TMI Blog1981 (3) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year ended on 31st June, 1962. During the accounting period relevant to the assessment year, the assessee incurred an expenditure, of Rs. 23,308 towards the foreign tour of its technical director one V. L. Doshi. According to the minutes of the meeting of the board of directors held on 22nd August, 1961, the said visit to Europe, the U.K. and the U.S.A. as also to Damascus was for further discussions with the company's existing collaborators and the proposed collaborators. The said tour included the programme of negotiation with Scottish Machine, i. e., the assessee's technical collaborators, for the manufacture of their planning machines at the assessee's machine tool division at Chinchwad; with Schiess Aktiengesellschaft, Dusseldorf, Germany, the assessee's technical collaborators for the manufacture of Vertical Turrent Lathes, and with Strojimport, Czechoslovakia, who were the assessee's collaborators for manufacture of Slotting Machines. The tour also included a visit to the Draper Corporation of U.S.A. to finalise a technical collaboration for the manufacture of their Automatic Looms in their factory at Satara Road. He was also further to discuss collaboration agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry Sons for expanding the existing pattern shop at Satara works as the said company had developed specialised processes and knowledge relating to the manufacture of plates. The said amount, which was equivalent to pounds 300, covering the payment to be made at the time of the agreement and the instalments payable under the agreement were not allowable as an expense on the ground that the said payment comprised mostly of the purchase price of the right to use the specialised processes and knowledge of the said company, and, therefore, was clearly an expenditure of a capital nature. The assessee feeling aggrieved preferred an appeal to the AAC urging that the ITO had erred in disallowing the aforesaid two claims. The AAC held that it was admitted that no report was submitted by the said technical director to the assessee as to what exactly he had done during the said tour. There was also no evidence on record to show as to the activities carried out during the said tour. In the circumstances, he held that there was no need to interfere with the order of the ITO. As regards the payment of the sum of Rs. 16,029 made to M/s. G. Perry Sons, the AAC held that it was rightly held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id amount as an expenditure for the relevant year. Thereafter, at the instance of the assessee, the Tribunal has referred the question to this court as stated at the outset, under s. 256(1) of the Act. On the first question, viz., the expenditure incurred on the foreign tour of the technical director of the assessee, Shri Mehta, on behalf of the assessee, contended that the Tribunal had come to the conclusion that the expense incurred was in the nature of a capital expense because, according to the Tribunal, the tour was undertaken for finalising the purchase of the machinery required for the factory of the assessee and also for technical collaboration agreement in respect of the new items of machinery and further to find out possibilities of entering into technical collaboration with the foreign firms. Shri Mehta submitted that the reason given by the Tribunal for arriving at the said conclusion was not correct inasmuch as, on the facts and circumstances of the case, it cannot be said that the purpose of finalisation of the purchase of the machinery or technical collaboration or even the entering into agreement for technical collaboration added to the assets of the assessee. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO could not be said to be wrong in disallowing 2/3rds of the said expense as revenue expenditure. As regards the second question, Shri Joshi, the learned counsel appearing for the department, fairly conceded that in view of the decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, there is no scope for the department to argue that the know-how and the technical knowledge that may be obtained under the agreement as in the present case would constitute an asset of a capital nature, and inasmuch as the Tribunal has taken a contrary view, the Tribunal's finding will have to be reversed. In order to appreciate this, it will first be necessary to reproduce the relevant clauses of the agreement between the assessee and the said M/s. G. Perry Sons Ltd. The vendor referred to in the following clauses is the said M/s. G. Percy Sons Ltd. and the purchaser is the assessee. The same are as follows: "(1) The vendor has hitherto exported to India patterns and other articles manufactured by it in the course of its trade of pattern makers but is apprehensive that that part of its trade may shortly cease owing to the policy of the Government of India to restrict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction and manufacture of typical patterns and plates and advice the purchaser on all matters reasonably necessary and incidental for the construction of patterns and plates provided always that the vendor shall not be required to supply the purchaser with more than one drawing relating to each type of pattern or to prepare any estimate of cost of any pattern (F) at times to be mutually agreed between the vendor and the purchaser give access to the vendor's works at Hall Lane in the City of Leicester to three employees of the purchaser for the respective periods hereinafter mentioned, namely, one technician for a period of three months and two pattern-makers for the period of nine months and: (i) during such period of three months the vendor will take all such steps as may in the opinion of the vendor be reasonably necessary to instruct the said technician as a supervisor over the construction and manufacture of patterns and plates including instructions in (a) the laying out of patterns for moulding (b) the design of prints, and (c) the use of all types of foundry fixtures. (ii) during such period of nine months the vendor will take such steps as may be in the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid sum of money. The present case, therefore, is covered squarely by the ratio of the decision of the Supreme Court in Ciba's case [1968] 69 ITR 692. The latest decision of this court on the point is CIT v. Tata Engineering Locomotive Co. Ltd. [1980] 123 ITR 538, which has also taken note of the case of Ciba of India Ltd. It has been held by this court in this case that technical know-how cannot be called a tangible asset. Technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. Merely because an assessee, who has entered into a contract with regard to know-how, is entitled to use the know-how even after the agreement has expired, it does not mean that he has acquired a benefit of an enduring nature. Agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction of acquiring the necessary technical information with regard to the technique o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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