TMI Blog1985 (5) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... n a further appeal to the Tribunal, it was held that no sale of an asset was involved. Some technical information and knowledge available to the Swiss firm was permitted to be utilised by the assessee. Thus, the amount was treated as a revenue expenditure and allowed as deduction. It is contended by the learned counsel for the Department that the payment was for the know-how and was in a lump sum form. Therefore, it was a capital expenditure. Reference was made to a decision of the Allahabad High Court in Ram Kumar Pharmaceutical Works v. CIT [1979) 119 ITR 33, where it was held that the know-how had been acquired without any limit of time. It was not limited to the period of payment of royalty. In the case of CIT v. Ciba of India Ltd.[1968] 69 ITR 692, the Supreme Court held that no exclusive use of the patents and trade marks of the Swiss company had been passed on to the assessee. It was held that the assessee was a licensee for a limited period with a right to use the patents and trade marks. It was also held that no asset was parted with by the Swiss company and hence no assets or any advantage of enduring nature was obtained by the assessee company. A most important part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset of enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payment of a capital nature." The court on further examination held: " The information remained that of Westinghouse and there was no sale involved." A similar point came before the Madras High Court in M.R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305. In that case, it was held that the payments under the agreement could be divided into two parts, one part being capital in nature and the other revenue. The right to manufacture some fresh items was considered as the acquisition of a right exploitable in future which was capital. As already pointed our earlier in this judgment, the exact term which is involved in the present case is the payment of the lump sum price. The term relating to this is clause (6) which reads as follows: " LAIER will make available to BHAI all necessary drawings and the documentation for the manufacture of vibrators, convertors, generators, furthermore for the correspondi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be sold to others and could also be used to produce an enduring result by utilisation in manufacture. The problem of the present case is whether or not the information supplied to the assessee is of an enduring nature enabling the manufacture of high frequency motor concrete vibrators covered by the agreement. Mr. Ahuja, for the respondent, has urged us to accept the fact that the present case does not lead to obtaining of any enduring benefit to the assessee. For this purpose, he has urged us to construe the agreement only as a licence agreement similar to the one in Ciba's case and the case of Shriram Refrigeration. He says that the payments to be made to the Swiss company were divided into two parts, one a lump sum amount and the other a payment of royalty. What did the assessee get under the agreement ? For this purpose, Mr. Ahuja states that the information regarding the method of manufacture was given as well as the sole manufacturing right in India. This is provided in term No. 2 of the licence agreement. At the same time, the assessee was debarred from giving the mechanical and other principles for manufacture of the high frequency vibrators to any other person. So, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question can arise as to whether the know-how has been acquired as a capital asset by the assessee. As pointed out earlier, this is a borderline case. The agreement, most definitely, divides the payment to be received under the agreement into two parts. One is a lump sum price to be paid when the drawings and information regarding the mode of manufacture of the vibrators is obtained by the assessee. The other payment is a royalty to be paid to the Swiss party on the (sale of the) manufactured articles. At the same time, the assessee got the sole right to manufacture the articles in India to the exclusion of other parties. Also, the information was not to be transmitted to any third party, nor was the method of manufacturing to be communicated to others. It, therefore, appears to be a case where the assessee has the information and know-how but he can only use it himself. He cannot give it to anybody else. Nevertheless, the advantage of the know-how is received by the assessee and can lead to a benefit of enduring nature to the assessee. How then does this case differ from the case of Shriram Refrigeration [1981] 127 ITR 746 (Delhi). There also the information was obtained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but must be considered as part of the expense for manufacturing the machines in India. The agreement could very well have been that the Swiss party has agreed to help in the manufacture of vibrators in India on payment of a particular amount. This expense cannot, therefore, be treated as a capital expense, though it appears very much like a capital expense. The distinction between the capital and revenue expense is sometimes difficult to ascertain although the two things are distinct and yet they end to overlap at particular points. If an entrepreneur has to manufacture anything, he must first get the necessary machinery and plant for making the article. He must also get the information as to how that machinery is to be utilised in the making of the goods that he wants to market. The expense on the manufacturing machinery and plant is most definitely capital expenditure. The question as to whether the information obtained for running that machinery is a capital expense or a revenue expense becomes a problematic question. For instance, the manufacturer may buy the know-how from another party or he may engage the services of an expert who knows how to do the manufacture. If he ge ..... X X X X Extracts X X X X X X X X Extracts X X X X
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