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TMI Blog2008 (12) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... e company entered into with the Italian and West German companies, the payments made of Rs 30,57,499 to M/s Technimont and Rs 3,48,033 to M/s IWKA, West Germany was allowable as revenue expenditure and not as capital expenditure?" 2. The issues involved in the two references are inter-related as they pertain to the same Licence and Technical Assistance Agreement (in short 'the agreement') which would be evident shortly, from the facts detailed out hereinafter. The questions of law on which our opinion is sought, are ubiquitous and perennial in nature, in as much as, whether an expenditure undertaken by an assessee would be in the nature of capital or revenue expenditure, having regard to the provisions of Section 37 of the Act. There is, undoubtedly a plethora of judgments, both of the Supreme Court and of various High Courts on this aspect of the matter. The difficulty which is encountered often, is to slot the facts of a particular case to the law and the principles enunciated by Courts in the country. Fortunately, in this particular case, there has been no submission made by the learned counsel for the parties as to any perversity in the findings recorded by the authorities bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n engineering as referred to in Article 3; (c) 186,500,000 (one hundred eighty six million five hundred thousand Italian lira for the supply of technical assistance and continuous know-how in Italy, including training of JK's personnel in Italy, as referred to in Article 5. The amounts indicated under (a)/(b) and (c) are firm and not subject to escalation." 6. Out of a total consideration of 623 million liras, the assessee on its own treated a sum of 250 million liras expended towards supply of basic design engineering of the plant as capital expenditure, while the remaining 373 million liras which, at the relevant point of time was equivalent to Rs 30,57,499, spent on grant of process and know-how licence, and for supply of technical assistance and, continuous know-how including training of company's personnel, in Italy, as revenue expenditure. In short, two identical sums of money amounting to 186.5 million liras each, amounting in all to 373 million liras, towards grant of process and know-how licence, as well as, technical assistance and continuous know-how, in Italy, including training of company's personnel, in Italy was, claimed by the assessee, as revenue expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed depreciation and rebate on the sum of Rs 30,57,499/- incurred in connection with the grant of process, know-how and technical assistance with respect to the Agreement entered into with M/s Technimont. However, depreciation was allowed on Rs 3,48,033/-incurred in connection with the Agreement entered into with M/s IWKA. 10. The assessee being aggrieved, filed an appeal with the Commissioner of Income Tax (Appeals) [hereinafter referred to as the 'CIT(A)']. The CIT(A) based on the material placed on record, and upon perusal of the judgments cited before him, examined the nature of the expenditure in the background of the following question posed by him, which according to him arose for determination. According to the CIT(A), in our opinion rightly, the basic issue which arose for determination was whether the payments made by the assessee were for acquisition of an asset or, for a use of technical knowledge and information for running the business during the period of the Agreement and for a mere user of patents and trademark. If, what had been acquired under the Agreement by the assessee, was merely a licence for use of technical knowledge of the foreign collaborator, the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. 11. Aggrieved by the order of the CIT(A), the matter was carried in appeal to the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal). The Tribunal sustained the view taken by the CIT(A) with regard to payments made to M/s Technimont, as well as, M/s IWKA. In arriving at the said conclusion, the Tribunal based its decision on the findings and reasons recorded hereinbelow:- (i) M/s Technimont was not the owner of the technical know-how. The technical know-how belonged to another company, namely, M/s Montefibre. M/s Montefibre owned both the know-how, as well as, patent rights. M/s Technimont had only a right to licence the said know-how. In other words, M/s Technimont was only the licensee of the know-how of patent rights owned by Montefibre; (ii) the grant of licence by Montefibre to M/s Technimont was 'non-exclusive', and irrevocable, as well as, permanent which, in other words, gave M/s Technimont the right to sub-lease or sub-licence the right under its licence to any third party and, in order to, enable it to do so, M/s Montefibre had to grant to M/s Technimont a licence which was permanent and irrevocable. The assessee had acquired the technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her submissions by laying stress on the fact that what has been acquired by the assessee is know-how which is unlimited in span of time and, is 'permanent' and irrevocable in nature. She submits, in that sense, the impugned expenditure both, in respect of, M/s Technimont and M/s IWKA has resulted in a benefit of an enduring nature and hence, was required to be treated as capital expenditure and not as revenue expenditure as claimed by the assessee. 