TMI Blog1995 (7) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... questions have been set out as two questions, they actually relate to the question whether the expenditures of Rs. 2,60,682, Rs. 2,83,655 and Rs. 4,23,291 in the abovesaid three assessment years, respectively, incurred by the assessee as royalty payments to Texmo Industries, Coimbatore, under the agreement dated January 1, 1977, between them, are revenue expenditures deductible under section 37(1) of the Act or capital expenditures not deductible thereunder. (The abovesaid agreement was literally between Texmo Industries and one, C. K. Industries, but the said C. K. Industries changed its name subsequently to Aquapump Industries, who is the assessee. So, the agreement is really only between Texmo Industries and the assessee). As per the abovesaid section 37(1), inter alia, only if the expenditure in question is not capital expenditure, but is revenue expenditure, it is allowable as deduction in computing the total income under the head " Profits and gains of business or profession ". In that context only, the Tribunal below held that the abovereferred to expenditures incurred by the assessee are revenue expenditures on the footing that no capital asset of enduring nature had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actory including determination of the sequence of tasks to be taken up, specification and selection of equipment and materials ; and (b) Transfer of specialised skills and knowledge, regarding all aspects of the production of the licensed products. . . . 7. C. K. I. shall every year before the end of September, pay to Texmo a royalty at the rate specified hereunder for the manufacture and sale of licensed products during the previous financial year. Royalty rates : Financial year 1977-78--10 per cent. of the net sale proceeds -do- 1978-79--5 per cent. -do- -do- 1979-80--5 per cent. -do- -do- 1980-81--5 per cent. -do- -do- 1981-82--5 per cent. -do- " Learned counsel for the Revenue, after adverting to the above features of the agreement, very much relied on the decisions in Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) ; CIT v. Maschmeijer Aromatics (India) P. Ltd. [1995] 214 ITR 22 (Mad) and Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad) to contend that the abovesaid expenditures are only capital expenditures. On the other hand, learned counsel for the respondent-assessee relies on Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.... It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular stage in this fast-changing area of medical science. The state-of-the-art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon holding an outlay such as this as capital . . . . It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the High Court held that the organisation set up under the distributorship under the abovesaid agreement was to endure only for seven years and upon the expiry of the said period, the assessee therein had no relationship with the said collaborator and that the period of agreement with the abovesaid distributor company was conterminous with the agreement with the collaborator and so, the Supreme Court held that the abovesaid sum of Rs. 50,000 was part of the consideration for the receipt of the benefits under the agreement with the collaborator and the said sum paid was only a revenue expenditure. In CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678, this court had to deal with a collaboration agreement between the assessee therein and an American company and the said agreement dealt with, (i) the planning and setting up of a tyre factory, and (ii) a continuous supply of information and technical consultancy services for a period of years for running the factory after its installation. There was no dispute with reference to the first one which was held to be capital expenditure. But, with reference to the second of the above, this court held that it was only a rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble thereafter for five years by mutual consent. During the subsistence of the agreement, the assessee therein had to pay royalty at five per cent. on the Indian selling price on the production of the machine. In that context, the Full Bench of the Andhra Pradesh High Court held that the expenditure incurred in paying the abovesaid royalties had a direct nexus to the carrying on of the business of the assessee and, therefore, it had to be treated as part of the profit-making process. So, the court held that it was a revenue expenditure. We may also point out that the said Full Bench has also held that merely because the collaboration agreement provided that the assessee shall be entitled to retain technical know-how, designs, drawings, etc., even after the expiry of the contract period under the agreement, it did not alter the nature of the transaction and that the fact that the assessee was not entitled to use the relevant trade mark for the products after the expiry of the agreement period, clinched the issue. Here also the assessee is not so entitled, after the expiry of the abovesaid agreement period, unless the agreement is mutually agreed to be renewed. Further, taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bovesaid (Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377) is also significant (at page 384) : "In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is wellnigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants ; but as masters they tend to be overexacting." In the light of the abovesaid observation, we have only to observe that Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad) turned on its own facts in holding that the relevant expenditure was capital expenditure. No doubt, one other decision relied on by the Revenue, viz., CIT v. Maschmeijer Aromatics (India) P. Ltd. [1995] 214 ITR 22 (Mad) makes the following observation : "It was also submitted that what the assessee has obtained from its foreign collaborator ..... X X X X Extracts X X X X X X X X Extracts X X X X
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