TMI Blog1982 (4) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... er to question No. 3 is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee-company was entitled to depreciation in respect of the whole or a part of the amount of Rs. 1,09,191 ? " The assessee is a public limited company manufacturing turbines and other machinery. The four assessment years with which we are concerned are 1965-66 to 1968-69, the corresponding previous years ending on 31st May, 1964, 31st May, 1965, 31st May, 1966, and 31st May, 1967. All the four above noted questions have been referred for the assessment year 1965-66; but only the first two have been referred for the subsequent assessment years. The disputes pertain to payments made in pursuance of two agreements entered into by the assessee with Peter Brotherhood Ltd. (to be referred to as " Brotherhoods ") and Bookers Sugar Machinery Group Ltd. (to be referred to as " Bookers The agreements with Brotherhoods and Bookers are dated 1st June, 1961, and 2nd June, 1961, respectively. Brotherhoods' agreement is in connection with the manufacture of turbines whereas Bookers' agreement is in connection with the manufacture of the sugar mill machinery. The relevant clauses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to revenue expenditure, the same could not be allowed under section 37 in any assessment year other than 1963-64, as there is no provision for the allowance of deferred revenue expenditure. The AAC also held that the technical know-how did not bring into existence any plant or machinery whose ownership could be said to have vested in the assessee. As such, he directed the ITO to withdraw the depreciation on the amount of Rs. 8 lakhs capitalised by the assessee and debited under the plant and machinery head. Being aggrieved, the assessee appealed to the Tribunal. The assessee argued that the payment of Rs. 4 lakhs was clearly an expenditure of a revenue nature; further it could not be disallowed only because it was prepaid the formula for distribution over eight years of production was fair and reasonable. In any case, without prejudice to the earlier contentions, the I.T. authorities should have allowed depreciation on this amount of Rs. 4 lakhs as they themselves had treated it as capital expenditure; and the papers containing the know-how were a plant. It was also urged that the AAC was not justified in treating the amount of Rs. 8 lakhs as unconnected with actual cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the know-how has also been set out in the agreement with Bookers. It is described in the preamble as 'processes and experience'." As such, it held that by reason of this payment, the assessee acquired (1) Technical know-how for the manufacture of steam turbines and engineering products which it did not have before; (admittedly, the assessee was not manufacturing these items before the agreement); (2) The right to consult the collaborators in respect of the adjustments and modifications according to the special requirements of its customers. The Tribunal also concluded that the company was promoted with the idea of manufacturing these products and the securing of the knowhow from the collaborators was, so to speak, the foundation on which the business of the assessee was started ; further, without the technical knowhow the plant and machinery would have been of no use and the technical know-how was as much a part of the company's permanent apparatus of Profit-making as the plant and machinery and the drawings and design organisation. The know-how was necessary for the starting of the manufacturing organisation and not merely for the running of the business; the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition, it is necessary to examine the relevant provisions of the agreements between the assessee and the foreign collaborators as also the law on the subject. The relevant and pertinent provisions of the agreement with Brotherhoods are extracted as it is the common case that the terms of Bookers' agreement are similar. WHEREAS: (a) Brotherhood are designers and manufacturers of steam turbines and have acquired information concerning techniques and methods of manufacture thereof. (b) Triveni desires to manufacture in whole or in part and to sell in India steam turbines in accordance with the designs and know-how of Brotherhoods and Brotherhoods have agreed to supply drawings and assist them in every reasonable way in regard thereto subject to the terms and conditions hereinafter contained. NOW THIS AGREEMENT WITNESSETH AS FOLLOWS: . ...... 2. (a) BROTHERHOODS agree to sell outright to Triveni in Peterborough subject, to the provisions of this Agreement technical know-how in respect of the steam turbines for use in the Republic of India and Triveni agrees in consideration thereof to pay Brotherhoods the sum of forty thousand pounds (sterling) payable in cash in Peterboro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the steam turbines subject to such training programmes not hindering Brotherhoods' normal operations; (iv) At its discretion (but without being bound so to do) send an employee or employees of Brotherhoods to Triveni in the Republic of India for the purposes of assisting Triveni in the manufacture of the steam turbines ; (v) Provide Triveni with assistance in the United Kingdom for the recruitment of employees. 