13.1 She also submitted that what the assessee was manufacturing was an entirely new product. In support of her submissions Ms Prem Lata Bansal, the learned counsel for the Revenue cited the following authorities:- (i) Assam Bengal Cement Co Ltd vs CIT: (1955) 27 ITR 34 (SC) (ii). Scientific Engineering House (P) Ltd vs CIT: (1986) 157 ITR 86 (SC) (iii). CIT vs Warner Hindustan Limited: (1986) 160 ITR 217 (AP) (iv). Jonas Woodhead and Sons (India) Ltd vs CIT: (1997) 224 ITR 342 (SC) (v). CIT vs Southern Structurals Ltd: (1977) 110 ITR 890 (Mad) (vi). Ram Kumar Pharmaceutical Works vs CIT: (1979) 119 ITR 33 (All) (vii). CIT vs. Toshniwal Electrodes Manufacturing Co Ltd: (1991) 192 ITR 209 (Bom) (viii). CIT vs Polyformalin (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax, West Bengal, (1955) 27 ITR 34: In this case, the assessee acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of lime stone quarries for a period of 20 years in consideration of payment of yearly rents and royalties. The assessee, in addition to rents and royalties, agreed to pay two further sums under the covenants contained in clauses 4 and 5 of the lease in issue as 'protection fee'. The 'protection fee' was paid in lieu of lessor giving an undertaking not to grant lease, permit or a prospecting licence with regard to lime stone to any other party without a condition that no limestone could be used for the manufacture of cement. In this context, the Supreme Court, after considering a bevy of authorities, affirmed the principles enunciated by the full Bench of the Lahore High Court in Benarsidas Jagannath in Re: (1947) 15 ITR 185. The Supreme Court encapsulated the essence of the judgement of the Full Bench of the Lahore High Court in its observations made at page 45 to 47. These being apposite are extracted hereinbelow:- ".......This synthesis attempted by the Full Bench of the Lahore High Court t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria, one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles?" The expression "once and for all'' used by Lord Dunedin has created some difficulty and it has been contended that where the payment is not in a lump sum but in instalments it cannot satisfy the test. Whether a payment be in a lump sum or by instalments, what has got ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation ((1938) 61 C.L.R. 337, 355) : "When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole'`...... e.g. ...... - ``enlargement of the goodwill of a company.'` - ``permanent improvement in the material or immaterial assets of the concern.'` To the same effect are the observations of Lord Greene, M. R. in Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. ((1942) 24 T. C. 453) above referred to. These are the principles which have to be applied in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure. Under clause 4 of the deed the lessors undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t laid down by Viscount Cave. The fact that 'protection fee' was not a lump sum payment but a recurring payment was immaterial because one had to look at the nature of the payment which, in turn, was determined by the nature of the asset which the assessee had acquired. The assets which the assessee had acquired in consideration of this recurring payment was in the nature of a capital asset i.e. a right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The Court thus concluded that the expenditure incurred by the assessee in acquiring this advantage was certainly an enduring advantage and hence, in the nature of capital expenditure. 17. Commissioner of Income-Tax, Bombay City I v. CIBA of India Ltd (1968) 69 ITR 692. In this case, the assessee was an Indian subsidiary of a Swiss Company. The assessee was engaged in the development, manufacture and sale of medical and pharmaceuticals preparations. The parent Swiss company entered into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential 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 and 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. We agree with the High Court that the first question was rightly answered in favour of the assessee.' 