereupon, the Income-tax Officer once again made the assessments on 29-1-1987 rejecting the assessee's claim for deduction of the above am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue under consideration is squarely covered by the decision of the Andhra Pradesh High Court in the case of Praga Tools Ltd. It is claimed that the assessee manufactures various types of machines and supplies them to various users. In the course of its business of manufacturing various types of machines, it had acquired the know-how for manufacture of such machines. The assessee (also referred to as BHPV) entered into a collaboration agreement with a French Company called L' Air Liquide (hereinafter referred to as AL) for manufacture of gas separation plants. The preamble of the agreement clearly stipulates as follows :-- " Whereas BHPV has been licensed by the Government of India for the manufacture of Cryogenic Units used in Steel Works, chemical industries and other similar industries : (a) for the separation of air in order to produce oxygen, nitrogen and/or argon under the gaseous or liquid state, (b) for the separation of converted or coke oven gas for the production of ammonia synthesis mixture by the liquid nitrogen wash process. Whereas A.L. has conducted research and development work for over fifty years and has developed processes, methods of manufacture, know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 4 states that BHPV agreed that during the terms of this agreement, they shall not conclude directly or indirectly a similar collaboration agreement with any other party in the same field as covered by Article 1, without the written consent of AL. This clearly shows that BHPV is not the owner of the information obtained from AL. BHPV is also supposed to ensure secrecy of the technical data and know-how obtained and it shall not pass on to other parties except inasmuch as is necessary to procure sub-deliveries and to enable the customers to operate and maintain the plant supplied. Transfer of technical data and know-how obtained by BHPV from AL to another Indian party is permitted subject to written approval by AL on such transfer and on mutually acceptable terms and conditions. In lieu of the above services rendered, AL was to be paid a lump sum of 750,000 French Francs in different instalments. In addition, fees for services rendered by AL by way of engineering fees and technical documentation fees were also to be paid. Royalty was also payable at the rate of 4% on the net ex-works sale value. On the basis of these terms of agreement, Sri Seetharamayya argues that the payments m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yya, the preamble of the agreement clearly states that the knowledge has been sought to be acquired in order to enable the assessee to carry on its business of manufacture of machines. The scope of the agreement as given in Article 1 shows that the assessee intended to design, fabricate, erect and commission plants for separation of various gases and also to produce ammonia synthesis mixture. For this purpose, it obtained a licence from AL. The collaborator is supposed to grant the assessee a licence and its patents, know-how and technical data to manufacture and sell in India the equipment comprised in the plants mentioned in Article 1. The assessee is not entitled to export the machines manufactured by it to certain countries stipulated in Article 2.2 whereas it is permitted to export them to other counuies. Article 3 stipulates that on signing the agreement, AL will remit to the assessee the general data and standard norms as per Schedule 2. On receiving an enquiry from a customer by BHPV, the collaborator shall supply the details required for preparing the proposal from BHPV to its customer, on acceptance by BHPV of a firm order for a plant, AL will supply to BHPV the basic des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements, merely because the agreements provided that the assessee shall be entitled to retain technical know-how, designs, drawings etc. Even after the expiry of the agreement, it did not alter the nature of the transaction. There was no property right transferable in the technical know-how. It was held that the totality or the cumulative effect of all the material facts evidenced by the documents and the surrounding circumstances in that case showed that the payment made by the assessee in that case for procurement of know-how, drawings and designs was in the nature of a revenue expenditure. 7. Again, the Andhra Pradesh High Court in the case of Veljan Hydrair (P.) Ltd., held that where technical know-how is obtained merely for improving the product by an industry which is already established, the payment would only be in the nature of revenue and not a capital payment. In that case, the assessee was engaged in the manufacture, of Valves even prior to its agreement with the foreign company. The collaboration agreement had been entered into only with a view to improve the product. It was held that the amount paid under the collaboration agreement was revenue expenditure. It m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in substance a transaction of acquiring the necessary technical information with regard to the technique of production. Instead of employing persons having knowledge of techniques and utilising their knowledge, technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. In that case, the assessee, Telco, entered into two agreements, one with Daimler Benz and another with Henricot. The first party was to provide drawings and designs and full technical information required for the manufacture of automotive products. It was also to provide training facilities for Indian personnel in their German plants. Under the second agreement, Henricot agreed to give technical advice, information and assistance to Telco Steel Foundry and to provide facilities for training Indian personnel in their Belgian plant. On these facts, the court held that in essence the agreements were for acquiring technical knowledge regarding methods of production and in the case of Daimler Benz for use of the trade name. The assessee had not acquired any asset or advantage of an enduring nature for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advantage may endure for an indefinite future. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. 12. The Supreme Court, once again, in the case of Alembic Chemical Works Co. Ltd. held, " In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants, but as masters they tend to be over-exacting. The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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