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TMI Blog1990 (2) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that this payment represented capital expenditure. He, therefore, initiated action under section 263 of the Act and called upon the assessee to show cause against his proposed action to revise the assessment order. After considering the assessee's objections, the Commissioner held that under the agreement dated 21-10-1977 the assessee obtained the technical knowhow for manufacture of air pollution control equipments, that a new line of manufacture was started using the knowhow and that the foreign company continued to use the knowhow was not at-all material, as in the hands of the assessee the purchase enabled them to embark upon a new line of manufacture which was an enduring benefit. The Commissioner, therefore, held that this was purely a capital expenditure and that the Income-tax Ofifcer erred in allowing the same as revenue expenditure and, therefore, the assessment was clearly prejudicial to the interests of Revenue. He, therefore, under the powers vested in him under section 263 of the Act, directed the Income-tax Officer to modify the assessment by treating the expenditure incurred by the assessee for purchase of the knowhow as capital expenditure. 3. On the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no performance guarantee given by EEC to the assessee, as could be seen from Article 5.03. He next referred to article 5.04 of the agreement as well as to page 14 of the paperbook, whereby the second sentence in that article was omitted by a later agreement between the parties on 5-6-1978. Shri Santhanakrishnan referred to the term and termination of agreement contained in Article 6 and pointed out that after the expiry of the term of the agreement, the assessee was to have free right to use the technical information under the agreement but could not grant sub-licences to other parties as could be done under the agreement during its currency. He particularly emphasised article 6.04 which showed that the technical information given under the agreement by EEC to the assessee, who is the licensee, continued to be the property of EEC, which was to be kept secret and was not to be used by the assessee upon the termination of the agreement except as provided in article 6.01. Shri Santhanakrishnan next referred to article 7.02 and article 7.03 to point out that any improvements made by the assessee to the technical information shall become a part of the technical information giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such. He, therefore, argued that the payment in question represented only revenue expenditure, which was rightly allowed by the Income-tax Officer and that the conclusion of the Commissioner to the contrary was incorrect and that the same should be vacated. In support of his submissions the learned counsel relied on the following decisions : 1. Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC), 2. Time-Aids (India) (P.) Ltd. v. CIT [1978] 112 ITR 328 (Mad.), 3. Triveni Engg. Works Ltd. v. CIT [1982] 136 ITR 340 (Delhi), 4. Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 (Delhi), 5. M.R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305 (Mad.), 6. CIT v. Brakes India Ltd. [1982] 136 ITR 322 (Mad.), 7. CIT v. Sundaram Clayton Ltd. [1982] 136 ITR 315 (Mad.), and 8. Frick India Ltd. v. ITO [1983] 3 SOT 64 (Delhi)(SB). Relying on these decisions the learned counsel contended that the assessee's case was a stronger case as could be seen from the various terms and conditions of the collaboration agreement, which was only a technology licensing agreement as its name indicated. He, therefore, argued that the expenditure claimed by the assessee should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure and that there was no dispute in the said case that the amount spent by the assessee for acquiring the technical knowhow was capital expenditure. The only question on which there was dispute was, whether such capital expenditure should be regarded as "plant", on which depreciation would be allowable. The learned counsel for the assessee also relied upon the decision of the Madras High Court in the case of CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678, to contend that the expenditure claimed by the assessee in the present case was rightly allowed by the Income-tax Officer as revenue expenditure and that the Commissioner's conclusion that it represented capital expenditure was erroneous. 9. We have carefully considered the submissions urged on both sides in the light of the materials placed before us and the case law referred to above. In our view the payment of Rs. 1,13,611 by the assessee to EEC representing the second instalment of initial engineering fee was rightly allowed by the Income-tax Officer as revenue expenditure and that the Commissioner of Income-tax erred in his conclusion that it represented capital expenditure. A perusal of the agreement entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those items of a tangible nature that are listed in Appendix A. Other items of the TECHNICAL INFORMATION shall be made available to LICENSEE at appropriate locations selected by ENVIRONMENTAL ELEMENTS to representative of LICENSEE in accordance with Article 5.02. 