18. In Empire Jute Co Ltd v. Commissioner of Income Tax; (1980) 124 ITR 1, the facts briefly were that the assessee was engaged in the business of manufacture of jute. The assessee was the member of the Jute Mills Association which was formed with the object of, inter alia, protecting the trade of its members, by regulating the production of the mills, run by its members. In pursuance thereto, the members had entered into a working time agreement, whereby the number of working hours per week for which the mills were entitled to work their 'looms' was restricted. In this background, the assessee had purchased 'looms hours' from four other mills. The issue which arose for consideration of the court was whether the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in this, was, that there may be cases where the test of enduring benefit may breakdown even though expenditure incurred may result in advantage of enduring benefit, the money spent, may still be, on revenue account. The Supreme Court observed that the nature of advantage had to be viewed in a commercial sense and it was only when the advantage was in the capital field that the expenditure would be disallowable on application of the said test. It further went on to say that if the advantage consists merely in facilitating assessee's trading operation or enabling the management to carry on business more efficiently and profitably while leaving the fixed asset untouched the expenditure would be on revenue account even though the advantage may endure for an indefinite period. The Supreme Court observed that the test of enduring benefit is, therefore, not a conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. At page 13 of the said report, the Supreme Court enunciated an important principle by approving the dictum laid down by Dixon J., Hallstorm's Property Ltd v. Federal Commissioner of Taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration was whether monies spent by the assessee for acquiring, from the foreign collaborator, 'documentation service', whereby the assessee acquired technical know-how requisite for the purpose of manufacturing the instruments, in question, were payments on capital account and hence, brought into existence a depreciable asset. The Supreme Court observed that the answer to the question was dependent on a proper interpretation of the terms and conditions of the two agreements. After examining the terms of the agreement it disagreed with the view expressed by the Tribunal and the High Court by observing as follows:- ''..Having regard to the rival contentions that were urged before us, it is clear that two questions really arise for determination in the case. The first is whether the 'documentation service' (supply of 5 complete sets of documents) agreed to be and actually rendered by the foreign collaborator to the assessee under the two agreements was incidental to the other services contemplated therein or whether it was the principal service for which mainly the payment of Rs 1,60,000 was made by the assessee as a result whereof the assessee acquired all the technical kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contrary view of both the Tribunal and the High Court, whereby they held that the payments were made for incidental services. The other question which the Supreme Court was called upon to decide was whether the documentation provided to the assessee by the foreign collaborator would come within the definition of a 'plant' within the meaning of Section 43(3) of the Act. As is obvious, the fact situation of this case is different to the issue under consideration in the present appeal and hence, would not be applicable. 20. Commissioner of Income Tax v. I.A.E.C. (Pumps) Ltd; (1998) 232 ITR 316. The question which the court was called upon to consider was 'whether amount paid by the respondent-assessee to the foreign collaborator for the technical know-how is capital or revenue'. The Supreme Court sustaining the view of the Madras High Court and cited with approval the following observations contained in the judgment of the Madras High Court. "''Having regard to the said Clauses, we are clearly of the opinion that the Tribunal was right in its conclusion that the whole of the amount paid by the assessee constitutes revenue expenditure and has to be allowed as a deduction.&nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process for fermentation of penicillin, along with, a flow-sheet of the process for a pilot plant, design and specification of main equipment, for such a pilot plant. Furthermore, the Japanese company was also obliged to arrange for the training of the representatives of the assessee at the Japanese company's plant, in Japan at the assessee's expense as also advice, which the assessee would receive, in order to engage in large scale manufacture of penicillin for the period of two years from the effective date of agreement. Importantly, the assessee was required to keep technical know-how supplied to it confidential and secret, with a further prohibition, on the assessee in parting with the technical know-how in favour of others or to seek patent for the process. In these circumstances, the lump sum payment made by the assessee to the Japanese company was claimed by the assessee as a revenue expenditure. In the context of these facts, Mr Justice M.N. Venkatachaliah (as he then was) made the following observations:- '''In computing the income chargeable under the head 'Profits and gains of business or profession', section 37 of the Act, enables the deduction of any expenditure laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the assessee's existing plant had become obsolete or inappropriate in relation to the exploitation of the new