4. TRIVENI agrees to inform Brotherhoods of any improvements developed by Triveni to the steam turbines of their method of manufacture and Brotherhoods shall be at liberty to use such information without payment provided that: (i) Where any such improvements cause or would require development expenditure by Triveni of Five hundred pounds or more (hereinafter called 'Special Improvements') then Triveni must declare all details of such, special improvements being effected and Brotherhoods must within six months of such declaration intimate whether they wish to acquire such special improvements whereupon Triveni will take all necessary steps to sell such improvements to Brotherhoods on mutually acceptable terms; (ii) Brotherhoods shall have the right in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the agreement cleary show that the secret processes were not sold by the Swiss company to the assessee: (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business ; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d), the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once for all : the Swiss company which was continuously carrying on research had agreed to make it available to the assessee ; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement. " Various High Courts have dealt with this matter and in our recent decision in Shriram Refrigeration Industries Ltd.'s case [1981] 127 ITR 746 (Delhi) we have referred to the majority of them. We, therefore, do not consider it necessary to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right in the same remained vested in Brotherhoods, the assessee having only a licence to use the same during the Agreement. (Clauses 3(b)(ii) and 9). 4. The assessee had to observe complete confidentiality with regard to the know-how and could not disclose any information without written consent. (Clause 12 and proviso to clause 16). 5. The assessee could not assign the agreement without written consent. (Clause 18). 6. The assessee had to inform Brotherhoods of any improvements developed by it, Brotherhoods being at liberty to use the same if the development expenditure incurred thereon was below pound 500 (Clause 4(i)). Further, if the development expenditure exceeds pound 500 and the improvements had not been declared by the assessee to Brotherhoods within three months they could acquire the same without payment (Clause 4(ii)). If such special improvements were patentable and Brotherhoods wished to acquire them, then it had to pay only the customary fee (Clause 4(iii) ). 7. The payment for the use of the know-how to design and manufacture steam turbines was made in a lump sum. This was a new business for the assessee. However, the information, etc., to be imparted in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, we are convinced that there is no absolute parting of the secret processes and technical knowledge by the collaborators to the assessee. As such no asset or enduring advantage has been acquired by the assessee or parted with by the collaborators. The use of the words " sell outright " cannot enslave the decision which is clear once the substance of the agreement is looked at, that the assessee has only got a licence for a limited use of the knowledge and information possessed by Brotherhoods. Before parting with this aspect of the matter, we would like to mention that it was contended for the assessee relying on the observations in certain decisions, that even if the agreement is construed as providing for and involving the acquisition of Brotherhoods' technical know-how, the expenditure thereon cannot be treated as a tangible capital asset. In CIT v. Tata Engineering Locomotive Co. Ltd. [1980] 123 ITR 538, at pp. 549 and 550, the Bombay High Court held that technical information with regard to the techniques of production is not a Protected right under a registered patent and as such there cannot be an outright sale of it; nor is it a tangible asset and, in these days of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduring benefit to the assessee. The AAC affirmed this view and so did the Tribunal. Before the Tribunal it was contended in the alternative, on behalf of the assessee, that if the sum was treated as a capital expenditure then depreciation thereon should be allowed. The Tribunal; held that the main part of this expenditure (i.e., Rs. 72,000) was in connection with the ancillary drawings and designs' organisation and the balance related to the initial know-how. This apportionment was done as the drawings and designs were related partly to the setting up of the ancillary organisation and partly to the initial know-how for the manufacture of turbines. The Tribunal, therefore, concluded that the expenditure allocated to the initial know-how would not be entitled to depreciation whereas depreciation and other related benefits in regard to the amount of Rs. 72,000 could be claimed. Both the assessee and the Revenue moved for reference on this aspect. The Tribunal, however, reframed the questions and referred two questions Nos. 3 and 4 as it felt that the controversy between the parties was precisely pinpointed therein. Learned counsel for the Revenue contended that by the conversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for utilising a capital asset is capital expenditure. The enquiry will have to be as to the object and purport of the expenditure in question. It appears that the layout, drawings, etc., were transmitted in 1961. The introduction of the metric system in India occurred earlier some time at the end of the fifties. Bat it was effectively enforced only some time thereafter. As such the conversion of the measurement system became necessary and the expenditure for the purpose was incurred in 1963. The purport of this expenditure was neither to bring a new asset into existence nor an advantage of an enduring nature. Further, it added nothing to the capital asset. Its purport was to facilitate the use of the layout plan; it did not alter the asset in any manner. The decision of the Supreme Court in CIT v. Finlay Mills Ltd. [1951] 20 ITR 475 throws some light on this aspect but as noticed therein the question is always one of fact depending on the circumstances of each case individually. In the present case, on the facts, we are of the opinion that it is a revenue expenditure. For the reasons outlined above, questions Nos. 1 and 3 are answered in the negative and in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
