TMI Blog1995 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... re the said raw material by himself, the same was bought from the market. The assessee entered into another supplementary agreement on July 14, 1965, for manufacturing cyanuric chloride. Under this agreement, the assessee had to pay certain amounts in five equal instalments to J. R. Geigy for acquiring technical know-how. The first instalment was payable on the commissioning of the cyanuric plant on March 31, 1966. The second instalment was payable in the financial year 1966-67 and each subsequent instalment was payable in the following financial years. Towards payment of these instalments in each year, which was paid in foreign currency and its rupee value was claimed as a deduction for the assessment year 1967-68, and subsequent assessment years. The first payment in respect of which was made in the financial year 1966-67. The rupee value of these instalments was Rs. 1,51,500. The assessee claimed deduction thereof as business expenditure of manufacturing cyanuric chloride commencing from the financial year 1966-67 as a revenue expenditure. The Income-tax Officer rejected the contention of the assessee by taking the view that because the payments were made for getting sub-licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Degussa's patents, proces ses, know-how and improvements. Under this right to manufacture the said product in India from the said two companies, Geigy had a right to sub-licence Geigy's associates in India for manufacture of the said products. In exercise of that right Geigy had entered into the agreement with the assessee on July 14, 1965. Geigy sub-licensed the assessee to manufacture cyanuric chloride under Musashino's as well as Degussa's patents, processes, know-how and improvements. In consideration of the said sub-licence permitting the assessee to manufacture cyanuric chloride under the said two processes, the assessee was to pay a fee of 50,000 US $ in five equal annual instalments of 10,000 US $ each to Geigy. On these premises, Shri Shelat, learned advocate, contends that the assessee has acquired an advantage or benefit of enduring nature, under the said agreement by which cyanuric chloride was required to be manufactured by the assessee. Once technical knowhow was disclosed to the assessee, it was permanently with the assessee and even after the expiry of the agreement the knowledge of the process of manufacturing cyanuric chloride whether by Musashino or by Deguss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be capital and when a particular expenditure can be said to be of revenue nature. In some cases it has been held that expenditure which brings into existence asset or advantage of enduring benefit is to be considered as capital expenditure. A disbursement, when it is referable to fixed capital or capital asset is treated as capital expenditure, but when it relates to circulating capital or stock-in-trade it is treated as revenue. Yet another test that has been applied is that where an expenditure relates to the frame work of the assessee's business, it is to be treated as capital as opposed to revenue when it is related to running of the business. Initial expenditure for commencement of a business is ordinarily considered a capital outlay. So also money spent on acquiring goodwill has been held to be capital outlay. But no one test is of universal application. The Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 quoted with approval following observation of Lord Pearce in B. P. Australia Ltd. v. Commr. of Taxation of the Commonwealth of Australia [1966] AC 224, 264 (PC) (page 386) : "The solution to the problem is not to be found by any rigid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." Another test evolved was to find out as to whether the expenses incurred are part of the working expenses or the expenditure laid out is part of the process of profit-earning. In other words, it is capital outlay if such expenditure is necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all. This was said by Lord Clyde in Robert Addie and Sons' Collieries, Ltd. v. IRC [1924] 8 TC 671 (C Sess) (page 676) : ". . . is it a part of the company's working expenses ?--is it expenditure laid out as part of the process of profit-earning or, on the other hand, it is a capital outlay ?--is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ? " The test was quoted with approval by the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. The further principle which their Lordships of the Supreme Court in Empire Jute Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll-settled that no one test dealt with in various cases distinguishing between capital and revenue expenditure is of permanent or conclusive nature or of universal application. Here it will be appropriate to notice another decision of the Supreme Court. In CIT v. Ciba of India Ltd. [1968] 69 ITR 692, the assessee was an Indian subsidiary of Ciba Ltd., a Swiss company. The pharmaceutical section of the Swiss company, in India, was taken over by the assessee in 1948. Under an agreement, the Swiss company undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of 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 the licensed preparations and to promote their sale in India, it granted to the assessee full and sole rights and licence under the patent listed in the agreement to make use of the same and also a licence to use certain specified trade marks in the territory subject to any existing licence to third parties h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for setting up plant, etc., for the production of penicillin. Initially, the appellant was able to achieve only moderate yields. With a view to increasing the yield, the appellant negotiated with Meiji, a reputed Japanese enterprise whereunder in consideration of a once for all payment of 50,000 US $, it agreed to supply the assessee a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin with a flow sheet of the process in the pilot plant and to arrange for the training of the appellant's representatives in various plants in Japan at-the assessee's expense and advise the assessee in large scale manufacture for a period of two years. The assessee was to get technical know-how confidentially and secretly and not to seek any patent for the process. The assessee's claim for deduction of the sum paid to the Japanese company as revenue expenditure was disallowed by the Department holding that the expenses were capital in nature, for the purpose of setting up a new plant and a new process and for complete replacement of the equipment inasmuch as a new process and new type of plant was to be put up in place of the old pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he true character of the expenditure. In view of the aforesaid, looking to the facts of the present case, the mere fact that the knowledge of Musashino, the process of manufacturing cyanuric chloride would become a permanent, part of the assessee's knowledge bank and will remain with the assessee even after expiry of the agreement will not be determinative of the character of the expenditure. The principal agreement with Geigy was to last for twenty years commencing from January 1, 1956. The supplementary agreements in furtherance of the principal agreement were coterminous with the principal agreement. In fact the agreement was terminated even before the expiry of the period of the agreement. Under the principal agreement (clause 14), though the assessee was free to purchase raw materials and intermediaries from any source, but the purchase of products manufactured by Geigy or from those who produce and manufacture raw material and intermediaries under the Geigy patent, there was a prohibition to purchase such raw materials from any source manufacturing the intermediary products in violation of the Geigy patent. From the agreement under which the assessee was licensed to manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial for production of Tinopal, that is to say, the purpose was in the area of existing business of the assessee for carrying on the existing business with more profitability and was not for the purpose of entering into a new adventure for operating in a new area of business. If that be so, the expenses incurred for acquiring the technical know-how to manufacture the raw material necessary for the principal product of the assessee to cut down the cost of producing raw materials from the market was the operational cost of the existing business incurred for the purpose of cutting down the day-to-day cost of the business and not for the purpose of installing a new business, the expenses had to be held to be revenue in nature and not capital ; though we observe that the Tribunal was not correct in observing that there would be no useful knowledge left which would help the assessee in manufacturing cyanuric chloride after the agreement is concluded. As a result of operation of clause 22 which required the assessee to return to Geigy Ltd., all documents put at the assessee's disposal and relating to manufacturing of engineering plants, designs, etc., in respect of the patents and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two methods known for manufacturing cyanuric chloride and the assessee could not at all have been able to commence production, but for acquisition of technical know-how from the said two concerns. Therefore, mere right of user of the technical knowledge of others has to be distinguished from the acquisition of right as proprietor of the knowledge in the sense that no one else could use that knowledge except with the permission or at the wish of the owner. A patent holder is the proprietor or the owner of the knowledge so long as that right remains with the proprietor and his permission is required by the users thereof, when such owner permits to use that knowledge under that name with condition of confidentiality/secrecy, what is transferred is not the capital asset, but only the right to use. So far as knowledge of such process is concerned that always remains with the acquirer and can never be recalled back. But it cannot be said that by such acquisition of knowledge the assessee has acquired any capital asset. So far as the question as to whether it amounts to acquisition of advantage/benefit of enduring na ture is concerned as we have already discussed, it depends upon the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X
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