sub-culture of the high yielding strains of penicillin supplied by Meiji and that the mere introduction of the new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. Shri Ramachandran is again right in the submission that the mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the assessee'' The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable as a deduction, the Supreme Court made following observations at page 347 of the judgment. ''..The question whether a particular payment made by an assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether the assessee obtained a completely new plan with a completely new process and completely new technology for manufacture of the product or the payments was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made, is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said case. But in the case in hand the Tribunal having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not-only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is a revenue expenditure merely because the payment is required to be made on a certain percentage of the rates of the gross turnover of the products of the income as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the revenue and against the assessee.......' 22.2 It is clear in this case, the Supreme Court in concluding that a part of the payment was made on capital account, took note of the fact that the Tribunal had returned a finding, that the foreign firm under the agreement was obliged to assist the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no transfer of fruits of research once for all; and (7) the foreign company which was continuously carrying on research had agreed to make it available to the assessee. These are the very factors which were taken into consideration by the Supreme Court in coming to the conclusion that the expenditure was of revenue nature and allowable under Section 10 (1) (xv) of the Indian Income-tax Act 1922, which is pari materia with Sec. 37 of the Income-tax Act 1961. Therefore, it is clear that the facts and circumstances in the instant case are indistinguishable from those in Ciba's case, The Supreme Court in the course of its judgment referred to the decision of the House of Lords in Jeffrey v. Rolls Royce Ltd. ((1965) 56 ITR 580) (HL) and Musker v. English Electric Co. ((1964) 41 Tax Cas 556) and distinguished the decision in Evans Medical Supplies Ltd. v. Mori-arty ((1959) 35 ITR 707) (HL). The principles enunciated by the Supreme Court in Ciba's case were applied by the High Court of Calcutta in Commr. of Income-tax (Central) Calcutta v. Hindustan General Electrical Corporation Ltd. The learned Judges referred to the speech of Viscount Rad-cliffe in Musker v. English Electric C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this was a case of acquisition and not merely a user for all limited time. The assessee according to the Court obtained an advantage of enduring nature and thus the payment for acquisition of such know-how was clearly capital in nature. 24.1 This case as is evident turned on its own facts. 25. Commissioner of Income Tax v. Tata Engineering and Locomotive Co Pvt. Ltd.(1980) 123 ITR 538. This was a case where the Bombay High Court was considering payments made by the assessee to the German collaborator with respect to provision of drawings, designs and technical information required for manufacturing of automotive products. Under the agreement the assessee could also use the name and the trade mark of the German collaborator. The point to be noted in this case was that after the agreement came to an end, the assessee was entitled to continue its manufacture, but without the use of the trade name Tata-Mercedez-Benz. The Division Bench, while holding that the payments in the agreement were in the nature of revenue expenditure, observed that where in substance the transaction for acquiring necessary technical information is really in the nature of having access to techniques of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Tata Engineering and Locomotive Co Pvt Ltd (supra) came to the conclusion that merely because the agreement provided that the assessee was entitled to retain technical know-how, designs and drawings even after the expiry of agreement did not alter the nature of the transaction. There was, according to the court, no property right transferrable in technical know-how. The fact that the assessee was not entitled to use the trade mark of the foreign company for the products manufactured by it after the expiry of the agreement clinched the issue. The Court also observed that in determining the nature of the expenditure the totality or cumulative effect of the material facts evidenced by the documents and the surrounding circumstances had to be taken into consideration in arriving at the decision. The Court observed that the circumstances had to be viewed in the larger context of business, each factor or circumstance by itself may not be decisive. Importantly, in this case the Full bench over-ruled the judgment of its own court in Hylam Ltd v. CIT (A.P.) (1973) 87 ITR 310. In these circumstances