TMI Blog2008 (12) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 7.1.2008 passed in ITR No. 139/1988 and an order dated 19.5.2008 passed in ITR No. 202/1989, framed the following questions of law, respectively:- "Whether the ITAT was correct in law and on facts in holding that the third Instalment of know how fee as also interest paid thereon for belated payment was allowable as revenue expenditure?" "Whether on the facts and in the circumstances of the case and having regard to the agreements that the Assessee 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The fees to be paid by JK to TEC for the use of the KNOW HOW in India, basic design engineering and technical assistance provided for herein is 623 (six hundred and twenty three) million Italian Liras consisting of: (a) 186,500,000 : one hundred eighty six million five hundred thousand) Italian Lira for the grant of the process and know-how licence under Article 2; (b) 250,000,000 (two hundred and fifty million) Italian lira for the supply of the know-how and basic design 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 licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resher course which is normally attended by the employees for updating their knowledge. It is a case of permanently acquiring a technique, which will, result in setting up the plant and using it in future. 8. On the same basis, the Assessing Officer also disallowed the treatment by the assessee as revenue expenditure, the sum of Rs 3,48,033/- incurred for manufacture of machines under the agreement entered into with M/s IWKA. 9. Pertinently, the Assessing Officer also disallowed 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 determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sic design engineering. The only item which the assessee claimed as revenue, related to technical assistance for training of its personnel and, in connection with the day to day running of the plant for the period provided under the agreement i.e 7 years. 10.2 Based on the aforesaid findings, the CIT (A) reversed the view taken by the Assessing Officer and allowed the liability incurred as a deductible expenditure, both, with respect to, M/s Technimont and M/s IWKA by treating them as revenue expenditure. 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 word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three segments, is a composite whole and is inseparable. It is submitted by the learned counsel for the Revenue, that it is inexplicable in the facts of this case that if, expenditure incurred by the assessee towards basic design engineering for setting up of the plant is treated by the assessee as capital in nature then, how is that, the remaining part of the expenditure towards acquisition of process know-how and training of personnel is treated as revenue. The learned counsel for the Revenue has buttressed 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) Assa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (x). CIT vs Mihir Textiles: (2006) 287 ITR 232 (Guj.) (xi). Sriram Pistons and Rings Ltd vs CIT: (2008) 177 Texmann 81 (xii). Bajaj Tempo Ltd vs CIT: (1994) 207 ITR 1017 (Bom) (xiii). CIT vs MRF: (1983) 144 ITR 678 (Mad) (xiv). CIT vs Aquapump Industries: (1996) 218 ITR 427 (Mad) 15. Having heard the learned counsel for both, the Revenue, as well as, the assessee and perused the records, we are of the view that the references deserve to be answered in favour of the assessee, for the reasons given hereinafter:- DISCUSSION OF SUPREME COURT CASES CITED BEFORE US 16. Assam Bengal Cement Co Ltd v. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. It is was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. 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 allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. The expression "enduring benefit'' also has been judicially interpreted. Romer, L.J., in Anglo-Persian Oil Company, Limited v. Dale ([1932] 1 K.B. 124, 146) agreed with Rowlatt, J. that by enduring benefit is meant enduring in the way that fixed capital endures : "An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date.'` Latham, C.J., observed 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.'` - ``permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngal Cement Co Ltd (supra), payments were made as 'protection fee' in terms of clauses 4 and 5 of the lease agreement, whereby the lessor had undertaken not to grant any lease, permit or prospecting licence regarding lime stone to any other party in respect of certain quarries without the condition, that the limestone would not be used for manufacture of the cement within the assessee's area. The 'protection fee' even though paid annually enured to the benefit of the assessee for whole period of the lease. It is in this context the Court came to the conclusion that it was an enduring benefit, for the benefit of the whole business of the company, and came, well within the test 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o no attempt to part with the technical knowledge absolutely in favour of the assessee. The following facts which emerge from the agreement clearly 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; © 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit making structure, but because the profit making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure.' 18.1 The other important observation which the Supreme Court 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 advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said instruments. In order to enable the assessee to manufacture the instruments in India, the foreign collaborator in terms of clause 3 of the said agreement, agreed to render 'documentation service' by supplying to the assessee an updated, correct and complete set of each of the documents which included manufacturing drawings and full processing documents, as also, complete set of specifications of raw-material, lay-out of manufacturing process and know-how, sample drawings and casting drawings. The assessee had claimed before the Income Tax Authorities that the payment made under the said agreement to the foreign collaborator resulted in acquisition of depreciable assets. The question which came up for 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ols by using which the business of manufacturing the instruments was to be done by the assessee and for acquiring such technical know-how through these documents lump sum payment was made. In other words, the payment of Rs. 80,000 under each of the agreements was principally for rendition of 'documentation service'.' 