TMI Blog1989 (11) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... cometax Officer allowed a sum of Rs. 1,19,693 paid by the assessee-company to the Federal-Mogul-Bower-Bearings, a company incorporated in USA, as royalty. After the assessment was completed, the Commissioner of Incometax took the view that the amount was not allowable as deduction and passed an order under section 263 directing the Income-tax Officer to disallow the above expenditure. The assessee preferred an appeal to the Tribunal. The Tribunal was of the view that the assessee had acquired a licence for the use of know-how and the amount in dispute was paid in terms of the licensing agreement and was allowable as business expenditure. The Commissioner of Incometax has questioned the correctness of the decision of the Tribunal in this reference. The point of the payment of royalty for user of technical know-how has been gone into and decided in a number of cases. It was held by Romer LJ. in the case of Handley Page v. Butterworth [1935] 19 TC 328 (HL) that secret knowledge was as much a person's capital asset as was the patent monopoly, the capital asset of the patent. A person may allow his capital asset to be used by other persons. In the case of out and out sale of a capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax further was of the view that because the agreement had provided that the assessee shall not communicate the technical information to a third party without the consent of the foreign company and because this obligation will continue even after termination of the, agreement, the expenditure was of capital nature and could not be treated as revenue expenditure. The Tribunal, however, was of the opinion that the Commissioner of Income-tax had failed to grasp the true scope of the agreement The Tribunal, on a perusal of the agreement, came to the view that the expenditure did not result in acquisition of a capital asset and, hence, was allowable as business expenditure. The Tribunal has taken the following points into consideration for deciding the question before it : (i) Under the agreement (and a supplementary agreement dated April 5, 1964) two types of expenditure were involved. The first related to an expenditure incurred up to June, 1968, when the plant for production of tapered roller bearings was put up. The expenditure incurred prior to that date by way of payments for designs, patents, etc., amounting to Rs. 1,524 lakhs were treated as capital expenditure. From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the assessee also did not improve in any way because of these payments. After the installation of plant and machinery the expenses that were incurred were in the process of carrying on the business. On behalf of the Revenue, it has been contended that the assessee had started a new line of business. Therefore, the expenditure must be treated as on capital account. That the assessee had set up a new plant for the production of a new type of bearing cannot be denied. The cost of setting up of the new plant must be treated as on capital account. There is no dispute on this point. The Tribunal has held that the entire expenditure incurred up to the stage of setting up of plant and machinery will have to be capitalised. But the question in this case is how are the royalty payments to be treated after the manufacturing process started. The question of allowability of expenditure incurred for use of scientific data, patents and trade marks was gone into exhaustively by the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 In that case, an agreement which was to be in force for a period of five years from January 1, 1948, was entered into by Ciba of India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten years. This, in our view, does not make any difference to the principle. If house is taken for business purposes for five or ten years, the monthly rent paid will be deductible as revenue expenditure. The crucial test is whether the assessee had acquired any asset of enduring benefit. The right to use the technical knowledge of the foreign company was certainly an advantage. The assessee was able to venture into a new line of product with the technical know-how supplied by the foreign company. But the asset that was used by the assessee remained the property of the foreign company. The assessee merely had a right of user of that asset in the course of carrying on of the business of the assessee. The payment which was made by the assessee was for the user and not acquisition of the technical know-how. The assessee was a mere licensee. It has not been shown from the agreement that the assessee had become an exclusive owner of the technical know-how. On behalf of the Revenue, our attention was drawn to a judgment of the Supreme Court in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86. On the strength of this decision, it was argued that drawings, desi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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