TMI Blog1978 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... uctions Art. 2 During the period of this agreement: (a) Tor-Isteg and the licensee shall make available to each other all information in their respective possession relating to the working of and improvements to each of the patents. (b) Should the licensee or any of his employees, or any one else acting under any sub-licence granted by him with the written consent of Tor-Isteg make any improvement or addition to or discovery in respect of any of the patents, then the licensee will make a complete disclosure thereof, immediately that fact which comes to the notice of the licensee, to Tor-Isteg who will enjoy the full benefit thereof without any consideration therefor and utilise the improvement in any manner deemed fit by Tor-Isteg. Art. 3 (1) Tor-Isteg shall supply and disclose all technical, engineering and manufacturing information, including specifications, drawings, etc. (which may be in its possession) to the licensee as may be reasonably required by the licensee in order to use the patents to the best advantage. (2) Tor-Isteg to this end will make available to the licensee the services of one or more European experts to assist in the production stage (rolling tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patents. " In the relevant previous year the assessee paid Rs. 18,825 to the foreign company under art. 6(a) of the agreement. The ITO has disallowed the assessee's claim, namely, that this expenditure is allowable as a revenue expenditure. The AAC has allowed the claim but the Tribunal has rejected it. I will now state the relevant facts found by the Tribunal. The foreign company has granted similar licences to five other Indian parties. " Ribbed tor-steel " is a new variety of twisted mild steel rod used in reinforced concrete constructions or structures. The assessee has not installed any new machinery for the purposes of manufacturing " ribbed tor-steel ". It has manufactured those goods with the help of its existing machinery. And that this agreement was entered into by the assessee with a view to manufacture this new variety of goods. In view of its aforesaid findings, the Tribunal held that the assessee has acquired an asset or an advantage of an enduring nature in the sense that it enabled the assessee to start a new line of business and, therefore, the aforesaid payment was not a revenue but a capital expenditure and was not an admissible deduction. The assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the report, as the Supreme Court has already discussed them in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. The cases of CIT v. Assam Oil Co. Ltd. [1977] 107 ITR 261 (Cal), IRC v. British Salmson Aero-Engines Ltd. [1938] 22 TC 29 ; [1939] 7 ITR 245 (CA), Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC), Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) and Moolchand Suganchand v. CIT [1972] 86 ITR 647 (SC) were decided on the terms of the respective leases and the agreement which are totally different from the terms of the agreement before us. Therefore, the aforesaid cases have no application to the facts and circumstances of the case before us and, apart from it, in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, the Supreme Court said that each case has to be decided on its own facts and on the legal principles applicable to it. Further, at page 727 of the report, the Supreme Court also says thus : " It is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure. " A Division Bench of this court has followed the above extract in CIT v. Hindusthan General Electrical Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the return of the technical know-how, it was held that the assessee was entitled to use the technical knowledge even after the termination of that agreement and that the said " knowledge was acquired for manufacturing new types of machines, i.e., to bring into existence new business ". The terms of that agreement are not fully set out in the judgment. It is not a case on sale or assignment of of any licence to use any registered patent, design or trade mark. It relates to use of technical know-how for 15 years, provided the terms of that agreement were carried out by the assessee. Further, the amount payable under the first limb of cl. 12(i) of that agreement was an initial, predetermined and lump sum amount and that the said expenditure was to be made " not only once and for all " but was also not related to the annual turnover of the assessee's business. Therefore, the Mysore Kirloskar case [1968] 67 ITR 23 (Kar) was decided on different facts. But we will again come back to it as it was followed by the Andhra Pradesh High Court in Hylam Ltd. v. CIT [1973] 87 ITR 310, in which the assessee was a manufacturer of copper laminates. Under the first collaboration agreement the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the termination of that agreement and, therefore, it was held that the assessee-company was entitled to use the technical know-how after the end of the period of the agreement. But with due respect we are unable to agree with it for the reasons stated later on. Then, by following the Mysore Kirloskar case [1968] 67 ITR 23 (Kar) it was held that the special knowledge relating to the patented processes was not in respect of any product which Hylam company was manufacturing, " but it related to a new product " and "although allied in nature to the products that were being manufactured " by Hylam company, it was an " acquisition of an advantage or an asset for the extension " of its business. The Ciba case [1968] 69 ITR 692 (SC) was distinguished on several grounds and one of them was that the technical know-how in Ciba case was with regard to the same products which Ciba of India was already manufacturing, whereas in Hylam case [1973] 87 ITR 310 (AP), " the special knowledge relates to a new product which" Hylam company " was not hitherto manufacturing ". But in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 at page 336 of the report, the Bombay High Court did not agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. On December 17, 1947, the agreement was entered into between Ciba of India and the Swiss company and thereafter on January 1, 1948, the pharmaceutical section of the Swiss company was taken over by Ciba of India and then it went into production. Therefore, those products, as rightly pointed out by their Lordships of the Bombay High Court, were new products so far as Ciba of India was concerned and yet the Supreme Court did not even think it fit to take that factor into account for determining the said issue. Similarly, in Hindusthan General Electrical Corporation Ltd. case [1971] 81 ITR 243 (Cal), although the product was a new product, the Division Bench of