TMI Blog1989 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... biotics and pharmaceuticals was granted a licence for the manufacture, in its plant, of the well-known antibiotic, penicillin. In the initial years of its venture, the assessee was able to achieve only moderate yields from the penicillin-producing strains used by it which yielded only about 5,000 units of penicillin per milli-litre of the culture-medium. In the year 1963, with a view to increasing the yield of penicillin, the assessee negotiated with M/s. Meiji Seika Kaisha Ltd. ("Meiji" for short), reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical know-how so as to achieve substantially higher levels of performance or production-- of more than 10,000 units of penicillin per milli-litre of 'cultured-broth'-- with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by Meiji. The negotiations culminated in an agreement dated October 9, 1953, whereunder, Meiji, in consideration of the "once for all" payment of 50,000 U.S. dollars (then equivalent to Rs. 2,39,625) agreed to supply to the assessee the "sub-cultures of Meiji's most suitable peni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been made available to us that Meiji agreed to give the designs, etc., not only for a pilot-plant but for the manufacture of penicillin according to Meiji's process on commercial scale. The assessee has to put in a larger plant modelled on the pilot plant.. " ". . . It is in consideration of Meiji's agreeing to supply the assessee with complete details of the technical know-how, the design, sub-cultures, flow sheet and written descriptions of the process once for all that the assessee paid to Meiji the stipulated sum of $ 50,000." ". . . It would thus appear that the payment was made for acquiring capital asset in the shape of technical know-how and other allied information. It was not made in the course of carrying out of an existing business of the assessee but was for the purpose of setting up a new plant and new process. It would, therefore, appear that the revenue authorities have rightly treated the payment as of capital nature." ". . . The process which the assessee took over from Meiji was not the same as it was working heretofore. In the present case, the outlay was 'incurred for a complete replacement of the equipment of the business inasmuch as a new pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate plant or machinery had to be designed, constructed, installed and operated ?" The High Court dismissed this application observing that the Tribunal had nowhere recorded a finding to the effect that a completely new plant was obtained by the assessee from Meiji and that the finding of the Tribunal that under the agreement the assessee had obtained a new process and a new technical know-how from Meiji was not without evidence. Against the dismissal of I.T.A. No. 24 of 1971, by the High Court, the assessee has preferred Civil Appeal No. 44 of 1975. On February 24, 1987, this court, while directing the Tribunal to draw up a supplementary statement of the case and refer for the opinion of this court the further question of law which, according to the assessee, arose out of the Tribunal's order and which was the subject-matter of the assessee's appeal in Civil Appeal No. 44 of 1975, however, disposed of that appeal formally, leaving the question of law arising out of the supplemental reference to be considered in the present appeal, i.e., Civil Appeal No. 43 of 1975. The Tribunal has since submitted the supplementary statement of the case and has referred that question of law als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." In Assam Bengal Cement Companies Ltd. v. CIT [1955] 27 ITR 34, this court observed. "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with view to produce the profits, it is a revenue expenditure." "The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." In Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC), Lakshmiji Sugar Mills Co. Ltd. v. CIT [1971] 82 ITR 376 (SC) and in Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 (SC), the enunciation made in Assam Bengal Cement Co.'s case [1955] 27 ITR 34, which in turn refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mon sense than on strict application of any single legal principle." 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 case on hand also. Judicial metaphors, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The non-determinative quality, by itself, of any particular test is highlighted in B. P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 (PC). Lord Pearce said (at p. 264) : "The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer. . ." (emphasis supplied). The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions ; nor are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an improved process of fermentation with new penicillin producing strains isolated and developed by Meiji so as to increase the unit yield of penicillin per milli-litre of the culture-medium. The supply of the technical know-how and the flow sheet of the process and the written description of the specifications of the pilot plant from Meiji were incidental to and for the effective exploitation of the high penicillin yielding strains of the culture to be supplied by Meiji. Learned counsel submitted that the whole range of the operations envisaged by the agreement pertained to the area of the "profit-earning process" and not the "profit earning machinery or apparatus". The cost relationship between what was involved in the improvisation of the process and the investment on the plant did, says counsel, indicate that the extant "profit-earning machinery" was not sought to be supplanted. Learned counsel also urged that there was no material for the Tribunal to hold that the use of new process and technology from Meiji amounted to a new venture not already in the line of the assessee's existing business or that it required the erection of a new plant discarding and supplanting the huge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nued to be penicillin. The agreement with Meiji stipulated the supply of the "most suitable subcultures" evolved by Meiji for purposes of augmentation of the unit-yield of penicillin per milli-litre of the culture-medium. Scientific literature on the bio-synthesis of penicillin indicates that penicillin is derived from fermentation process. Some penicillins are obtained from direct fermentation and some others by a combination of fermentation and subsequent chemical manipulation of the fermentation product. The manufacturing process, it is Stated, consists Of four processes : Fermentation, isolation, chemical modification and finishing. Referring to the common basis of commercial production of penicillin in the New Encyclopaedia Britannica (Micropaedia, Vol. VII), it is mentioned: "penicillin, antibiotic, the discovery of which in 1928 by Sir Alexander Fleming marked the beginning of the antibiotic era. Fleming observed that colonies of Staphylococcus aureus (the pus-producing bacterium) failed to grow in those areas of a culture that had been accidentally contaminated by the green mould penicillium notatum. After isolating the mould, he found that it produced a substance capable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how 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 know-how and the conditions as to nonpartibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. In the present case, the principal reason that influenced the option of the High Court was that the initiation and exploitation of the new pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from the area of the day-to-day business of the assessee's established enterprise. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692. There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose, of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Cornpanies Ltd. [1988] 172 ITR 257 (SC) at p. 262, this court said: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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