TMI Blog1983 (6) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... with EID Parry Ltd. on April 16, 1964. The important features of this agreement, among others, are as follows : "(5) EID has agreed to impart and disclose to Coromandel its said know-how for the consideration and on the terms and conditions hereinafter set forth : 1. EID shall impart and disclose to Coromandel the said knowhow for exploitation by Coromandel in India : all documents, materials and information relating to the said know-how shall be handed, given or imparted by EID to the representatives of Coromandel designated for the purpose. 2. For the purpose of enabling Coromandel to make the fullest use of the know-how to be imparted and disclosed pursuant to clause 1 hereof, EID covenants not to impart or disclose the said know-how to third parties, that is parties not within the EID group of companies, which shall or may produce or sell fertilisers in competition with Coromandel in the State of Andhra Pradesh or other areas adjacent thereto and in which the complex fertilisers produced by Coromandel are then being sold. EID further undertakes that it will on or before Coromandel commencing production enter into a further agreement with Coromandel the terms of which shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He further held that the profit gaining apparatus had not been set in motion and the company was only in the initial stages of erection; only to understand the proper implications of the market and the types of products to be manufactured, that the above know-how was acquired and hence it must be treated as acquiring an asset of enduring advantage, and hence the payment of this sum can only be treated as capital expenditure. On appeal, the Appellate Tribunal by its order, dated August 2, 1976, observed : " We are inclined to uphold the view of the Appellate Assistant Commissioner that the expenditure incurred by virtue of the agreement, dated April 16, 1964, should be considered only as capital...... What the assessee acquired from EID Parry by virtue of the agreement is the entire knowhow which the EID acquired by virtue of its long and extensive research during the last sixty years. The expenditure incurred on account of purchase of such know-how can only be classified as capital in nature...... the restrictive clause in the agreement prohibits the EID to enter the market in Andhra Pradesh. The expenditure relating to such restriction will also have to be considered only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure have been further elaborated by the Supreme Court in Empire , Jute Co. Ltd. v. CIT [1980] 124 ITR. 1. There, the assessee-company, Empire jute Company, incurred expenditure for the purchase of loom hours. That expenditure was treated as revenue expenditure and in upholding the same, the court observed that every case has to be decided on its own facts. As a fact it found that by purchasing loom hours no new asset was created. It only enabled the assessee to carry on business more beneficially. Before we decide whether the expenditure was revenue expenditure or capital expenditure, what, however, has to be ascertained is whether by expending that amount a capital asset was created. The Supreme Court further laid down that what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. While approving the test to determine whether the expenditure was capital expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive non-assignable licence to manufacture laminates in accordance with the processes covered by the patents, the consideration paid being 5% royalty on the net selling price of all laminated products made and sold by it in accordance with those patented processes until the said payment reached pounds 5,000 and the further agreement under which the English company had agreed to furnish exclusively to the assessee technical information relating to manufacture and testing of the products for which a consideration of 2% of net sales on certain class of products as consultancy fee and 5% of the net sales of other products every year during which the agreement remained in force was agreed to be paid. This court upheld the apportionment of the consultancy fee between capital and revenue in the ratio of 1 : 2 and allowed deduction of 2/3rds of the consultancy fee as revenue expenditure made by the Appellate Tribunal. Purporting to follow the Supreme Court decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, that Division Bench laid down certain principles. A Full Bench of this court in Praga Tools Ltd. v. CIT [1980] 123 ITR 773, was of the view that the Hylam's case [1973] 87 ITR 310 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The court declared that it is the totality or cumulative effect of all the material facts evidenced by the documents and the surrounding circumstances that are to be taken into consideration to arrive at a decision as to what is the nature of the expenditure and viewed in the larger context of business, each factor or circumstance by itself may not be decisive. In view of the several factors mentioned in the agreement referred to above, the expenditure incurred by the assessee for the purpose of payment of royalty, etc., to the collaborators was " revenue " in nature and hence deductible. The Hylam's case [1973] 87 ITR 310 (AP) was specifically overruled by the Full Bench. On a perusal of the Supreme Court decisions and the Full Bench decision of this court referred to above, which are binding on us, it is clear that no single circumstance would be decisive of the question now before us. The cumulative effect of all the terms and stipulations of the agreement and the nature of the benefit accrued and the restrictions imposed on the respective parties, the period during which the agreement is operative and the rights that flow to the assessee therefrom have to be taken into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de whether the expenditure incurred constituted revenue or capital expenditure. The court held that the assessee had acquired a right to make use of the