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TMI Blog1969 (4) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ance costs) of preparing and providing prints, designs, drawings, specifications, instructions and other information as aforesaid and of supplying patterns and tools upon invoices in respect thereof being submitted by 'simplex' to HGEC. HGEC shall also pay to 'Simplex' a fee at the rate of pound 500 per annum (payable annually in advance, the first payment to be made within one month from the date hereof and thereafter on the first day of each year of this agreement), towards the salary of the members of the staff of 'Simplex' appointed for the purposes of paragraph (d) of clause 2 and sums equivalent to the salaries or other remunerations of any persons sent as production engineers or technical advisers for the purpose of paragraph (e) of clause 2 during their absence from England and all travelling and living expenses incurred by them during such absence, payments of such sums to be made promptly upon the same being invoiced by 'Simplex' to HGEC. " "Clause 5(a).--Simplex will file and prosecute with due diligence an application for registration of HGEC as the registered user of the trade mark in respect of 'Simplex' products and HGEC shall do all such acts and execute all docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Simplex' products or any of them in spite of 'Simplex' making available to HGEC all information, drawings, specifications and technical advice in terms of clause 2 above, ' Simplex' may either, (i) itself sell or supply such products to any person, firm or company in India, or (ii) be free to make arrangements (including the provision of services and information similar to those herein provided) for the manufacture and sale of such products in India by persons, firms and companies other than by HGEC PROVIDED that in the latter event 'Simplex' shall first give notice in writing to HGEC of its intention to make such arrangements for the manufacture of such products in India and if after receipt of such notice as aforesaid HGEC shall satisfy 'Simplex' that it will within a reasonable time manufacture sufficient quantities of such products to meet the demand therefore ' Simplex' SHALL not proceed with such arrangements. Subject as aforesaid 'Simplex' shall not at any time during the continuance of this agreement sell or supply to any person, firm or company in India the ' Simplex ' products ". " Clause 9(a).-In consideration of the rights, services and facilities agreed to be grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e last day of January, April, July and October of each year detailed reports of manufacture and sales of 'Simplex' products covered by this agreement, and to permit 'Simplex's' duly authorised representative to inspect such records from time to time. (e) 'Simplex' shall have the option by notice in writing to HGEC at any time and from time to time to apply for ordinary shares in the capital of HGEC for cash at par and to apply the whole or part of the amount for the time being standing to the credit of 'Simplex' in the said account in meeting such subscription money provided that 'Simplex' may not apply and subscribe for ordinary shares of a nominal amount in excess of the total amount for the time being credited to it as aforesaid and that the total number of ordinary shares of HGEC held by 'Simplex' at any time shall not exceed 49% of the issued ordinary shares of HGEC for the time being. Upon 'Simplex' exercising its option to apply for and subscribe any ordinary share pursuant to this provision HGEC shall forthwith allot and issue the same and deliver to 'Simplex' a share certificate in respect thereof and shall debit the said account of 'Simplex' with the amount of such subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the assessee's business profit. The Tribunal held that what the assessee acquired was not the right of the trade name as such but the right to use the foreign company's trade mark on payment of royalty to be paid periodically depending on manufacture and sale of the products of 'Simplex' design. The Tribunal concurred with the Appellate Assistant Commissioner's view that the sum of Rs. 13,938 was an expenditure of revenue nature and dismissed the appeal. The following question of law has been referred to this court under section 66(1) of the Indian Income-tax Act, 1922 : " Whether, on the facts and in the circumstances of this case, and on a proper construction of the terms of the agreement dated May 21, 1956, entered into by the assessee with Messrs. Simplex Electric Co. Ltd. of England, the sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the business profits of the assessee ? " Mr. Dipak Sen, learned counsel for the revenue, contends that the agreement between the assessee and the foreign company is for a period of 10 years. In other words, the benefits conferred by this agreement are to last for a fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying-equipments (later on manufactured by J. K. Steel Ltd ) and also to acquire generally available technical knowledge about manufacture of paints, wire ropes, hoops and box-strappings. The total expenses of the foreign tour came to Rs. 33,009. The assessee claimed it as business expense. This court has held that, though by reason of expenses incurred by the managing agent, certain assets of enduring benefit might have accrued to one or more of the managed companies, the purpose for which the managing agent incurred these expenses was to increase its own earnings or augmenting the commission it derived from its managed companies, and it was with the object of creating possibilities for enlargement of its income that the assessee spent the amount in question. The foreign tour expenses of the