TMI Blog1998 (2) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature?" 2. The controversy in this reference pertains to two assessment years viz., asst. yrs. 1974-75 and 1975-76. The material facts of the case giving rise to this reference, briefly stated, are as follows: The assessee, M/s Kirloskar Tractors Ltd., was incorporated as a public limited company under the Companies Act, 1956 on 27th April, 1970, and granted certificate of commencement of business on 16th May, 1970. The business of the assessee consisted of the manufacture and sale of tractors and engines. The accounting year was the year ending 30th June. The holding company of the assessee-company was M/s Kirloskar Oil Engines Ltd. The promoters of the assessee-company were in correspondence with Klockner Humboldt Deutz of West Germany (hereinafter referred to as "Deutz"), a company engaged in the manufacture of tractors, for technical collaboration agreement under the approval of the Government of India. Pursuant thereto, an agreement for technical collaboration was executed between the assessee-company and the West Germany company "Deutz" on 29th June, 1970. According to the said agreement, manufacturing programme of the assessee was to be in a phased manner. To its first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee to the West German company "Deutz" in consideration of the use of the "know-how" was revenue in nature. The Tribunal observed that in the present case there was no sale of "know-how". The information supplied to the assessee was confidential and there were restrictions on the assessee divulging the same. The Tribunal found that the assessee had made the payment for the use of the know-how for manufacturing tractors and, therefore, the payment was an integral part of profit making process. The Tribunal, therefore, held that the CIT(A) was right in holding that the expenditure of Rs. 5,19,630 incurred by the assessee in the previous year relevant to the asst. yr. 1974-75 was an expenditure of revenue nature. The Tribunal also held that in the asst. yr. 1975-76, the CIT erred in holding in his revisional order under s. 263 of the Act that such payment was of capital nature. Accordingly, the Tribunal confirmed the order of the CIT(A) for the asst. yr. 1974-75 and set aside the revisional order of the CIT under s. 263 of the Act for the asst. yr. 1975-76. As a result, the appeal of the Revenue for the asst. yr. 1974-75 against the order of the CIT(A) dismissed and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in view of the specific finding of the High Court in that case to the effect that the services rendered by the foreign company, for which the expenditure had been incurred, included valuable services in the setting up of the factory itself. 7. We have carefully considered the rival submissions. Law is well -settled that the question whether an expenditure is on account of revenue or capital has to be decided by looking at the facts and circumstances of the case and from the point of view of a practical and prudent businessman rather than from the point of view of a tax gatherer upon strict juristic classification of the legal right secured in the process. In order to arrive at just and proper conclusion, one must look at the true nature and character of the advantage in a commercial sense (without giving undue emphasis to the form thereof or the terminology used) in the light of the surrounding circumstances. If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit making process and not for acquisition of an asset of a right of permanent character, the expenditure may be regarded as revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat case, the assessee-company was engaged in the manufacture and sale of oil engines etc. It entered into a collaboration agreement with a foreign company and in pursuance of the agreement paid to the foreign company a sum of Rs. 20,79,513 as consideration for supply of (i) technical assistance for products to be manufactured and assembly thereof and (ii) supply of drawings, specification or procedures and operation maintenance manuals for the foreign company's engines. The assessee claimed the amount paid as a deduction in computing its income. The ITO took the view that one-half of the amount paid by it was in the nature of royalty and hence partook the character of capital expenditure. With regard to the remaining half, the ITO took the view that 50 per cent thereof related to the technical assistance for the products to be manufactured and assembled and the remaining 50 per cent related to supply of manufacturing, drawings, specification etc. and that the consideration relatable to the technical assistance received from day-to-day in respect of the products manufactured was revenue expenditure and the remaining 50 per cent was capital expenditure. The AAC concurred with the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been referred to and relevant observation therein quoted with approval. The legal position has been summed up by the Supreme Court in Jonas Woodhead Sons (India) Ltd. vs. CIT (supra) as follows: "It would thus appear that the Courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trade marks which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one-or dependent upon certain contingencies, the right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign firm, payment whether made 'once for all ' or in different instalments corelatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the Court comes to the conclusion that it does so, then it has to be held to be a capital expenditure". In the above case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, the assessee was to pay to Deutz, free of tax, the following : (a) Within sixty days of the signing of the agreement : DM 125,000 (b) At the end of twelve months of the signing of the agreement, but before fourteen months : . DM 225,000 (c) At the end of twenty-four months of the signing of the agreement, but before twenty-six months : . DM 520,000 (d) At the end of thirty-six months of the signing of the agreement, but before thirty-eight months : . DM 530,000 India. The assessee was also required to pay to Deutz in consideration of the rights granted by them to the assessee at all times during the continuance of the agreement, royalty @ 3 per cent of the net sales value of each type of the machine and spare parts manufactured by the assessee and 5 per cent of the sale value of the machines and spare parts thereof exported by the assessee out of India. The agreement was for a period of five years from the date of starting of the commercial production. In cl. 21 of the agreement it was provided that the agreement might be terminated forthwith by the party not in default giving to the party in default a notice in writing terminating the agreement in any of the eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors, we are of the clear opinion that the expenditure incurred by the assessee for getting the technical know-how and other assistance from Deutz represented revenue expenditure which was allowable as a deduction in the computation of the income of the assessee. 15. The next controversy is in regard to the year in which the amounts in question can be claimed as a deduction. The assessee followed mercantile system of accounting. That being so, the expenditure incurred by it would be allowable as a deduction in the year in which the liability accrued for the first time. However, in the instant case, it is contended that the accrual of the liability was dependent upon the approval and/or sanction of RBI and in that view of the matter, the liability did not accrue and/or arise till the receipt of the sanction. Our attention was drawn to the finding of the Tribunal that no remittance to a person resident outside India or to the credit of such person could be made without the approval of the RBI. That being so, it was contended that the liability would arise only on receipt of the approval of the RBI. There is no dispute in this case that the approval of Reserve Bank was received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year 30th June, 1957 and managing agents' expenses for the year ending 30th June, 1956 paid/recouped during the year ending on 30th June, 1958, relevant to the asst. yr. 1959-60. Though the above sums did not pertain to the previous year relevant to asst. yr. 1959-60, the company claimed it as deductible expenditure for that year on the ground that the same became payable only during that year when the Government accorded its approval to the new agreement. The ITO rejected this claim on the view that the approval of the Central Government was necessary only for actual payment and "the assessee should have ascertained the liability for each year and claimed it on the mercantile basis which was the system adopted by the assessee-company". The AAC and the Tribunal also took the same view. On reference, the High Court was of the opinion that though at the time the debit entries were made in the accounts, approval of the Central Government had not come but when it came later, it gave legal effect to the debit entries not from the date of the approval but from 1st April, 1956. On appeal of the assessee, the Supreme Court held that the High Court was in error in answering the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y payment to, or for the credit of, any person by order or on behalf of any person resident outside India; (e) place any sum to the credit of any person resident outside India;" In the instant case, the RBI granted approval to the assessee in the previous years relevant to the assessment year under consideration and the remittances were also made in the same years. That being so, the liability to pay the amount pertaining to the earlier assessment years can be said to have accrued or arisen only in the years under consideration and the same was, therefore, allowable as deduction in computation of income of that year. 18. We may now turn to the alternate submission of the learned counsel for the assessee that in view of the provisions of Foreign Exchange Regulation Act, the assessee did not follow the mercantile system of accounting in respect of the above expenditure but followed cash system of accounting in respect thereof and in that view of the matter, it is entitled to deduction in the assessment of its income for the years under consideration because the payments were made in the previous years relevant to the assessment years under consideration. Our attention was dra ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