know-how made available by BTM at the instance of Standard and incurred the expenditure not for acquiring an asset of an enduring nature, but only to improve the prospects of its own business and to meet requirement of the transitional stage before taking to the manufacture of the electronic equipment and hence the expenditure was allowable under s. 37 of the I.T. Act. If we examine the terms of the present agreement under which the assessee has paid Rs. 6,35,400 and which it claimed to be revenue expenditure deductible under s. 10(2)(xv) of the I.T. Act, we find that (no asset of an endurable nature has been acquired by the assessee). EID Parry which has been engaged in the manufacture and distribution of fertilisers of various types in India for a period of sixty years and had during that period conducted extensive agronomical research and maintained well equipped facilities for further research and gained considerable knowledge and experience, did not transfer these research equipment or project. It only agreed to impart and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase of sales know-how by the assessee-company and purchase of the knowledge of market conditions and soil compositions. This knowledge could have been acquired by engaging its own personnel, but that would have taken considerable time and involved heavy expenditure. Instead that knowledge was sought to be acquired quickly by paying a lump-sum amount to EID Parry. Acquisition of sales know-how, market conditions and soil compositions are not, in our view, of a lasting and enduring nature. Especially market conditions change rather swiftly and sales know-how becomes obsolete much too quickly. Acquisition of such know-how is not acquisition of any tangible asset or an asset of an enduring nature. The period for which the agreement would be operative cannot be a decisive factor in such matters. In our view, the acquisition of the know-how and the expenditure incurred was the integral part of the profit making process and has not created an asset of an enduring benefit ; it, therefore, constitutes revenue expenditure. Mr. Ch. Srirama Rao, learned counsel for the Revenue, however, contended that the amount was also paid to eliminate a competitor and any amount paid for securing such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding this decision we must bear in mind that the agreement is with respect to exhibition of a film in a particular area. A film can be exhibited and exploited for making money over a short period and if for the whole of that period others are excluded from a particular area, it may amount to securing an enduring benefit. The conclusion of the court may perhaps be justified on such reasoning. The correctness of that decision, however, is open to doubt having regard to what the Supreme Court has said in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR I and CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). In any case, we are not persuaded to accept that the facts of this case allow the application of what is stated in Blaze Central (P.) Ltd. v. CIT [1979] 120 ITR 33 (Mad). Another case, CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC), on which reliance is placed by the learned counsel for the Revenue was a case where payment was made to the assessee for the termination of the exclusive agency and for restricting its right to sell similar products covered by the agency terminated. We do not see how the principle laid down in that case has any application to the facts of this case. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in technical know-how. Even so, Mr. Srirama Rao argues that for holding that the benefit was of an enduring nature it was not necessary that there should be complete transfer of ownership of the asset. It is enough if it is of an enduring nature to hold that it is a capital asset and capital expenditure. That is true; none the less such an expenditure must result in a capital asset or benefit of an enduring nature and not be an expenditure in a profit making process. Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), was a case where expenditure was incurred only to put another company out of production for 12 months. The Privy Council observed that (headnote) " it had no true analogy with expenditure for the purpose of acquiring a business or the benefit of a long-term or enduring contract. It bore a fair comparison with a monetary levy on the production of a given year. What the assessee-company did was to charge its 1958-59 production with the payment of this money in order to settle its share of the group's production programme in the way that suited it best. It was a cost incidental to the production and sale of the output of their mine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reation of an asset of enduring benefit ? " Technical know-how with regard to agronomical research, soil conditions, manufacture and distribution of complex fertilisers suitable for various types of soil in a particular area for a certain period to the exclusion of others without any transfer of The right in the technical know-how and leaving the transferor free to sell that technical know-how outside the area and restrict the transferee from disclosing it to third parties does not result in acquisition of any asset of enduring benefit so as to make the expenditure incurred for acquiring the same capital expenditure. Acquisition of sales and marketing know-how or acquiring the exclusive right to market the goods and eliminating a competitor from the market whether constitutes acquiring an asset of enduring benefit, depends upon the nature of the business which the assessee carries on. With the fast pace of development of scientific and technical knowledge and the quick spread of advanced technology all over the world, the technical know-how of the sort acquired by the assessee from EID Parry under the agreement is, in our view, liable to become obsolete within a short span of time. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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