5.02 During the first six (6) months extending from the date of this agreement, ENVIRONMENTAL ELEMENTS shall, on terms to be mutually agreed upon with LICENSEE, provide office space and selected personnel to train representatives of LICENSEE to use and apply the TECHNICAL INFORMATION. 5.03 The services rendered by ENVIRONMENTAL ELEMENTS' representatives will be in the form of counsel and advice as to the utilization of the TECHNICAL INFORMATION but shall be without any responsibility on the part of ENVIRONMENTAL ELEMENTS for the ultimate performance and outcome. LICENSEE will be responsible for the performance of the LICENSED PRODUCTS made and installed by LICENSEE and for the proper application and interpretation of the TECHNICAL INFORMATION. 5.04 ENVIRONMENTAL ELEMENTS has no obligation under this Agreement to undertake special investigative or engineering work for the purpose of expanding the TECHNICAL INFORMATION in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MENTAL ELEMENTS, and shall use the same only for the purpose of this Agreement. LICENSEE shall require of its subcontractors a written commitment of secrecy of the same scope as that of LICENSEE'S obligation. The obligation of secrecy shall not apply to the extent that the TECHNICAL INFORMATION (a) is now or hereafter becomes part of the public domain; or (b) is in possession of the recipient thereof at the time of its disclosure by the other party; or (c) is received in good faith from an independent third party who has a right to disclose the TECHNICAL INFORMATION. 7.02 During the TERM OF AGREEMENT, the parties hereto shall exchange information concerning any improvements made relating to the design, manufacture or use of LICENSED PRODUCTS. Any such improvements made by ENVIRONMENTAL ELEMENTS shall become a part of the TECHNICAL INFORMATION licensed hereunder. 7.03 Licensee grants to ENVIRONMENTAL ELEMENTS a non-exclusive, irrevocable, royalty free license, with right to sublicense, throughout the world under any improvements under Article 7.02 ". This article shows that the technical information provided by the Licensor EEC to the appellant continues to be the property of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Established Commercial Production 900,000 Second year -do- 1,800,000 Third year -do- 2,700,000 Fourth year -do- 3,600,000 Fifth year -do- 4,500,000'." Consequent to the said new Article 3, existing Articles 3 to 17 were re-numbered as Articles 4 to 18. 9.6 A perusal of the said Articles clearly establish that the appellant company was granted only a License to use the technical information provided by EEC, under this Licensing Agreement for manufacture of Air Pollution Control System, that is Wet Scrubber and other equipments as specified in Appendix-A to the Agreement used for effluent control for industrial, municipal and utility processes. The various clauses quoted above clearly establish that the technical information provided by EEC to appellant under this Agreement continues to remain the property of EEC, even though there is provision for granting sublicenses by the assessee with the previous approval of the Licensor on such terms and conditions as may be agreed between them and also for free use of such technical information after the expiry of the term of the Agreement entered into between the assessee and the EEC. It is the contention of the appellant's learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical knowhow at any particular stage in this fast-changing area of medical science. That state of the art in some of these areas of high priority research is constantly updated so that the knowhow cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the knowhow and the conditions as to non-partibility, confidentiality and secrecy of the knowhow incline towards the inference that the right pertained more to the use of the knowhow than to its exclusive acquisition. " Again at pages 391 and 392 Their Lordships held as follows : " The improvisation in the process and technology in some areas of the enterprise was supplemental to the existin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court decision, it would be clear that the amount of Rs. 1,13.611 did not bring into existence any new asset or any enduring advantage in the capital field to the appellant, to hold that it represented capital expenditure. We would, therefore, respectfully follow the ratio of the decision of the Supreme Court quoted above and hold that the assessee was entitled to the deduction of this amount of Rs. 1,13,611 as revenue expenditure under section 37(1) of the Act and that the Income-tax Officer had rightly allowed the same while making the assessment for this year and that the CIT was not justified in revising the said assessment order by invoking his powers under section 263 of the Act. Accordingly, we cancel the order passed by the CIT under section 263 of the Act and restore the assessment made by the Income-tax Officer. 12. In view of the latest decision of the Supreme Court, which we have followed in the present case, we do not consider it necessary to examine in detail and discuss any of the decisions cited by the learned counsel for both sides. Since we have accepted the appellant's main plea, it is unnecessary to examine its alternative contention. 13. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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