this court did not find it necessary to take it into consideration for deciding the same question. Therefore, a new product of an allied nature cannot be regarded as a decisive factor. In CIT v. Associated Electrical Industries (India) P. Ltd. [1975] 101 ITR 844 (Cal), the assessee was a manufacturer of electrical motors. It entered into a collaboration agreement. No new machinery was installed by the assessee for the purpose of manufacturing the electrical motors for which the design was obtained and the manufacture was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... changes in the goods, both the products cannot be the same and in that sense the goods produced with the aid of the technical know-how must be a new product. A simple illustration will make the position clear. The Waterman fountain pens manufactured before the second world war are not the same fountain pens manufactured nowadays by that company. Their quality has completely changed and in that sense they are new products. And yet on no commercial principle can it be said that the Waterman company by manufacturing new fountain pens by utilising the scientific developments and the technical knowledge has either extended its business or has started a new line of business. It is beyond dispute that no one is permitted to use the patents or designs without the licence of their owner. Generally speaking, the technical know-how for the use of the patents or designs is like a manual or a guidebook to manufacture the goods in accordance with the patented inventions or the designs. The goods produced earlier must be different from the goods produced subsequently by the use of the patents, designs and the technical know-how. It must be a new product but merely on that ground it cannot eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as argued that the assessee was entitled to use the technical know-how after the termination of that agreement and has, therefore, acquired an enduring benefit for its business and accordingly the amount paid by the assessee for technical know-how was a capital expenditure. But, speaking for this court, I rejected those arguments. It may be noted here that there is a typing mistake in, my said judgment which should be read as " clause 10(c) " in place of " clause 10(b) " of the agreement in the Fenner Woodroffe case [1976] 102 ITR 665 (Mad) which was distinguished as then advised. Mr.Sengupta submits that we should not differ from this case including the Mysore Kirloskar case [1968] 67 ITR 23 (Kar) and the Hylam case [1973] 87 ITR 310 (AP). But we are not impressed by his argument for the reasons already given in rejecting the arguments in the Indian Oxygen case [1978] 112 ITR 1025 and also for the reasons given later on. Almost every commercial transaction is entered into for the mutual benefit of both the parties. And yet each case has to be decided on its own facts and the legal principles involved in it. Further, the aim and object of the expenditure would determine its cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement is a capital expenditure. Mr. Sengupta further argues that the exploitation of the patents and the technical knowledge cannot help the assessee in running its business carried on by it before entering into this agreement and, therefore, the expenditure incurred by the assessee under this article has not been incurred for running its business or working it with a view to produce profits but has been incurred with a view to acquire a right to produce and sell these goods and, therefore, it should be held that this expenditure is not a revenue expenditure. But we are not impressed by his arguments. The nature of this receipt in the hands of the foreign company is not a relevant consideration. That apart, this amount cannot be regarded as a capital receipt in its hands for the reasons stated in the next paragraph. Further, the amount payable under art. 6(a) is not an initial or a lump sum or a predetermined amount and it is not to be paid " once and for all ". Therefore, its source or mode of payment cannot be ignored by us. To us it appears that the patents, the technical knowledge for the use of these patents and the trade mark are the trading assets of the foreign compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the other party. Further, art. 9 provides for an automatic termination of the agreement. Moreover, art. 8(b) overrides art. 8(a) of the agreement, because under art. 8(b) the foreign company is entitled to terminate the agreement if the assessee does not produce at least 5,000 tons of these goods during any calendar year except for the reasons beyond its control. In view of this right of the foreign company under art. 8(b) it cannot be said that the assessee has become the owner of these assets, because, as already stated, the assessee has no right to use them after the termination of this agreement. The assessee is not to pay anything for the patents after they cease to be in force in India as stated in art. 11 of the agreement. And if thereafter the assessee uses the trade mark and obtains the technical services and assistance mentioned in sub-arts. (2), (3), (4) and (5) of art. 3, it has to pay 50% of the fees mentioned in art. 6(a) as stated in art. 11 of the agreement which clearly shows that the payment under art. 6(a) is related solely to the use of the patents, the trade mark and the technical knowledge, services and assistance to be received by the assessee from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring advantage or benefit in the way a capital asset endures. Further, art. 6(a) does not provide for payment of any lump sum amount. The expenditure under this article is not to be made " once and for all ". It is also not an initial or a predetermined amount. This article does not also provide for payment of any maximum or minimum amount. If more is produced, more is payable. If less is produced, less is payable. And if nothing is produced, nothing is payable. In other words, the amount payable under this article is not only an indefinite amount but is also of a recurring nature and is solely related to and based on the annual production of the goods. It is not at all related to any fixed or capital sum or the capital value of any asset. This article, in our opinion, excludes the very idea of a capital outlay. Therefore, the expenditure under this article cannot be regarded as a capital expenditure under any circumstances. The question now is whether this expenditure can be regarded as revenue expenditure. Article 6(a) is the only article which provides for payment and that too only of two sums, namely, (i) royalty, and (ii) technical fee. By the payment of royalty the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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