TMI Blog1979 (11) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... has been carrying on business in the manufacture of precision and machine tools, machinery and forgings since 1942. On January 2, 1961, the assessee-company had entered into a licence agreement with a foreign collaborator, M/s. A. A. Jones and Shipman Ltd., Leicester, U. K., for the manufacture of what is described as " JonesShipman " Tool and Cutter Grinding Machine Model 310-16" X 8" capacity, complete with all items of standard equipment, M. 20 motor-drive unit and X-17 Indexing attachment for which the collaborator was to supply the necessary designs, drawings, technical know-how and assistance. Jones Shipman agreed to assist the assessee in the production of the main castings of the machine and also to sell all relative jigs, fixtures, tools, gauges, raw materials and special parts as ordered at their normal commercial retail value. Jones Shipman also agreed to furnish all the technical information with the latest modifications and standards. In consideration of the grant of the manufacturing rights and for providing assistance under the agreement, the assessee-company agreed to pay to Jones Shipman pound 1,000 pound 500 on the signing of the agreement and pound 500 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, special tools, gauges and special machines used by C. V. A. for the manufacture, assembly, inspection, complete specifications of raw materials, complete sets of up to date layouts, and technical service by deputing their senior executives and expert technicians. Clause 10 of the agreement states that in consideration of the grant of the manufacturing rights and for providing supplies, services and their assistance under the agreement, the assessee-company shall make a payment of pound 2,000 pound 500 on the signing of the agreement, pound 500 on the supply of documents and pound 1,000 within twelve months of the signing of the agreement-free of Indian taxes to C.V.A. The agreement shall be for a period of ten years which may be extended for a further period on terms to be agreed upon by the parties. Clause 12 requires the assessee-company to pay the collaborator during the currency of the agreement, royalty of 5% on sales effected by the assessee subject to Indian taxes calculated in Praga's list prices reduced by the commission payable to Praga's selling agents. The said royalty is payable half-yearly in sterling before the expiry of sixty days from the end of the half-year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orators and as such they constituted capital expenditure. The Tribunal, relying upon the decisions of this court in Hylam's case [1973] 87 ITR 310, Karnataka High Court in Kirloskar's case [1968] 67 ITR 23 and of the Bombay High Court in Vithaldas's case [1968] 68 ITR 388 and on a consideration of all the relevant clauses in the agreements, held thus : " What the assessee was acquiring from the collaborators was a licence to manufacture certain patented machinery which was in the production range of the collaborators and patented by them as also the designs and drawings and technical know-how for the manufacture together with complete specification of raw materials required for the component parts of each item. The drawings and designs and the know-how became the property of the assessee and the assessee was free to use the same in its manufacture after the termination of the agreement with the collaborators ....... Though the payment of royalties is linked to the selling price of the machinery, it cannot be treated as an integral part of the ' profit earning process '. The payment was essentially for acquisition of a capital asset. But it has been agreed to be computed with refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [1968] 68 ITR 388 respectively on which reliance has been placed in Hylam's case [1973] 87 ITR 310 have been overruled. This claim of the assessee is resisted by the learned standing counsel for the revenue, Sri P. Rama Rao, contending, inter alia, that what the assessee acquired, according to the terms of the agreement, has been rightly held by the Tribunal to be of an enduring benefit of a permanent nature and, therefore, the payment of royalties, though linked to the production and selling price of the machinery, is essentially for the acquisition of a capital asset. But the same cannot be treated as an integral part of profit-earning process. Further, it is emphasised that the two types of machinery to be manufactured by the assessee under the agreements were found to be entirely new items which were patented by the collaborators and which were in their production range only. The assessee, without payment of any royalty or any amount, would be entitled to make use of the know-how, knowledge and patent acquired by it after the expiry of the periods specified in the agreements. The decision in Ciba's case [1968] 69 ITR 692 (SC) cannot be taken aid of by the assessee herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of view. Different tests have been enunciated and applied in this regard by the courts in various decisions, of which we may mention here some important decisions pertaining to the test of acquiring an asset or advantage of an enduring benefit which is material for the determination of the question before us. The Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 approved the principles laid down by the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185, for the purpose of deciding the question as to whether an expenditure is revenue or capital. Therein it was laid down at page 45 : " If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring nature is capital expenditure. The reason underlying the illustration is that the payments made to enter into a forward contract have relation to the raw material eventually to be obtained. Viscount Cave acknowledged that in certain cases an expenditure for obtaining an enduring advantage need not be capital expenditure for he inserted the words ' in the absence of special circumstances leading to an opposite conclusion ' within brackets. We are of the opinion, that in the present case, the royalty payment is not a direct payment for securing an enduring advantage : it has relation to the raw material to be obtained ...... the royalty payment, including the deadrent, have relation only to the lime deposits to be got." Applying the aforesaid principles enunciated by the Supreme Court, we have to examine whether in fact an enduring advantage or permanent benefit has been secured by the assessee in the present case by the payment of the royalties in question during the years of account to the two foreign collaborators and if it is so, whether the royalty payment is or is not a direct payment for securing an enduring advantage or the payments have relation only for running ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material used for experimental work. The AAC agreed with the assessing authorities. But the Income-tax Appellate Tribunal allowed the deductions under s. 10(2)(xii) or, in any event, under