director in these premises were, therefore, allowable as the assessee's business expenditure under section 10(2)(xv). It is clear that the purpose that induced the managing agents to incur its director's foreign tour expenses was the guiding factor in determining whether the expenses were of a capital nature or could be treated as legitimate business expenditure. In a case before the Mysore Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f products discovered and developed in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts, which might be useful to introduce licensed preparations and to promote their sale in India. The Swiss company granted to the assessee full and sole right and licence under the patent listed in the agreement to make, use, exercise and vend the inventions specified therein in India and also a licence to use certain specified trademarks in the territory subject to any existing licence which third parties held at the date of agreement, or which the Swiss company might grant to third parties thereafter. In consideration of the right to receive scientific and technical assistance the assessee agreed to make contributions of 5 per cent., 3 per cent. and 2 per cent. respectively, of the net sale price of the products sold by the assessee towards, (i) technical consultancy and technical service rendered and research work done ; (ii) cost of raw material used for experimental work ; and (iii) royalties on trade marks used by the assessee. The assessee further agreed : (a) not to divulge to third parties w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period ; and by making that technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business. " There are a few other aspects of this case which are not necessary for our purposes. At pages 701 and 702, their Lordships of the Supreme Court have referred to the salient features of the agreement between the parties which show that the Swiss company did not sell its secret processes to the assessee. If we compare these salient features with the relevant clauses in the agreement in the instant reference, we would discover striking similarities between these two cases. Let us, therefore, deal with these salient features one by one and compare, them with the relevant clauses in our agreement. Firstly, in the Supreme Court case, the licence was for a period of 5 years, liable to be terminated in certain eventualities even before the period of expiry. In our case the agreement is for 10 years, but may be determined at any time by Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (that is " know-how ") for efficient and modern manufacture and testing of such products respectively : and 'Simplex' shall also in a consultative capacity give advice for and assistance in such manufacture at the request of HGEC and as they may reasonably require from time to time so as to enable HGEC to manufacture ' Simplex' products in the best and most up to date manner known to 'Simplex'. And, sixthly, the stipulated payment was recurrent, in the case before the Supreme Court, dependent upon the sales, and only for the period of the agreement. In our case also, as we have seen from clause 9 quoted above, the stipulated payments of royalty on percentage basis (in addition to payments provided by clause 3(a) also quoted above) were entirely dependent on 'Simplex' products actually manufactured by HGEC during the continuance of the agreement. We intend to refer to a few other decisions before we summarise our views on this reference. Mr. Dipak Sen, learned counsel for the department, strongly urged, as we have observed, that the assessee in the instant case had derived a permanent benefit under the agreement in question, namely, the " know-how " of 'Simplex' products. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is parted with for money what is received can be, but will not necessarily be, a receipt on capital account. But imparting " know-how " for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil. " With great respect we agree with this view. We do not think, on the facts of this case, that 'Simplex' by communicating its " know-how " to HGEC was parting with any capital assets. We are, therefore, unable to uphold this contention of the department's counsel. The Supreme Court has explained the legal principles applicable to this type of cases in Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax, in these words : " It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure. It is not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income. The court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit earning process it should be held to be a revenue expenditure. Should, however, the purpose be the acquisition of an asset or a right of a permanent character the possession whereof is the condition precedent or the pre-requisite to the commencement or continuance of the business, the expenditure would be a capital expenditure. Royalties, usually, are periodical payments for continuous enjoyment of certain benefits under a contract. In every case payment of royalty is not a capital expenditure. In our case the various types of payments that the assessee has to make seem to be closely related to the assessee's manufacturing processes of " Simplex " products. In other words, these payments are intimately linked up with the manufacturing activities of the assessee and not with the capital values of the assets that the assessee would acquire. They cannot, strictly speaking, be said to be the purchase price of these assets. It is true that the assessee's foreign principals would be imparting their " know-how " to the assessee for a reward ; but that is nothing more than a te ..... X X X X Extracts X X X X X X X X Extracts X X X X
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