19.1 It is obvious that the result of the case pivoted on the finding that the payments made by the assessee to the foreign collaborator was not for services which were incidental to the principal service, which was, for the purchase of drawings, designs, charts and plans required for the purpose of manufacture of instruments, in question i.e. theodolites and microscopes. The Supreme Court rejected the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9) 177 ITR 377. In this case, the assessee since 1961 had been engaged in the business of manufacture of antibiotics and pharmaceuticals. The assessee was granted a licence for manufacture, at its plant, a well-known antibiotic 'penicillin'. In 1963, in order to increase the yield of penicillin the assessee negotiated with a Japanese Company for supply of requisite technical know-how, so as to, achieve substantially higher level of performance and/or production. In consideration thereof, the assessee made a 'once for all payment', against which, the assessee was supplied by the Japanese company the sub-cultures of the most suitable penicillin producing strain, as also, technical information, know-how and written description of the 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 penicil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and technical know-how was obtained from Meiji under the agreement. Certain assumptions fundamental to, and underlying, the approach of the High Court are that the agreement dated October 9, 1963, envisaged a new process and a new technology so alien to the extant infrastructure, equipment, plant and machinery in the assessee's enterprises as to amount to an entirely new venture unconnected with the different from the line of the assessee's extant business. It is in that sense that the expense was held not to have been incurred for the purposes of the day-do-day business of the assessee but for acquiring a new capital asset'.. We are inclined to agree with Sri Ramachandran that there was no material for the Tribunal to hold that 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 comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production and testing equipment and other data and information necessary to manufacture the product and to set up proper and efficient plants. In consideration thereof, the assessee was to pay royalty on fixed rate based on the turnover of the licensed product. On commencement of the production, assessee made certain payments as royalty. In the assessment proceeding the Income Tax Officer disallowed 25% of the aforesaid payments on the ground that such payment represented a consideration for service provided by the foreign company of an 'enduring nature' and was therefore, in the nature capital expenditure. While sustaining the view of the High Court that 25% of the payment made by the assessee was in the nature of capital expenditure and hence, not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demark of that company. The assessee acquired under the agreement merely the right to draw for the purpose of carrying on its business as a manufacturer or dealer upon the technical knowledge of Swiss company for limited period. By making a technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefits of its business and, therefore, the said contribution was merely a revenue expenditure or a business expenditure.' The reason why the Supreme Court sustained the view of the Tribunal in this case that part of the royalty paid in the said case had to be held as paid towards capital account is evident from the following observations in 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowledge available the foreign company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business'..' From the terms of the agreement it is clear that (1) No secret process or technical knowledge was sold by the foreign company to the assessee, (2) the period of user was for 15 years; (3) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (4) the permission was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons though outside India; (5) the assessee was expressly prohibited from divulging the confidential information to third parties; (6) there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now-how and data for the construction and operation of the plant for manufacture of saccharine. In consideration, the assessee was to pay a lump sum down payment followed by royalty @ 2.5% of the sale value of the manufactured product, subject to, a maximum of DM 35,000/-, for the next five years. In this case, the Division Bench was impressed by the fact that know-how and data was parted with, by the foreign collaborator, for setting up and operating of a plant for production of saccharine, and that, know-how and data was transferred to the assessee for being used by it in future without any time limit. The Court observed that the only restriction which was placed on the assessee was that it could not transfer the know-how to anyone else and that, it had to be kept a secret. The Court observed 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) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Commissioner of Income-Tax (1976) 102 ITR 665. 26. Praga Tools Ltd v. Commissioner of Income-Tax, Hyderabad; (1980) 123 ITR 773(AP). In this case, the Full bench of the Andhra Pradesh High Court was called upon to examine the nature of payments made by the assessee under a licence agreement with a foreign company for manufacture of certain tools and cutter grinding machine, for which, the foreign company was to supply the accessories, designs, technical know-how with the latest modification and assistance. The agreement was for a period of 10 years and thereafter, renewable for a further period of five years with mutual consent. The assessee was required to pay royalty at the rate of 5% on the Indian selling price, on the production of the machine, subject to Indian taxes. The Full Bench like in 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-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue account. It seems that the Division Bench of the High Court, while sustaining the view of the Tribunal that there was an element of capital in the royalty payments was persuaded by this finding of fact returned by the Tribunal. 28. Commissioner of Income Tax v. Warner Hindusthan Ltd. (1986) 160 ITR 217. This was a case where the assessee has entered into a collaboration agreement with an American company. The agreement was entered into at the inception and before setting up of the plant. The foreign collaborator i.e., the American company held a 40% shares in the assessee company. The foreign collaborator i.e., the American company had a right to terminate the agreement if the American company's shareholding in the assessee company fell below 40%. The American company was required to provide expertise 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company was required to acquire a 40% shareholding in the assessee company on certain basis. The British company, under the agreement, was also required to give to the assessee Company technical assistance in the form of inventions, designs relating to railway wagons, whether obtained or not, which were owned by the British Company. The British Company under the agreement had also undertaken to supply to the assessee at their request full technical advice and manufacturing data and details which the British Company may have acquired in relation to design and manufacture of existing type of railway wagons and which could be of assistance to the assessee in tendering for any other order for such a wagon or, in manufacturing the same at Madras. In consideration thereof, the assessee was to pay a certain percentage of the works 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 info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition of a capital asset in the shape of designs and drawings. The matter travelled right up to the Tribunal. The Tribunal held that it was a clear case of licence and not of sale so far as, designs and drawings and patterns were concerned and that, by parting with them, the right of the foreign collaborator had not diminished, in any, manner. The Tribunal also held that payments made for the use of drawings, designs and patterns did not bring into existence an asset of an enduring nature. The Division Bench of the High Court sustained the view of the Tribunal. The Division Bench held that the workshop drawings, manufacturing instruments etc. were obtained by the assessee company from the foreign company for the purpose of enabling it to exploit the licence agreement and to manufacture rotary air-compressor under the licensing agreement. