TMI Blog1998 (4) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... n concern. Since there are no restrictions for the use of the technical know-how beyond the period of the first ten years, the Income-tax Officer was of the view that the assessee had acquired the technical know-how and he held the payment had to be regarded as a capital expenditure. The assessee has challenged the order of the Income-tax Officer before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) found that the assessee was manufacturing "P-3TA" model of diesel engines with the technical know-how supplied by the same English company which could be fitted in a tractor manufactured by a sister concern of the assessee, viz., Tractors and Farm Equipment Ltd. The said Tractors and Farm Equipment Ltd. had changed over to a new model of a tractor which necessitated the assessee to change its engine model and accordingly introduced "AD-3152" version of diesel engine as designed by Perkins Engines Limited. The Commissioner of Income-tax (Appeals) noticed that in the case of TAFE, the Income-tax Appellate Tribunal held the payment was a revenue expenditure and following the order of the Appellate Tribunal, he held the payment should be regarded as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer disallowed the claim as a revenue expenditure only on the ground that there was no prohibition against the firms using the technical know-how beyond the period of ten years. But he failed to notice that the English company is not prohibited from transferring such technical information to any other Indian or foreign concern even during the period of ten years. The next objection raised by the Income-tax Officer was that the assessee can utilise the technical know-how for even beyond the period of ten years. This view of the Income-tax Officer is quite untenable. With the rapid change in the technology, it was found that technical knowledge obtained by the assessee would become obsolete during the course of a few years from the date of agreement. Though under the agreement there was a transfer of technical documentation, the intention of the parties is important to determine the object behind the payment and the intention of the parties was that the payment has been made for business purposes and not for acquiring technical know-how. The fact that there is no prohibition against the user beyond the period of ten years is also not of any significance as it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding the transferability of the know-how during the agreement, the confidential nature of the know-how are all circumstances which one should take into account in considering the question whether the expenditure can be regarded as a capital expenditure or not. Though the agreement provides for the purchase of the technical know-how, the nomenclature is not conclusive of the matter. The right obtained under the agreement, in our opinion has an impact on the running of the assessee's business, and, therefore, the expenditure in our opinion would be revenue in nature. We are, therefore, of the opinion that the tests laid down by the Supreme Court in the decision cited supra are satisfied. This court in the case of CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678 rejected a similar contention urged on behalf of the Revenue and held that because the knowledge obtained might endure beyond the contract period, it would not make the expenditure as a capital expenditure. The following tests laid down by the court are apposite to the facts of the case : "Technical or commercial knowledge acquired by a trader or industrialist is of this kind, enduring, if not everlasting. Expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a careful consideration of the decision of the Supreme Court, we are of the opinion the decision has no application to the facts of the case as the know-how in the instant case had been acquired by the assessee for running its business. The case before the Supreme Court was that only with the aid of the documents supplied, the assessee was able to commence its manufacturing activity and those documents formed the basis of the business of manufacturing the instruments in question. On the other hand, the assessee in the instant case was already a manufacturer of diesel engines and to change the type of diesel engines manufactured by it, the assessee had to go in for an agreement to obtain technical knowledge. In other words, the assessee was in the manufacturing line earlier and the object of the assessee in obtaining technical knowledge was to run the business of manufacturing the diesel engines more profitably, Therefore, the decision of the Supreme court cited supra is distinguishable on the facts of the case. In Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224 ITR 342, the Supreme Court has laid down the following tests to determine the question when an expenditure ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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