TMI Blog1978 (11) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... d., having its registered office in the United Kingdom, hereinafter referred to as the "English company" for the manufacture of all types of springs and suspensions for road and rail vehicles as were being manufactured by the English company, with the help of the technical knowledge and experience possessed by the English company in connection therewith. In the preamble portion of the said agreement, it is stated that the new company, namely, the assessee-company is desirous of obtaining from the English company the right to manufacture and sell such of the products manufactured and sold by the English company as are mentioned in the agreement subject to and upon the terms and conditions therein mentioned. It is also stated in the preamble portion that it was agreed between the assessee-company and the English company that the assessee-company will have an issued equity share capital of Rs. 13,98,000 and that the English company will subscribe for equity shares equivalent to 33-1/3 per cent. of the issued equity share capital. The important clauses in the agreement are as follows : Clause 1(a) of the agreement defined "licensed products" as meaning as on the date of the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt with advertisements and cl. 8 dealt with competing product. Clause 9 dealt with visits by the employees of the English company to the works of the assessee-company. Sub-clause (a) of this clause provided: "At the request of the new company (assessee-company) JWS (the English company) will during the period of this agreement and any extension thereof arrange for engineers and/or technical specialists employed by JWS to visit the premises of the new company in India for the purpose of assisting and advising and co-operating with the new company in connection with the manufacture of the licensed products and the setting up of a proper and efficient plant suitable for the manufacture thereof on the scale required by the new company". Clause 10 provided for visits by the employees of the assessee-company to the English company's factories. Clause 11 dealt with confidential information. Sub-clause (b) of this clause provided that after the termination of this agreement from any cause the assessee-company will promptly return to the English company at the expense of the assessee-company all specifications, designs, formulae, plans and other technical data furnished by the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement referred to above, the assessee-company made payments of Rs. 24,000 and Rs. 47,000 for the assessment years 1967-68 and 1968-69 respectively to the English company as royalty. The ITO disallowed one-fourth of the payments, namely, Rs. 6,000, for the assessment year 1967-68 and Rs. 11,750 for the assessment year 1968-69, on the ground that such part of the payments represented consideration for services provided by the English company of an enduring nature and was, therefore, capital in content. The assessee-company's appeals to the AAC and the Tribunal failed and hence the question extracted above was referred to this court for its opinion. Before the Tribunal, the assessee relied on the ratio of the decision of the Supreme Court in Ciba of India Ltd.'s case [1968] 69 ITR 692 and contended that the entire payment made by the assessee-company to the foreign company was revenue in nature and should have been allowed in the computation of profits. As against this, the department relied on a decision of the Karnataka High Court in Mysore Kirloskar Ltd.'s case [1968] 67 ITR 23 and contended that the authorities below were right in disallowing the portion as capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset, the assessee-company had not made any payment to the English company for the services rendered in setting up the factory and the payment which the assessee-company made was only for the production of the licensed products and not for anything else. We are unable to accept this argument for more than one reason. We have already referred to the terms of the agreement and cl. 4 of the agreement expressly contemplates the English company supplying all technical information and know-how to the assessee-company for setting up a plant for the manufacture of the licensed products. We have also extracted sub-cl. (a) of cl. 12 which uses the expression, "In consideration of the information to be furnished and services to be rendered to the new company (assessee-company) by JWS (the English company) in general terms, without restricting it towards manufacture of licensed products". Therefore, a combined reading of cl. 4 and cl. 12 will lead to the result that the royalty payment of which is provided for in cl. 12 was in consideration of the information furnished and the services rendered by the English company to the assessee-company, which information and services were not confi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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