TMI Blog1993 (4) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... d agreement but also after the expiry or termination of the agreement. The disallowance made by the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals). On the assessee's appeal, the Tribunal held that the payment under the agreement with the said foreign company of the amount of Rs. 13,28,500 was revenue expenditure and deductible as such. The Tribunal set forth its reasons for the conclusion as under : "We have considered the matter. As per section 2 of article VI, the assessee-company is entitled to continue to use the information transferred and imparted by the collaborator even after the expiry of the agreement. But at the same time, under article VII of the said agreement, the assessee-company was prohibited from disclosing to others any information derived from technical or other data to be received from the collaborator under the said agreement. The argument of the income-tax department that the expenditure could be on capital account where the Indian company continues to get the benefit of technical know-how in the sense that it did not return it after the expiry of the agreement and that it continues to manufacture the same product thereafter, was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is a legally protected property interest in a secret process. Special knowledge or skill can indeed ripen into form of property in the fields of commerce and industry, as in copyright, trademarks and designs and patents, and where such property is parted with for money what is received can be, but will not necessarily be, receipt on capital account. But imparting 'know-how' for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil." The exclusivity is contained in section 1 of article IV, which reads as under : "Revere shall not transfer or permit to be transferred or imparted the information constituting the subject-matter of this agreement to any other person or company in India or knowingly to any person or company acquiring the same for use in India and shall not enter into any other agreement with any other party in India in connection with the agreement products." One of the objections of the lower authorities in refusing the assessee's claim is this exclusivity. But the High Courts have held otherwise. The Andhra Pradesh High Court in the case of Praga Tools Ltd. [1980] 123 ITR 773 [FB], held as under (at page 788) "The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 773 [FB]. The facts in the said case were that the assessee carrying on the business of manufacturing precision tools and machine tools entered into a licence agreement with a U. K. company which was to supply the accessories, designs, technical know-how with latest modifications and to provide assistance. U. K. company agreed to assist the assessee in its existing business of manufacture of weigh bridge machines and all the fixtures, jigs, gauges, raw materials and special parts. In consideration of grant of manufacturing know-how and for providing assistance, the assessee agreed to pay an initial amount. The agreement was for ten years and renewal for five years by mutual consent. During the subsistence of the agreement, the assessee had to pay royalty at five per cent. on the Indian selling price on the production of the machine, subject to Indian taxes. The rights of the assessee to use all the information, techniques and know-how, patents, copyrights and drawings received from the foreign company were not to be affected by the termination of the agreement. The only restriction was that the assessee in that case could not use the trademark of the foreign collaborator. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany fixed fee and also royalty on the sale of the machines at a stipulated rate. This court held that the assessee had obtained user of the know-how only during the continuance of the agreement. It had been found as a fact by the Tribunal that under the agreement, the assessee had not acquired or started a new line of business. The assessee was already a manufacturer of machines, and the agreement only enabled the assessee to utilise its existing business unit. For the purpose of manufacturing new items, there was no outright transfer of know-how to the assessee and the know-how supplied remained the property of the foreign company. The assessee had only the user of the know-how during the currency of the agreement. The fact that the assessee had to pay a lump sum in addition to royalty was not of consequence. The lump sum amount paid was directed to be allowed as a revenue deduction. We are of the view that the advantage of continued utilisation of the special knowledge and technical know-how along with the specific drawings, business and other information does not obliterate the fact that the payment in question was merely for the more technically competent manufacture of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factory an advantage that lasts for long, still the expenditure for such procurement has a direct bearing on the working, running of the existing fixed capital not creating any advantage in the capital field. There is one more aspect that has been emphasised by the different High Courts in similar situation. By acquiring technical know-how the advantage that comes into being is too short-lived by reason of the fast-moving technology. The new technology acquired becomes obsolete too soon for the advantage in such acquisition to be treated as enduring. This view has been taken in Coromandel Fertilizers Ltd. v. CIT [1984] 148 ITR 546 (AP). There the Andhra Pradesh High Court held that the know-how acquired cannot be said to be enduring for the reason that further development in technology within a short span of time renders the know-how obsolete. Therefore, having regard to the rapid pace of scientific and technical development in the global economic scene it is unrealistic to say that the technical know-how is an advantage of enduring nature. The corner-stone of all these decisions is CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). In that case, the assessee in order to obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awings and data to the collaborator. In CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal), royalty paid for similar collaboration was held to be a revenue deduction. In CIT v. Ciba of India Ltd. [1968] 69 ITR 692, the Supreme Court held that the contribution made by the Indian company to the foreign company was allowable as expenditure under section 10(2)(xv) because, (1) the agreement was for a definite term, liable to be terminated before the end of the term in certain eventualities, (2) the object was to enable the assessee to commence and continue the manufacture in India of all types of simplex products, (3) the licence was granted subject to the rights actually granted or which may be granted after the date of the agreement to other persons, (4) the assessee shall treat as secret and confidential, and not disclose or permit the disclosure of any matter provided or made available by simplex, (5) there was no transfer of the fruits of research but simplex should make available to the assessee the "know-how" and give advice and assistance in the manufacture of the products, and (6) the stipulated payment of royalty was recurrent and entirely depen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount. The Income-tax Officer held that since the information and knowledge received by the assessee were of an enduring nature, the expenses were capital expenditure and he, accordingly, disallowed the expenditure. In second appeal, the Appellate Tribunal, held that the expenditure was only of a revenue nature and that the assessee was entitled to deduction under section 37 of the Income-tax Act, 1961. There, it was held that the agreement between the assessee and the agent-company fixed a period of ten years during which the assessee was to have the licence. Under the agreement, all the information under the licence given were to be treated as confidential to the assessee and on the termination of the agreement, had to be returned to the English company. Therefore, the assessee had merely the use of this licence for a limited period of time and for certain limited purpose, that is to use it for the manufacture of its motors for the purpose of mainly selling it to the agent-company. It should be borne in mind that for this purpose no new machinery was acquired or installed. The new type of things manufactured were improvements over the existing machinery. Further, as found by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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