TMI Blog2005 (8) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Income-tax Appellate Tribunal was justified in confirming the order of learned Commissioner of Income-tax (Appeals) who deleted the addition of Rs. 12,89,251 treated as capital expenditure on account of technical know-how?" The present reference relates to the assessment year 1985-86. The brief facts of the case are as follows: The assessee-respondent (hereinafter referred to as "the assessee") is a company and engaged in the business of manufacture and sale of sugar machinery parts. The assessee entered into an agreement on April 11, 1984, with a company in West Germany (hereinafter referred to as "BMA"). The said company was engaged in the manufacture of machinery and equipment for the sugar industry. In the course of the assessment proceedings the Assessing Officer came across a claim for deduction to the tune of Rs. 15,16,766 being the amount payable to BMA "on account of acquisition of technical know-how". The Assessing Officer after an examination of the various clauses/articles of the agreement between the parties came to the conclusion that the assessee had acquired "a benefit of enduring nature" and the same represented capital expenditure. According to him th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific Engineering House P. Ltd. [1986] 157 ITR 86 to the effect that the same was not applicable to the facts of the case before the hon'ble Patna High Court and which, according to learned counsel, were akin to the facts of his case. The following decisions were also relied upon during the course of the hearing before the Commissioner of Income-tax (Appeals) with a view to canvass that the expenditure claimed by the assessee was revenue in nature: (i) CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC); (ii) Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 (Delhi); (iii) Kirloskar Pneumatic Co. Ltd. v. CIT [1982] 136 ITR 746 (Bom); (iv) CIT v. Bajaj Electricals Ltd. [1984] 148 ITR 83 (Bom); (v) Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28 (Bom); and (vi) CIT v. British India Corporation Ltd. [1987] 165 ITR 51 (SC). Learned counsel appearing on behalf of the assessee furnished a paper-book before the Commissioner of Income-tax (Appeals) and a copy of which was forwarded by the first appellate authority to the Assessing Officer inviting his comments. In para. 2.6 of the appellate order the Commissioner of Income-tax (Appeals) has reproduced the repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y learned counsel appearing on behalf of the assessee and in the ultimate analysis accepted the claim for deduction. The first appellate authority has summarised the facts, the arguments and the reported decisions relevant to the issue under consideration in para. 2.5 of his order. He very fairly confronted the Assessing Officer with the paper-book filed by the assessee's counsel as also the decisions relied upon and we have already reproduced the report of the Assessing Officer wherein he has categorically accepted that the decision of the hon'ble Patna High Court reported in Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 'directly applicable to the assessee's case.' In this view of the matter, we uphold the action of the Commissioner of Income-tax (Appeals) in treating the expenditure under the head 'Revenue' rather than under the head 'Capital'. The first ground in the Revenue's appeal is accordingly rejected." We have heard Sri A.N. Mahajan, learned standing counsel appearing on behalf of the Revenue and Sri R.R. Agarwal, learned counsel appearing for the assessee. Learned standing counsel, though he submitted that the expenditure incurred on account of technical know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical know-how in terms of article 1 of the said agreement, in the form of workshop drawings, documentation for basic engineering on structural components and individual parts not manufactured by BMA itself, data on necessary special tools and special manufacturing techniques, assembly instructions, arrangement drawing of the mill, foundation and loading plan, operation and maintenance instructions, information on the storage of spare parts, etc. In terms of article 2 of the said agreement, the assessee-company was allowed to make use of the technical know-how to manufacture the mill at its workshops in India, to sell the mill within India without any limitation and also to export the mill to countries other than Indonesia, Thailand, Srilanka, Iraq, Iran and Kenya as in these countries, BMA had made licensing agreements. In terms of article 4 of the agreement, the assessee-company was entitled to use the know-how for the purpose of performing this agreement only and keep such documentation confidential even after termination of the agreement. In terms of article 12 of the agreement, in case the item of manufacture is one which is patented in India, the payments of lump sum pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment and services according to the patents and other technical information which had been communicated to the assessee but the assessee was prohibited from using the trademarks of the foreign companies after the termination of the agreement. The assessee claimed the payment of royalty as revenue expenditure, which was disallowed by the assessing authority and also by the Tribunal. The Division Bench of the Patna High Court treated the payment of royalty as revenue expenditure and not capital expenditure. The Patna High Court had also considered the decision of the apex court in the case of Scientific Engineering House P. Ltd. v. CIT reported in [1986] 157 ITR 86 and distinguished the same as not applicable to the facts of the case. In the case of Tata Robins Frazer Ltd. v. CIT reported in [1987] 165 ITR 347 the Patna High Court held as follows (headnote): "That the second set of agreements was intended to enable the assessee to manufacture and sell specified equipment and services. It provided for activity which could be regarded as profit earning activity. The agreements did not provide for return of the documents and knowledge supplied by the foreign companies. This, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical knowledge of the Swiss company for a limited period; 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." In the case of CIT v. Bajaj Electricals Ltd. reported in [1984] 148 ITR 83, the Bombay High Court held as follows: "Technical know-how and technical advice cannot be treated as a capital asset and merely because the assessee who had entered into a contract with regard to know-how is entitled to use it even after the agreement has expired would not mean that he has acquired a benefit of an enduring nature. An agreement of foreign collaboration where foreign know-how is availed of in lieu of payment does not stand on the same footing as protected rights under a registered patent. Whether the payment is made before the start of the manufacture or is made because of the recurring liability under the agreement makes no difference to the nature of the transaction." In the case of Premier Automobiles Ltd. v. CIT reported in [1984] 150 ITR 28, the Bombay High Court held as follows: "Technical know-how and techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on expiry of that period, the respondent had no relationship with that organisation and that the period of agreement with the distributor was conterminous with the agreement with CW and Co. under which the respondent became entitled to the benefits of using the registered trademarks and of disclosure of know-how, the sum of Rs. 50,000 was a part of the consideration for the receipt of the benefits and had to be considered to be a revenue expenditure." In the case of Alembic Chemical Works Co. Ltd. v. CIT reported in 22 [1989] 177 ITR 377, the apex court laid down the test of "enduring benefit". In this case the assessee was engaged in the manufacturing of antibiotics and pharmaceuticals with a view to increase the yield. The assessee negotiated with a reputed Japanese enterprise engaged in the manufacture of antibiotics, who had agreed to supply the assessee subcultures of Meiji's most suitable penicillin producing strains, in a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow sheet of the process in the pilot plant and the design and specifications of the main equipment in such pilot plant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antage of an enduring nature' was evolved to emphasize the element of a sufficient degree of durability appropriate to the context. There is also no single definitive criterion which, by itself, is determinative 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 commonsense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down." In the case of CIT v. Kirloskar Pneumatic Co. Ltd. reported in [1993] 202 ITR 309 (Bom), the assessee was engaged in the business of manufacture and sales of air compressors, pneumatic tools, etc., and paid technical fees to W of U.K. and cost of drawings paid to T of U.S.A. and claimed it as revenue expenditure. The Division Bench of the Bombay High Court has allowed the claim as revenue expenditure and held as follows: "So far as the first there questions are concerned, the real dispute is whether under the facts and circumstances of the case, technical fees and cost of drawings paid by the assessee is revenue expenditure or capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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