TMI Blog2008 (4) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are now dealing only with the reference made under Section 256(1) of the Income Tax Act, 1961 (the 'Act') at the instance of the Revenue. 3. The questions of law that have been referred for our opinion are as follows:- "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,96,988/- paid by the assessee to M/s. Riken Piston Rings Inds. Co. Ltd., Tokyo revenue expenditure?" 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure on gifts amounting to Rs. 10,58,855/- was not of the nature of advertisement failing within the purview of Section 37(3) of the Income-tax Act read Rule 6B of the Income-tax Rules and was of the nature of a trade discount?. 3. Whether the Tribunal was right in holding that the payments made by the assessee to its employees under the nomenclature 'Good Work Reward' did not constitute bonus within the meaning of Section 36(1)(ii) of the Income-tax Act,1961 and were allowable as normal business expenditure under section 37?" 4. Insofar as the first question is concerned, the Assessee had entered into a Technical Collabor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the Revenue laid emphasis on the word 'sold' used in clause 5.0 of the Agreement. 9. Clause 10.0 of the Agreement enables the Assessee to sub-license the technical know-how to another Indian party subject to the prior written permission of Riken, should it become necessary. 10. Clause 10.1 of the Agreement requires the Assessee to treat as a confidential matter all inventions, drawings, documents, specifications, engineering data, processes and other information or material furnished by Riken to the Assessee pursuant to the Agreement. 11. Clause 11.0 of the Agreement lays down that the right of the Assessee to market any of the products manufactured under the Agreement would cease upon its expiry or termination. 12. The validity of the Agreement was for a period of five years and that is mentioned in clause 15.0 of the Agreement, but it could be terminated before the expiry of that period in the event of any default by any of the parties as mentioned in clause 17.0 of the Agreement. 13. On the expiry or termination of the Agreement, whether by efflux of time or by its termination by the parties, the Assessee would have a perpetual non-exclusive right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company and there was no transfer of the fruits of research once for all. 18. Similarly, in Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, [1989] 177 ITR 377, the Supreme Court dealt with an agreement entered into between the assessee and a Japanese company for the purpose of increasing the yield of penicillin. As per the agreement, the Japanese company agreed to supply to the assessee the requisite technical know-how so as to achieve substantially higher levels of performance or production. 19. One of the terms of the agreement entered into between the parties concerned itself with the placing of limitations on the right of the assessee in dealing with know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how. 20. 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 criterion which by itself is determinative of the question whether a particular outlay was revenue in nature. What is relevant is to see the intended object and effect of the agreement bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity with regard to the know-how and could not disclose any information or assign the agreement without the written consent of the British company. 24. Having noted this, the Division Bench held that this could hardly be equated to a situation where a seller sells his goods outright to a buyer. The Division Bench noted that there was no provision in the agreement for the return of drawings, documents etc. the copies of which were deemed to become the property of assessee on transmission but it was observed that with fast technological development and scientific research, such drawings become obsolete and mere scraps of paper very soon unless they were updated. 25. Following the law laid down by the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692 and despite the use of the words 'to sell outright', the Division Bench came to the conclusion that the assessee had merely obtained a licence for limited use of the knowledge and information possessed by the British company. 26. Learned counsel for the Revenue relied upon Scientific Engineering House P. Ltd. vs. Commissioner of Income Tax, [1986] 157 ITR 86 (SC). But we find that the controversy in that case is not qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case. 32. Applying the various principles that have been laid down, we find that there was in fact no absolute transfer of any right in the documentation given by Riken to the Assessee. The Assessee was entitled to use the technical know-how for a period of five years or for a lesser period, in case the Agreement was terminated before that. The Assessee did not have a free hand to sub-license the technical know-how and that was possible only with the prior written permission from Riken. For all other matters, the Assessee was liable to treat as confidential all inventions, drawings, documents, specifications etc. furnished by Riken to the Assessee. Even though the Assessee was entitled to use the name of Riken in the marketing of its products but that right would cease upon the expiry or termination of the agreement. 33. As already noted, the Agreement was valid only for a period of five years but could be terminated earlier. There is no magic in the word 'sold' used in clause 5.0 of the Agreement because on a reading of the Agreement as a whole, it appears to us that what was transferred to the Assessee was only a right to use the technical know-how of Riken and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 611, a Division Bench of this Court laid emphasis on the advertisement value of the gift, but, as learned counsel for the Revenue has rightly pointed out the gifts in that decision pertained to gifts made during festive occasions including weddings. To this extent, the decision relied upon by learned counsel for the Assessee may not be relevant but it is nevertheless appropriate to refer to this decision because it deals with the advertisement value of the gift which is what Section 6B of the Rules also deals with. If a gift does not have any advertisement value, it cannot be deemed to fall within the category of 'advertisement' as understood for the purposes of Rule 6B of the Rules. 40. In Commissioner of Income Tax vs. Modi Spinning and Weaving Mills Co. Ltd. [1993] 202 ITR 708, a Division Bench of this Court held that Rule 6B of the Rules would apply only when there is presentation of articles by way of advertisement. If this is so, insofar as the present case is concerned, since we have held that the gifts given by the dealers to their customers were not in the nature of advertisement, they would not fall within the financial limits as laid down under Rule 6B of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to consider payment of various kinds of bonus such as production bonus, attendance bonus and incentive bonus and whether they were within the contemplation of the Payment of Bonus Act, 1965. It was held that such types of bonus as well as ex gratia payment would not fall within the provisions of Section 36(1)(ii) of the Act and that they were payments allowable as revenue expenditure having been incurred for the purpose of business expediency. These payments were not of the type contemplated by the Payment of Bonus Act. It was held that it was an ex gratia payment or some sort of reward given to an employee for the good work done by him and would therefore, fall within the category of expenditure incurred for the purpose of business expediency and for improving the working of the Assessee. Therefore, it would not fall within the meaning of Section 36(1)(ii) of the Act but would fall within the ambit of Section 37 of the Act. 49. Accordingly, the third question is answered in the affirmative, in favour of the Assessee and against the Revenue and it is held that the 'good work reward' is allowable as business expenditure under Section 37(1) of the Act. 50. The reference is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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