TMI Blog1981 (7) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... ks, potentiometers and other products, which have a world-wide reputation for their quality and durability. The assessee-company was originally formed with the intention of manufacturing and of marketing in India the products of the foreign company and its associates and also of such additional products as may be mutually agreed upon between the foreign company and the assessee-company. The assessee was desirous of being given the right to ask the foreign company for guidance as to its development as well as technical knowledge which the foreign company had in procuring and marketing the products. The assessee-company also requested the foreign company to render technical advice and assistance for the furtherance of its objects which the foreign company agreed to do, render or procure upon the terms and conditions. An agreement was entered into on 6th September, 1963, between the assessee-company and the foreign company. In the agreement it was stated that the foreign company was formed with a nominal equity capital of Rs. 10,00,000 out of which 5,000 shares of Rs. 100 each had already been issued to and fully subscribed by Indian shareholders. The shareholders in the Indian compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be made available by the foreign company to enable the Indian company to manufacture the products in India. Clause 4(a) contemplated the foreign company affording training at its works in England to men selected by the Indian company from time to time. The employees under training were to be paid by the Indian company. The foreign company was also to send its staff to India to assist the Indian company on the construction and equipment of its works and on processes and manufactures. The amount payable to the said staff sent on deputation was to be determined by the foreign company, and paid for by the Indian company. In any case, where the foreign company considered that the Indian company could manufacture and sell economically in India any products additional to the products described in the first schedule to the agreement, the foreign company would give to the Indian company an opportunity to manufacture such additional products: See cl. 5(a). Subclause (b) of cl. 5 laid down the procedure to be adopted in making an offer to the Indian company for manufacturing additional items. The foreign company under cl. 6 agreed as consultant and technical adviser to disclose to the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l place of business books of account, which would be open for inspection by the foreign company in order to enable it to verify for itself the amount payable to it. The payments were to be made in sterling in the U.K. on the expiration of one month from the date on which the accounts were certified by the Indian company's auditors. Interest was payable in case of default of payment within the period of one month. Clause 10(a) provided that in consideration of the technical information imparted and the secrets disclosed by the foreign company to the Indian company and the exclusive rights-conferred on the Indian company to manufacture products by processes discovered and/or perfected by the foreign company, the Indian company agreed to use its best endeavours to preserve and increase the goodwill and business connection in respect of all such products in India. The Indian company agreed to confine its activities only to the manufacture and sale of the products contemplated by the agreement. Only with the written consent of the foreign company, any other product could be manufactured or dealt with by it. The Indian company was to keep the information passed on to it in strict confide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were two sets of appeals before the Tribunal. For the first three years, appeals were filed by the ITO and for the second two years they were filed by the assessee. The Tribunal which dealt with all the appeals together in its order dated 19th April, 1974, held that a portion of the royalty paid represented capital expenditure and that the AAC, who dealt with the last two years, had correctly and reasonably apportioned the capital element in the expenditure at 25%. The result was that the AAC's order for the assessment years 1971-72 and 1972-73 was affirmed and the order of his predecessor for the earlier years was modified. The assessee has brought the matter on reference contesting the disallowance of 25% as capital expenditure. In the submission of the assessee the entire expenditure was allowable as revenue expenditure as the assessee had actually paid for the machinery either in the shape of shares or otherwise. He (the assessee's counsel) pointed out that initially the Indian company agreed to pay a lump sum of pound 10,000 and that as the Govt. of India did not approve of this arrangement, the foreign company agreed to forgo this payment subject to the Indian company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions is that under the terms of an agreement, if the assessee acquired a benefit of enduring nature that will constitute `acquisition of an asset' and any amount paid for the same would constitute 'capital expenditure' and, on the other hand, if the assessee had acquired merely technical knowledge or knowledge for the manufacture of any particular item for a specified duration, then he had acquired only licence to use the other party's patent and knowledge and the amount would constitute 'revenue expenditure'." The rationale behind the above view is obvious. No two agreements of this kind contain identical terms. Thus, the matter has to be decided only on the terms of the agreement under consideration. In order to illustrate the way in which the matter has been considered in the decided cases, we may briefly refer to some of the recent decisions. In CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338 (Mad) the assessee was granted the exclusive right and licence to make use, exercise and vend various items of electrical equipment for vehicles and engines and services tools. The Appellate Tribunal held that the entire technical fees paid by the assessee was liable to be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though there may be an option for renewal for a specified period. The cases that fall in between the terminals would require examination on facts, as there is likelihood of the expenditure being capital in part and revenue in part. The determination of the exact percentage of the capital and the revenue element in the payment has to a large extent to be left to the fact-finding authority. It is thus necessary to analyse the terms of the agreement in the present case to find out how far the terms bear on the revenue or capital character of the expenditure. From the technical aid agreement it is clear that the foreign company bad undertaken to advise the Indian company on the construction and equipment of its works and also on processes and manufactures. The foreign company agreed also to enable the Indian company to produce additional products in any case where the foreign company considered that the Indian company could manufacture and sell economically such products. Thus, there were terms in the agreement which provided for technical assistance in the matter of the designing and construction of the factory and for fresh items of manufacture. The consideration provided in c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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