TMI Blog1982 (4) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year 1972-73 is substantially the same, though slightly differently worded and is set out: Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that royalty amounting to Rs. 39,666 paid by the assessee to the foreign collaborators for the assessment year 1972-73 was of revenue nature ? The assessee, M/s. Shama Engine Valves Ltd., is engaged in the manufacture of valves. A company known as B. K. Khanna Co. Pvt. Ltd. (in short " Khanna ") entered into an agreement dated 25th October, 1961, with a foreign company, Bayerisches Leichtmetal Work KommanditgeselIschaft of Munchen (to be referred to as " BLW ") to manufacture valves in India. BLW was already engaged in the design, manufacture and sale of valves in Germany and export thereof. Article I of the agreement provided that the period of the agreement was for ten; years; thereafter it was automatically renewable, with prior approval of the Govt. of India, unless terminated by six months' registered notice, from year to year. Article 2 is set out: "Licence BLW hereby grants to Khanna the following rights and agrees to furnish Khanna with all information, data, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written consent ". In accordance with art. 5, Khanna had the right to proclaim its valves in India as manufactured under BLW-licence styled as " BLW-SHAMA and sell them under this description in the territories covered by the agreement. In terms of art. 6(a), Khanna had to pay BLW immediately on receipt of the planning design and data required for establishment of a valve factory and production, a non-recurring fixed sum of 30,000 German marks. This payment was to be made irrespective of whether the valve production started and no deductions could be made from it. Under art. 6(b) Khanna was also to pay to BLW a royalty of one per cent on the " net selling valve " of all valves produced and sold by Khanna under licence of this agreement. A detailed statement of the amounts was to be given to BLW every three months and payment was to be made within sixty days of the end of the same periods without any deduction. It is the nature of these royalty payments that is the point at issue. Article 7, which deals with patents, provides for the situation at the end of the agreement. It says : " After conclusion of this agreement BLW shall place at Khanna's disposal BLW's patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the territories stipulated in this agreement. BLW agrees to this assignment already at the time of contract of agreement. " In consequence of this assignment the assessee had to make payments to BLW. The first payment pertained to 30,000 German marks, which it is common ground is a capital expenditure. However, the payment pertaining to royalty for the various years was claimed by the assessee as deductible revenue expenditure. In making this assertion, it relied on the decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692. The amounts paid for the various assessment years, the corresponding previous years ending on 30th September, are as follows: Rs. 1965-66 24,747 1966-67 39,068 1967-68 30,945 1968-69 25,621 1969-70 28,922 1972-73 39,666 The ITO found that the facts did not justify the applicability of the ratio of the decision of Ciba's case [1968] 69 ITR 692 (SC) and held that the expenditure incurred was of a capital nature, as the assessee got an enduring benefit. Ciba's case was distinguished mainly on the ground that, there, merely a right to draw upon the practical knowledge of the Swiss company for a limited period wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relating to capital expenditure. Distinguishing the case of Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Mys), it held that the know-how did not become the property of the assessee even at the end of the period of agreement. By our judgment in Shriram Refrigeration Industries Ltd. v. CIT 1981] 127 ITR 746, applying the principles enunciated in Ciba [1968] 69 ITR 692, by the Supreme Court, we have held that the collaboration agreement with Westinghouse providing for technical know-how did not amount to a permanent parting of the technical knowledge in favour of Shriram. We have taken a similar view in Triveni Engineering Works Ltd. v. CIT [1982] 136 ITR 340 (Delhi). We, therefore, do not propose to deal with the case law in any detail. What has to be seen in each case is the substance of the matter and not the words used, the surrounding circumstances and the nature, of the expenditure. What is it that the assessee has acquired ? An exclusive licence for a limited period or an advantage of enduring benefit ? It would seem to us the former. In coming to this conclusion we have examined the totality of the terms of the agreement. These are (i) the period of the agreement is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement to the assessee, it is debarred from disclosing them to any third party; (ix) the object of obtaining the technical know-how was clearly for running the business; (x) though there is no provision in the agreement for a return of the documents which form part of the know-how including the drawings, production schedules, calculation schemes, etc., this is not pertinent as in the present state of fast technological developments these become obsolete and mere scraps of paper unless updated; and (xi) this updating or providing of information would naturally stop at the end of the period of the agreement. It would, therefore, appear to us that what the assessee has obtained is a licence to manufacture valves, a right to sell the same and assistance in carrying this out. The recurring payment of royalty is for the use of the know-how/assistance and not for its acquisition. The payment of royalty is a recurring charge on the " net selling value " and no advantage of enduring benefit has been obtained. The restriction pertaining to confidentiality of information would further indicate that no secret process or technical know-how has been sold to Khanna (assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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