TMI Blog1980 (12) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... boach, the Netherlands (hereinafter referred to as " the said Grasso "). The recitals to the said agreement show that the assessee, which was engaged in the manufacture of air compressors, desired to extend its business to the manufacture and sale of certain types of industrial refrigerating compressors. As the said Grasso had for over 50 years been engaged in the manufacture of refrigerating compressors, the assessee had requested the said Grasso to provide and make available to the assessee the scientific and technical knowledge and information, know-how, engineering data, calculations, drawings, designs, material specification, experience and continuous development with the benefit of all patents held by the said Grasso in connection with products described in cl. 1 of the said agreement. The object of the said agreement which has been described in cl. 1 thereof was to enable the assessee to obtain scientific and technical knowledge and so on set out earlier, all of which items have been collectively referred to as " know-how " in the said clause. This clause makes it clear that the agreement covered the existing know-how relating to the products mentioned in cl. 1, as well as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the products and the design and manufacture thereof as strictly confidential and to use them for the purposes for which they were given and not to disclose the same to any person except its own employees or contractors or sub-contractors without the previous written consent of the said Grasso. By cl. 13, the said Grasso undertook to train certain authorised personnel from the assessee and to make available to the assessee competent technical personnel from the works of the said Grasso for the training of the employees of the assessee if necessary. Clause 15 provides that the assessee would use the words or inscription " LICENSE-GRASSO " on all the products destined for India. The relevant portion of cl. 17, which is directly material for the purposes of this reference, runs as follows: "(a) The assessee-company will pay to the said Grasso against receipt of drawings covering the products a sum of Hfl. 59,000 (fifty-nine thousand Dutch Guilders), a further sum of Hfl. 28,000 (twenty-eight thousand Dutch Guilders) twelve months after the initial payment of Hfl. 59,000 referred to above has been made and a further sum of Hfl. 28,000 (twenty-eight thousand Dutch Guilders) twenty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AAC, however, declined to grant any deduction in respect of the balance amount of Rs. 77,756 on the ground that the said amount was in the nature of payment to the said Grasso in respect of drawings and was in the nature of a capital payment. The assessee then appealed to the Income-tax Appellate Tribunal (referred to hereinafter as " the Tribunal "). The Tribunal held that the said sum of Rs 77,756 represented a part of the initial payment to be made under cl. 17(a) of the said agreement. The Tribunal followed the decision of Division Bench of the Karnataka (then Mysore) High Court in the case of Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Mys) and held that the said amount did not represent a payment of a revenue nature. On this basis, it disallowed the deduction claimed by the assessee. It is from this decision of the Tribunal that the aforesaid question has been referred to us. The submission of Mr. Inamdar, the learned counsel for the assessee, is that under the said agreement there was no sale of drawings as such and that the entire agreement was a composite agreement regarding the supply of know-how by the said Grasso to the assessee. It was submitted by him that it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of bringing into production new types of machines solely on the basis of "know-how" supplied by Alfred Herbert and the said "know-how" was to become the property of the assessee at the end of the period of the agreement the sum of Rs. 26,713 was properly disallowed as a capital expenditure. It is interesting to bear in mind that under cl. 21 of the agreement between the assessee and Alfred Herbert, which has been annexed as annex. E to the statement of the case herein, it is, inter alia, provided that, even on the expiry of the said agreement between the assessee and Alfred Herbert by efflux of time, the assessee would be entitled to manufacture and sell the products comprised in the agreement between the assessee and Alfred Herbert. The aforesaid decision of the Division Bench of the Karnataka (Mysore) High Court has been expressly overruled by the decision of a Full Bench of the same High Court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443. It is pointed out by the Full Bench of the Karnataka (Mysore) High Court that under the agreement in question no secret process or technical knowledge was sold by the foreign company to the assessee ; the period of user w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , pamphlets or drafts, which might be useful to introduce licensed preparations and to promote their sale in India. It granted to the assessee full sole right and licence under the patents listed in the agreement to make, use, exercise and vend the inventions specified therein in India and also licence to use certain specified trade marks in the territory subject to any existing licence which third parties held at the date of agreement, or which the Swiss company might grant to third, parties thereafter. In consideration of the right to receive scientific and technical assistance, the assessee agreed to make contributions of 5%, 3% and 2% respectively, of the net sale price of the products sold by the assessee towards, (i) technical consultancy and technical service rendered and research work done; cost of raw material used, for experimental work; and (iii) royalties on trade marks used by the assessee. The assessee further agreed, (a) not to divulge to third parties without the consent of the Swiss company any confidential information received under the agreement, (b) without the written consent of the Swiss company not to assign the benefit of the agreement or grant sub-licences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision before a Division Bench of this court. The assessee, Tata Engineering Locomotive Co. Pvt. Ltd. (referred to hereinafter as " TELCO"), had entered into two agreements, one with Daimler Benz and the another with Henricot. Under the first agreement, Daimler Benz were to provide drawings and designs and full technical information required for the manufacture of automotive products. They were to provide training facilities for Indian personnel in their German plants. Telco could use the name and trade mark of Daimler Benz. The period of the agreement was fifteen years but either one of the parties could terminate the agreement by six months' notice in case of a serious breach of its terms and conditions. After the agreement came to an end, Telco was entitled to continue its manufacture but they could not use the trade name of Tata-Mercedez-Benz. It was held in that case that the agreement was one of foreign collaboration, where foreign know-how was availed of in lieu of payment and was in substance a transaction of acquiring the necessary technical information with regard to technique of production. Instead of employing persons having knowledge, of those techniques and utilisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was not possible to say that the property in the, said drawings and instructions for which the consideration was paid, had passed to the assessee-company. We may make it clear, however, that in the present case, it has not been contended by Mr. Kotwal at all that the drawings, etc., for which the amount in question has been paid by the assessee, constituted a capital asset and hence it is not necessary for us to go into that question in this reference. It appears to us that in order to determine the question referred to us, we must consider the agreement dated 2nd January, 1962, as a whole rather than to put too much emphasis on the various clauses in isolation. In our view, the object of the agreement which is set out in cl. (1) thereof was mainly to acquire the technical know-how for the manufacture and sale of the products referred to in the said clause. The said clause also show that the agreement was not confined to the said Grasso supplying such knowhow but it was also intended that the said Grasso would keep the assessee informed about the research and development work carried on in the works of the said Grasso on the know-how of the compressors. Clause 2 shows that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there were essential differences between the agreement in this case and the agreement before the Supreme Court in Ciba's case [1968] 69 ITR 692, which would take this case out of the ratio of the decision in Ciba's case.. It was submitted by him that in Ciba's case, there was no sale of materials containing know-how, whereas in the present case there was in effect sale of the know-how contained in the form of the drawings., In our view, this contention is totally unsustainable. As we have pointed out, it is clear that there is no separate agreement for the sale of the drawings as such and all that the agreement provides is that the drawings should be supplied by the said Grasso to the, assessee as a part of the supply of the technical know-how which was not entirely comprised in the said drawings. It was next urged by Mr. Kotwal that, in the present case, there was a right given under the agreement to the assessee to export the products manufactured with the help of the know-how supplied by the said Grasso to certain foreign countries. We may point out that this circumstance has no relevance. In fact, if there had been no mention in the agreement regarding export at all, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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