TMI Blog1982 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... arate consideration. The assessee had to pay the American collaborator in this regard a lump sum consideration of 100,000 dollars. For supply of plant and machinery of foreign make for the factory to be set up in India, there was another distinct provision. The Indian company was to allot to Mansfield fully paid equity shares of the value of 500,000 dollars instead of cash payment. There is no dispute that these two payments, namely, 100,000 dollars paid for import of the factory equipment, and 500,000 dollars worth of equity shares allotted to Mansfield in consideration for supply of blue print and factory installation, were in the nature of capital expenditure in the hands of the assessee-company. The assessee accordingly did not claim any deduction for this capital outlay either in drawing up its profit and loss accounts or in formulating its income-tax returns. The other part of the consideration payable by the assessee to Mansfield related to payment for consultancy services supplied by Mansfield from time to time for running the factory and for maintaining production. The collaboration agreement laid down that this part of the consideration was to be paid for by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such, for instance, as to whether a given know-how payment is capital or revenue. We are assisted in this task by the fact that collaboration agreements are invariably reduced to writing, often set down in rigid legal prose, leaving very little to be inferred from outside. Whenever, therefore, a question is raised about the nature of the commitment of one or the other of the parties to a collaboration agreement, we have only to go into the relevant clauses to be able to arrive at a satisfactory solution. A different approach is not indicated merely because the questions which call for our answers relate to taxation. They too depend, first and foremost, on the terms of the documents. Once their meaning is grasped, the rest is merely the application of the usual tests we employ to every other commercial contract. The tools of our understanding are the same ; the materials are the same ; customer alone is different, namely, the Revenue. In this case too the arguments from the bar were addressed, understandably enough on the terms of the collaboration agreement between Mansfield and the assessee-company. Two clauses in particular figure much in the discussion. Clause 1(g) of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinct and separate : One connected with the initial setting up of the factory and the other connected with the running of the factory. The object and end-result of the former expenditure is the emergence of the tyre factory, which represents the assessee's fixed capital equipment. The object and end-result of the fees paid by the assessee to Mansfield after the installation of the factory is to Tun it as an industrial unit, produce trading stock, and turn it into profit. There can be no doubt whatever that even as the former represents capital expenditure, the latter represents revenue outgoings. It is not suggested that payment by the assessee to its own workmen and staff, payment of purchase price of raw material, the incurring of overheads are not wholly and exclusively expenditure of a revenue character. It is not suggested that these outgoings, although they form part of the assessee's operational expenses, must yet be regarded as expenditure of mixed or composite character, capital as to a portion, and revenue as to the rest. We do not see how any different principle can be enunciated for considering the nature of the fees payable to the foreign collaborator when it const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its activity or in a non-capital field ; in every case, therefore, the inquiry must be directed as much to the character of the expenditure as to the nature of the advantage derived therefrom. The Supreme Court's enunciation of the test of enduring benefit is particularly apposite in the present case. It may be conceded that what Mansfield or its resident engineer in India were imparting to the assessee on operational matters might tend to outlast, and endure beyond, the contract period. This, however, is a common characteristic of all knowledge which a person acquires. There is a saying in Tamil that knowledge once acquired is everlasting, and it cannot be destroyed either by flood or by fire, nor can it be obliterated or even diminished by being imparted to others. Technical or commercial knowledge acquired by a trader or industrialist is of this kind, enduring, if not everlasting. Expenditure to acquire it cannot be disallowed merely because knowledge dies hard. It is only where the expenditure bears on the fixed capital or other capital structure of the assessee that it can be regarded as capital in nature. Where the expenditure, although enduring in character has its impact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue expenditure. In the other case, according to learned counsel, the absence of a like provision led the court to arriving at the opposite conclusion that the expenditure was capital in nature. We do not have to consider whether and to what extent the Supreme Court was swayed by the presence of the clause in question. Nor do we have to examine the validity of the assumption that a return of the specifications to the foreign collaborator at the end of a collaboration agreement would automatically obliterate the experience gained by the assessee in working these specifications for the duration, for, our task in this case is cut out for us. What we have is an agreement in writing between two commercial concerns which cries aloud for being construed on its own terms. Earlier decisions of courts, even though rendered on agreements in this genre, can only come in our way and clutter up our decision. They are neither precedents to be followed, nor aids to construction to be adopted. The Ciba case [1968] 69 ITR 692 (SC) and the Fenner Woodroffe case [1976] 102 ITR 665 (Mad), whether considered separately or in juxtaposition, do not lay down any rule of construction which regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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