we do not consider it necessary to discuss the said case i.e., Hylam Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise in the construction of the factory, lay-out, as also, the know-how which, the American company was required to keep updated. The American Company was also required to provide technical personnel in connection with setting up of the plant and manufacture of the products and facilities at the assessee's plant and also, at the plant of the assessee's associates and, for the training of associates' personnel. Under the agreement, the assessee had no right to use any trade name, however, it could continue to use the know-how even after termination of the agreement. In this case, in consideration thereof, the assessee paid certain sums of money to the American Company during the assessment years, under consideration. The assessee had claimed these payments as technical fee and hence, as revenue expenditure. The Tribunal held the payment, in issue, to be in the nature of revenue expenditure. The High Court, considering the facts of said case, reversed the view of the Tribunal on the grounds that: First of all, the collaboration agreement was not on record; Secondly, the agreement related to assistance at the very inception i.e., formation of a company; Thirdly, the agreement provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price, in respect of, certain kinds of wagons. Importantly, the agreement was required to subsist for a minimum of 10 years, which was terminable by either party on giving 12 months prior notice. Upon the expiration of the agreement both parties were to be relieved of their obligations, in particular, the assessee was free to use without a charge, all such information made available by the British Company, during the tenure of the agreement. In coming to the conclusion that the monies paid by the assessee to the British Company were in the nature of capital expenditure, the Division Bench of the High Court, was impressed by the fact that the assessee could use the information acquired for an indefinite period, and that too, free of charge. In other words, whatever information was acquired by the assessee during the period of the agreement would enure to the benefit of the assessee without any limitation of time. In coming to this conclusion the Division Bench applied the principle laid down by its own court in the case of Fenner Woodroffe and Co Ltd v. Commissioner of Income-Tax (supra). 30.1 As discussed above the Full Bench of the Andhra Pradesh High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. It further held that the supply of workshop drawings was for the purpose of main licence itself, and in the course of, working the terms and conditions of the license to manufacture rotary air-compressor. It also observed that other expenditure incurred in connection with capital asset is not expenditure of a capital nature. The nature of the expenditure depends essentially upon the totality of the attendant circumstances obtaining in respect of a transaction and the context in which it is made. Where a payment is made for the ownership of a capital asset, which is the tool of the assessee's trade, it may not be difficult to come to the conclusion that the expenditure is in the nature of capital expenditure. Where, however the benefit of a capital asset is secured as one element of a comprehensive arrangement, by virtue of which a trader seeks to obtain advantage, with the end in view to expand his business and earn greater profits, the whole transaction will have to be critically analyzed in order to find out whether the expenditure incurred is a part of that transaction for acquiring the benefit for the use of the capital asset and hence, is in the nature of capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that assessee had absolutely acquired any knowledge or asset. The payments, according to the Division Bench were made to have an 'access' to the knowledge and information that was necessary to carry on and run the business from day-to-day, and that, it was not of much significance as to whether the agreement was entered into at the time of commencement of business or in the course of business which is already being carried out. 34. Sriram Pistons and Rings Ltd. v. Commissioner of Income Tax, New Delhi; (2008) 177 Taxmann 81. This is again a judgment of Division Bench of this Court, wherein this court, after examining a plethora of case law including the judgment of this court in the case of Sriram Refrigeration Industries Ltd (supra) has followed the view held in another judgment of a Division Bench of this Court in Triveni Engg. Works ltd. v. CIT (1982) 136 ITR 340. The observations made in para 17, 28 and 29 being apposite are set out below:- ' ........The Supreme Court interpreted this to mean that the right pertained more to the use of the know-how than to its exclusive acquisition by the assessee. The Supreme Court also noted that there is no single definitive crite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x; (1994) 207 ITR 1017 (Bom). Mr. Justice B.N. Srikrishna (as he then was) speaking for the Division Bench cited with approval the observations of the judgement of its own court in Tata Engineering and Locomotive Co. (P) Ltd. (supra) that there was no property right in know-how which can be transferred just as, it is, in a limited sense in a patent. The court approved the observation of its own Division Bench in the case of Tata Engineering and Locomotive Co. (P) Ltd.