s. 10(2)(xv). The High Court of Bombay affirmed the view of the Tribunal that the expenditure was admissible unders.10(2)(xv). On appeal by the department,the Supreme Court noted the following facts that emerged from the agreement entered into in that case, viz., (1) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period ; (2) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (3) the licence was granted to the assessee subject to the rights actually granted or which may be granted after the date of the agreement to other persons; (4) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company; (5) there was no transfer of the fruits of research once for all; and (6) the stipulated payment was recurrent, dependent upon the sales, and only for the period of the agreement. The Supreme Court, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawings, specifications and other technical information to enable the assessee to manufacture and sell that equipments listed in the agreement. In other words, the payment was for the benefit of the entire technical know-how agreed to be made available to the assessee to enable it to manufacture and sell the listed equipments so that the assessee could earn profits. The expenditure was thus so related to the carrying on of the business that it will have to be regarded as an integral part of the profit-making process and there does not appear to be any indication that the payments undertaken to be made by the assessee under the agreement, particularly under sub-clause (a) of clause 10, was for the purpose of acquisition of an asset or a right of a permanent character, the possession whereof was a condition precedent to the continuance of its business. " The contention of the learned counsel for the revenue is that the agreement entered into in Ciba's case [1968] 69 ITR 692 (SC), was for a period of five years only which was liable to be terminated even earlier in certain events where as the agreement in the aforesaid case was for ten years and was liable to be extended by period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... variably revenue expenditure. See CIT v. Hindustan General Electrical Corporation Ltd. [1971] 81 ITR 243, CIT v. Aluminium Corporation of India Ltd. [1973] 92 ITR 563, CIT v. Associated Electrical Industries [1975] 101 ITR 844, CIT v. Indian Oxygen Ltd. [1978] 112 ITR 1025 and Agarwal Hardware Works (P.) Ltd. v. CIT [1980] 121 ITR 510. In the case cited last, viz., Agarwal Hardware Works (P.) Ltd. v. CIT [1980] 121 ITR 510, the Calcutta High Court specifically dissented from the view taken by this court in Hylam's case [1973] 87 ITR 310 (AP). We shall now refer to the Hylam's case [1973] 87 ITR 310, decided by a Division Bench of this court. Therein the assessee paid royalties for acquiring a licence for the use of the special knowledge of the processes covered by certain patents owned by the collaborator English company in respect of the manufacture of a new product copper-clad laminates. Though the new laminated project was of an allied nature, it was held that it did not amount to extension of the assessee's business and that the acquisitions of the special knowledge in respect of a new product would amount to the acquisition of an advantage or an asset of the assessee's busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pertaining to the manufacture or processing of said products, which have been discovered and developed in Ciba Balse's laboratories and will forward to Ciba Pharma as, far as possible all scientific and bibliographic information, pamphlets or drafts, which might be useful to introduce licensed preparations and to promote their sale in India. To the same effect is the observation of the learned judge, Tulzapurkar (as he then was) of the Bombay High Court who delivered the judgment for the court in ACC Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 at page 336 : " With respect, we may point out that in Ciba's case (1968] 69 ITR 692 (SC), the technical ' know-how ' was not merely with regard to the same products which Ciba India was already manufacturing but the technical ' know-how ' was also to extend to new products which Ciba Indian were to manufacture after the agreement had come into operation. As such, in our view, the aspect that the technical ' know-how ' is supplied for manufacturing a new product, though relevant, would not be decisive of the matter. " The period of five years specified in the agreement in Ciba's case [1968] 69 ITR 692 (SC) is not decisive. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [1964] 41 TC 556 (HL). The know-how cannot be treated to be property if it is imparted for the purpose of enabling the assessee to manufacture specialised products in the course of its business. That apart, the decision of the Bombay High Court in Vithadas's case [1968] 68 ITR 388 relied upon by the learned judges in Hylam's case [1973] 87 ITR 310 (AP) has been reversed by the Supreme Court. The decision of the Division Bench of the Mysore High Court in Kirloskar's case [1968] 67 ITR 23, which has been relied upon by the learned judges in Hylam's case, has also been overruled by the recent Full Bench decision of the Karnataka High Court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443. With great respect to the learned judges, we are unable to persuade ourselves to agree with the view expressed in Hylam's case [1973] 87 ITR 310 (AP) as it does not represent the correct position of law. It is, therefore, overruled. On the other hand, the facts of the present case do squarely fall within the decision in Ciba's case [1968] 69 1TR 692 (SC). We do not find any' rationale or basis to distinguish Ciba's case from the present one as pointed out earlier. On a close reading of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement. But the Tribunal took the view that such a restriction does not exist in the agreement. In the case of the other agreement, the rights and liabilities of either party to the agreement shall not be assigned to a third party or firm without the consent of the other party. Such restriction was considered in Ciba's case [1968] 69 ITR 692. (SC) to be a pointer to indicate that the expenditure is of revenue character. The Tribunal is more obsessed by the fact that the two types of machinery to be manufactured by the assessee under the agreements were entirely new items which were patented by the collaborators, that the assessee became the owner of the designs and the know-how for the manufacture of the machinery patented by the collaborators and that the collaborators permanently parted with the technical know-how in favour of the assessee which enures to the benefit of the assessee even after the expiry of the agreement. The assessee's counsel complains that the Tribunal had erroneously assumed that it is not the case of the assessee that the payments in question were made for the purpose of acquiring a new technical knowhow for the manufacture of an item of machinery which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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