TMI Blog1985 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000 by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset ? " Briefly stated, the facts giving rise to the question are these. M/s. Scientific Engineering House (P.) Ltd. (hereinafter called " the assessee ") manufactures scientific instruments and apparatus like dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements, one dated March 15, 1961, and the other dated March 31, 1961, with M/s. Metrimpex Hungarian Trading Company, Budapest, for undertaking the manufacture of microscopes and theodolites, under which the said foreign collaborator, in consideration of payment of Rs. 80,000 each (Rs. 1,60,000 under both the agreements together), agreed to supply to the assessee all the, technical know-how required for the manufacture of these instruments. The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the assessee thereunder acquired the right to manufacture in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, would, at the appropriate rate, be allowable and he directed the Income-tax Officer to allow the depreciation claimed. In the further appeal preferred by the Department, the Tribunal took the view that clauses 2, 3, 4, 5 and 10 of the agreements did not lend support to the stand taken by the assessee that payments (Rs. 80,000 each) had been made mainly for the supply of designs, drawings, charts, etc., that the services to be rendered by the foreign collaborator covered a wide field and that the supply of designs, charts, drawings, etc., was incidental and only in furtherance of other services which the foreign collaborator was expected to render. It further took the view that since the supply of designs, drawings, charts, etc., was only incidental and the payment of Rs. 1,60,000 could not entirely be held to represent the purchase price of those documents, it was unnecessary for them to go into the question whether the said documents fell within the meaning of the expression " books " and whether depreciation was, therefore, admissible thereon. The Tribunal, however, held that the agreements showed that some of the services which the foreign collaborator was required to render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Company, Budapest, the payment of Rs. 1,60,000 was attributable partly to the acquisition of depreciable asset and partly to revenue expenditure or wholly towards the acquisition of a depreciable asset ? " On a consideration of the terms and conditions of the two collaboration agreements, the High Court took the view that the payment of Rs. 1,60,000 did not mainly represent the purchase price of the designs, drawings, charts, etc., as contended by the assessee, that the rendering of " documentation service " was incidental, that no part of the expenditure was on revenue account but the whole of it was of a capital nature bringing into existence an asset of enduring benefit to the assessee, but what was brought into existence was a non-depreciable asset and, therefore, the assessee was not entitled to any relief in the case. In other words, by its judgment dated January 7, 1973, the High Court held that the assessee was not entitled to any relief either by way of depreciation allowance or on account of revenue expenditure. Following the aforesaid decision rendered by the High Court in relation to the assessment year 1966-67, the assessee was denied similar relief claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted therein or whether it was the principal service for which mainly the payment of Rs. 1,60,000 was made by the assessee as result whereof the assessee acquired all the technical know-how requisite for the purpose of manufacturing the instruments in question ? And, secondly, whether the said expenditure which was entirely of a capital nature, brought into existence a depreciable asset ? The answer to the former question depends upon the proper interpretation of the terms and conditions of the two agreements while the answer to the latter depends upon whether a capital asset like the technical know-how acquired in the shape of drawings, designs, charts, plans, processing data and other literature which formed the basis for the business of manufacturing the instruments in question would fall within the wide and inclusive definition of "plant " given in section 43(3) of the Income-tax Act, 1961. Turning to the first question, having regard to the relevant terms of the two agreements, we find it very difficult to accept the view concurrently expressed by the Tribunal and the High Court that the " documentation service " undertaken to be rendered by the foreign collaborator to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the agreement and in sub-clause (c) thereof, it was provided that if the assessee designed any new model or type of the instrument to suit the circumstances in India, the assessee was entitled to have the supply of components being manufactured in Hungary and suited to its purpose on such terms and conditions as may be mutually agreed upon. Clause 6 dealt with payment to be made by the assessee and the manner thereof to which we will refer in detail later. Clause 10 indicated a five-year period commencing from a certain date during which the agreements were to remain in force. The rest of the clauses dealing with assignability and other topics are not material. On the issue under consideration, clauses 3 and 6(a) are very material and they run thus "3. Supplies: Vendor shall supply to purchaser in accordance with the terms laid down in clause 6 hereunder: (a) One complete set of up-to-date, correct and legibly reproducible manufacturing drawings and full processing documents of all components of the instrument and lists of parts in metric system in English language, this full documentation will comprise of one complete list of up-to-date, correct and legibly reproducible d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present agreement ". In fact, the other services mentioned in clauses 4 and 5 appear to be incidental as some of these were undertaken to be rendered as and when desired by the assessee and for which the assessee had agreed to bear and pay the expenses separately. The tenor of the agreements clearly shows that the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the assessee and for acquiring such technical know-how through these documents, lump sum payment was made. In other words, the payment of Rs. 80,000 under each of the agreements was principally for rendition of " documentation service ". It is, therefore, clear that this expenditure was incurred by the assessee as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in " documentation service " specified in clause 3. The expenditure, therefore, was undoubtedly of capital nature as a result whereof a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing shoes were held to be plant. IN CIT v.Taj Mahal Hotel [1971] 82 ITR 44 (SC), the respondent, which ran a hotel, installed sanitary and pipeline fittings in one of its branches in respect whereof it claimed development rebate and the question was whether the sanitary and pipeline fittings installed fell within the definition of plant given in section 10(5) of the 1922 Act which was similar to the definition given in section 43(3) of the 1961 Act and this court after approving the definition of plant given by Lindley L.J. in Yarmouth v. France [1887] 19 QBD 647, as expounded in Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681 (CA), held that sanitary and pipeline fittings fell within the definition of plant. In IRC v. Barclay, Curle Co. Ltd. [1970] 76 ITR 62 (HL), the House of Lords held that a dry dock, since it fulfilled the function of a plant, must be held to be a plant. Lord Reid considered the part which at dry dock played in the assessee-company's operations and observed (at p. 67): " It seems to me that every part of this dry dock plays an essential part ...... The whole dock is, I think, the means by which, or plant wit which, the operation is performe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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