TMI Blog1981 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... selling automotive lubrication equipment and supplies. The object of the agreement was to enable the assessee to manufacture the said equipment and supplies in India. In the agreement Stewart is referred to as the license or and the assessee as the licensee. Under cl. 1 of the agreement Stewart granted to the assessee an exclusive licence for all pertinent patents and technical information to manufacture, use and sell in India all automotive lubrication equipment and supplies together with parts and components thereof and auxiliary equipment manufactured, designed or developed by Stewart as specified in their catalogues in forms 38-55 and 38-87 and in any new catalogues which may supersede or supplement the said catalogues. The assessee had also the right to have the products made or fabricated in India by third parties, and could also purchase the products from Stewart for sale in India. Clause 2 authorised the export of the products to certain nearby markets under certain conditions. The assessee was also given under cl. 3(a) of the agreement the right to use the trade mark and trade names of Stewart on certain conditions. Clause 3(d) of the agreement prohibited the registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 14 of the agreement then provided for an initial payment to Stewart by the assessee, and cl. 15(a) provided for the recurring royalty payment. The said cls. 14 and 15(a), so far as they are material, are as follows: "14. Immediately after the execution of this agreement by both the parties the licensee shall pay to the licensor in United States dollars an initial fee of seven thousand five hundred dollars ($ 7,500), which will not be subject to Indian taxes, for the services herein provided. 15. (a) As royalty for the exclusive licence granted by the licensor under this agreement and, for the use of its Indian patents and applications therefor, trade marks and trade names, the licensee agrees to pay to the licensor in United States dollars within sixty (60) days following each quarter annual period ending on the 1st day of March, June, September and December of each year, a royalty of five percent. (5%) on licensee's net factory sales of S-W products and of any other substitute lubrication equipment and supplies, including parts and components thereof, an auxiliary equipment reduced by the costs C.I.F. Indian ports of imported components purchased from license or at l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harma Private Ltd. [1965] 57 ITR 428. It was also contended on behalf of the assessee that the observation made by the ITO that the expenditure of Rs. 17,992 could not be deducted as part of the depreciation cost of the plant and machinery was unwarranted as there was no claim for depreciation made before the officer for the year in question. The AAC held that the decision of this court in Ciba's case [1965] 57 ITR 428 was not helpful to the assessee inasmuch as, in the present case, the agreement fell into two parts, one for the acquisition of the technical know-how and the other for the user of the said know-how, and the different payments were prescribed for the said two different purposes for which the agreement was entered into. According to the AAC, while the payment made for the use of the trade marks and patents on a royalty basis would be a revenue payment, the payment for acquisition of the technical know-how by way of lump sum fee would be a capital payment. He also held that the exclusive right to manufacture and sell Stewart's products did not confine itself to India but the said right was available also to nearby markets and that the rights granted for the manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival submissions, rejected the argument advanced on behalf of the department that the assessee had made an outright purchase of know-how in the present case. The Tribunal, therefore, held that the present case was covered by Ciba's case [1965] 57 ITR 428 (Bom) inasmuch as the assessee had only access to the technical knowledge and experience which Stewart commanded and the assessee was a mere licensee, for a limited period, of the technical knowledge of the U.S.A. company with the right to use the patents and trade marks of that company. The Tribunal also held that as in Ciba's case [1965] 57 ITR 428 (Bom), the assessee acquired under the agreement only the right to draw, for the purpose of its manufacturing business, upon the technical knowledge of the foreign company, and that too for a limited period. Hence, the mode of payment, viz., partly as lump sum and partly as recurring royalty, had no significance, since no capital assets as such were acquired. The Tribunal, however, held that a portion of the payment under cl. 14 was referable to the services under cl. 10 of the agreement, viz., the assistance in the selection, procurement and installation of machinery, tools and eq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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