(supra) that technical know-how made available by a party to an agreement does not stand on same footing as protected rights under a registered patent. The Division Bench distinguished the judgment of the Supreme Court in the case of Scientific Engineering House P. Ltd. (supra) by observing that the Supreme Court in that case was considering whether the 'documentation service' was the main service rendered by the foreign collaborator and also, that the documentation service supplied to the assessee in the said case constituted 'book' or 'plant' so as to entitle the assessee to claim depreciation thereon. The Division Bench observed that 'the argument before the Supreme Court did not appear to have turned on the issue w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the supposition that any expenditure or outlay by a taxpayer which results in enduring benefit to his trade must, without more, be regarded as capital in character. The truth, however, is that enduring benefit is not the acid test of capital expenditure in all cases. Even its celebrated author, Viscount Cave, while laying down this testin Atherion v. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155 (HL), did not mean to propound a doctrine in unqualified terms. In the recent Empire Jute Co.'s case (1980) 124 ITR 1, our Supreme Court has had occasion to clarify this position. They explained Viscount Cave's dictum this way: enduring benefit or advantage might enure to an assessee's business either in a capital field of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue expenditure. BROAD PRINCIPLES WHICH EMERGE ON READING OF VARIOUS AUTHORITIES 38. An overall view of the judgments of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case:- (i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure; (ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment; (iii) the test of 'once and for all' payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by look ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue. 39. In the context of the present case what has emerged is as follows:- (a) The agreement was in three parts. One part related to purchase of basic design, engineering and for provision of tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement, the payments in issue, made for such a purpose, can only be categorized as one made on revenue account. 39.3 The Revenue, in order to buttress their submission with respect to the permanent character and so called enduring nature of the advantage obtained under the Licence, had submitted that the Agreement had no time limit prescribed for working the Licence. This submission of the revenue is factually incorrect as found by the authority below. As noted, hereinabove, under Article 15.4 the obligation for certain purposes was limited to 12 years, and likewise, under Article 5.5.1 and 5.5.2 M/s Tecnimont was obliged to give advice for a period of 7 years. 39.4 In respect of payments made by the assessee towards training of personnel and supply of technical assistance and continuous know-how as referred to in Article 5 of the Agreement, it is clear on an application of the tests enunciated by Courts, that it would not result in an advantage of enduring nature, especially as noted above, that by virtue of Article 5.5.1 and 5.5.2 M/s Tecnimont was obliged to give advice limited to a period of 7 years. 39.5 It is important, at this juncture, to refer to the finding returne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Workshops; (b) delivery of Germany of drawings and technical data; (c) transfer in Germany of the use of IWKA manufacturing know-how; (d) transfer of IWKA sales know-how; (e) training of specialists for JK in Germany and India; (f) delegation of IWKA staff member for technical assistance to India; (g) exchange of experiences including continued technical assistance and development. 39.8 In the background of these facts, the CIT(A) came to the conclusion that the expenditure incurred by the assessee on know-how during the year, under consideration, was in respect of, a business which was already in existence and hence, the payments were made for user of licence and were akin to the payments made to M/s Tecnimont. The CIT(A) agreed with the assessee that money paid to M/s IKWA was required to be treated as expenditure on revenue account. This finding of the CIT(A) has been sustained by the Tribunal. 40. Given the findings returned by both the CIT(A), as well as, the Tribunal and given the discussion held above by us, we have no hesitation in coming to the conclusion that Rs 30,57,499/- paid to M/s Technimont and Rs 3,48,033/- paid to M/s IKWA had to be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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