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an international company. The said foreign collaborator provided information in the form of basic designs, data, drawings, process specifications, material specifications etc. The Division Bench after examining the facts, as well as, the case law on the subject held that the whole object of the agreement was to obtain benefit of technical assistance for running the business, on a restricted licence and to accord limited use of patent rights of the foreign company, the use of which, was restricted to the assessee alone and that too for the duration of the agreement. It concluded that on examining the basic features of the agreement the foreign company had not parted with the 'technical knowledge' absolutely in favour of the assessee as the foreign company had not sold their secret process to the assessee. It was of the view that it could not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what was transferred to the assessee was only a right to use the technical know-how of Riken and there was no sale of the technical know-how which the assessee could exploit. The assessee's right were hedged in with all sorts of conditions, clearly making it a case of right to use the technology and not sale of the technical know-how......' 34.1 From the above, it is clear that despite the use of the word 'sold' in one of the clauses of the agreement, in relation to, technical know-how and the process which the assessee acquired, this Court held that, if on a holistic reading of the agreement it appears that what was transferred to the assessee was only a right to use technical know-how and not sale of technical know-how then the expenditure would have to be treated as one on revenue account. 35. Bajaj Tempo Ltd v. Commissioner of Income Tax; (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 limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the agreement by itself kept two aspects of the collaboration agreement distinct and separate, one was connected with the initial setting up of the factory and the other was connected with running of the factory. The fee paid by the parties for obtaining technical consultancy services required for keeping the factory running was in the nature of revenue expenditure. The Court rejected the argument of the Revenue that, since the assessee was not bound to return the know-how acquired during the contract period the expenses incurred for obtaining the same had to be treated as capital expenditure as it had acquired the use of knowledge beyond the contractual period and hence, was in the nature of an enduring advantage. In this connection the following observations of the court are of significance:- '.....We must reject the argument of Mr. Jayaraman as unsound. It is based 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, Viscoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessee to use its brand name for the production, manufacture and sale of specified products. In consideration, the assessee paid royalties to the collaborator who agreed to allow manufacture of articles for five years. The collaborator under the agreement was required to furnish technical information pertaining to manufacture of the said articles. The issue which came before the Madras High Court was whether royalty payments made by the assessee could be treated as revenue expenditure. The court observed that expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. It is only where the expenditure bears on the fixed capital or other capital structure of the assessee that it can be regarded as capital in nature. Where the expenditure, although enduring in character has its impact on the running of the business, there can be no doubt that it is revenue 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 fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:- (a) the tenure of the Licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor 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 Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case the assessee. The submission of the learned counsel for the Revenue, based on Article 2.12 of the Agreement, to the effect that, what the assessee had obtained was a permanent right by virtue of the Agreement is incorrect; in view of the fact that, M/s Tecnimont could not have granted that, which it did not itself possess. In any event, grant of Licence by itself does not result in transfer of property, in a limited sense as, in the case of, patent rights. It is not the case of the Revenue that any patent rights were transferred in favour of the assessee. 39.2 In our opinion, in view of the aforementioned findings, in particular, that under the Agreement the assessee had only acquired 'access' to technical information, that is, know-how which related to the process of manufacture, which was not; related to any secret process or patent rights or even the right to use a trademark or trade name under the 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts, in issue, were already being manufactured by the assessee and hence, payments made by the assessee towards this end, would only go to increase the profitability; as what it had obtained, by virtue of the Agreement was a new method of manufacture or process of manufacture. 39.7 Similarly, in respect of payments made to M/s IWKA, the CIT(A) found that, the know-how for which the assessee had made payments was for manufacture of machines. The CIT(A), examined the Agreement of the assessee with M/s IWKA, and found that, the assessee had been granted an exclusive manufacturing licence for India. He, however noted, that the assessee was not permitted to use any knowledge or experience gained for any other purpose. The CIT(A) also returned the finding that under the Agreement, M/s IWKA was to provide the following services to the assessee. (a) assistance in Germany in planning, construction and installation of JK's 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) delegatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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