TMI Blog1978 (4) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... andis Tool Company, U.S.A. (hereinafter referred to as "Landis"), of, 12,000 dollars and to M/s. Monarch Machine Tools Company of U.S.A. of 10,000 dollars, also. The Tribunal held that the payments made to Herbert and Landis were capital in nature while the payment made to Monarch Machine Tools Co. was revenue in nature. The Appellate Assistant Commissioner had held that the payment made to Monarch Machine Tools Co. was revenue in nature and the Tribunal dismissed the appeal that had been filed by the department against that order. The reference in regard to Monarch Machine Tools Co. is at the instance of the Commissioner while others are at the instance of the assessee. In regard to an earlier assessment year, namely, 1960-61, a similar payment that had been made to Herbert Ltd. had been held to be capital in nature by the Tribunal and there was a reference to this court at the instance of the assessee. This court held that the view taken by the Tribunal was correct. On behalf of the assessee, the principles enunciated by the High Court of Bombay in Commissioner of Income-tax v. Ciba Pharma Private Ltd. [1965] 57 ITR 428, had been relied upon. This court, however, distinguished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material placed before him sent a remand report dated October 30, 1971, in relation to the assessment years 1962-63, 1964-65 and 1965-66 which substantially supported the contentions on behalf of the assessee. So far as the assessment year 1968-69 was concerned, the appeal was kept pending before it awaiting remand report of the Appellate Assistant Commissioner as it was agreed between the parties that the report will hold good even for that assessment year. However, as already stated, the Tribunal held that the payments to Alfred Herbert Ltd. and Landis Machine Tools Co. were capital in nature and the assessee was not entitled to allowance of those expenditures under section 37 of the Income-tax Act. The question that is common to all the years which relates to the payment to Alfred Herbert Ltd. is as follows : " Whether, on the facts and in the circumstances of the case and on the true interpretation of the agreement dated August 1, 1958, between Mysore Kirloskar Ltd. and Alfred Herbert Ltd., U. K., the Tribunal was right in law in holding that the payment of Rs. 13,400 (pound 1,000) made under clause 12(i) of the agreement is of a capital nature ? " The amounts for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd. v. Commissioner of Income-tax[1976] 103 ITR 321. The Appellate Assistant Commissioner in his exhaustive report on remand noticed the several clauses in the three agreements in regard to the several provisions and conditions under which the technical knowledge or know-how was supplied to the assessee and the purpose of such supply and that they were similar. The Tribunal does not find anything contrary thereto. The only difference, if at all it can be said to be so, is that in the preamble to the agreement with Monarch Machine Tool Company, the expression " licence " is used which is not to be found in the other two agreements. Apart from this difference, the main purpose of the supply of know-how and the conditions subject to which it was to be used are identical. Therefore, it would be sufficient if we notice a few of the clauses in the agreement with Alfred Herbert. The preamble to the agreement specifies that Herbert who are manufacturers of machine tools, small tools and workshop equipment have agreed to grant to MK (Mysore Kirloskar) permission, to manufacture certain machine tools and workshop equipment for sale in India. Clause 1 states that Herbert hereby grant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for termination of the agreement if the quality of the products manufactured did not come up to the standards of Herbert. Under clause 8 it was provided that all machines manufactured pursuant to the agreement had to be sold under the trade mark " Herbert Kirloskar " which name had to be cast on all machines in a conspicuous space and had to be used in all quotations, specifications, orders, advertisements and description of the products. Under that clause it was specifically agreed that the assessee shall cease to use all the said trade marks or any of them in relation to any machine on the termination of the agreement. Clause 11 made provision for communication of information on improvements in the manufacture, design or use of the products which may come to the knowledge of the parties and licence for the user thereof free of any royalty. Clause 15 provided that Herbert would not authorise or assist any other concern in India to manufacture the products and spare and component parts thereof so long as the manufacturing capacity of the assessee will ensure a reasonable supply to satisfy the demand for the same in India and it further provided that if the assessee was un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain articles upon the technical knowledge of the foreign company for a limited period. The foreign company did not part with any of its assets absolutely for ever or for any limited period of time. It continued to have a right of user of its knowledge ; even after the agreement had run its course, its right in this behalf was not lost. The assessee did not acquire any right to the user of the name " HERBERT " in regard to the products even if the agreement had run its course. Actually, it could not use that name and had to discontinue such user or associating that name with the product to be manufactured thereafter. In the words of the Supreme Court in Ciba's case [1968] 69 ITR 692 " by making that technical knowledge available the foreign company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business ". From the terms of the agreement it is clear that (1) no secret process or technical knowledge was sold by the foreign company to the assessee ; (2) the period of user was for fifteen years ; (3) the object of the agreement was to obtain the benefit of the technical assistance for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and where such property is parted with for money what is received can be, but will not necessarily be, a receipt on capital account. But imparting " know-how " for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil. " This court in its judgment in Mysore Kirloskar Ltd. v. Commissioner of Income-tax [1968] 67 ITR 23 (Mys) referred to certain observations in Rolls-Royce's case [1965] 56 ITR 580 (HL) in the speech of Lord Radcliffe and in particular to the following : " These considerations lead me to say that, although 'know-how' is properly described as fixed capital by way of analogy, it is the kind of intangible entity that can very easily change its category according to the use to which its owner himself decides to put it. I am not sure that it is too much to say that it is his use of it that determines the category. It is not like a single physical entity which must be employed for production or else broken up : it is more like a fluid in store which can be pumped down several channels." After referring to these observations, this court proceeded to state (See [1968] 67 ITR 23, 30, 31) : " The above decision clearly establishes t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and purpose of the payments under both the sub-clauses are the same ; Only the payments are in two stages. Merely on this account the character of the payments is not changed. They cannot be treated differently. It is pertinent to point out that the relevant agreement considered by the High Court of Bombay provided for a lump sum payment, though payable in instalments, and the agreement itself was renewable for a period of five years at a time, if no notice terminating the agreement six months before the expiry of the period was given. Therefore, the period of the agreement by itself is not conclusive or determinative of the nature of payment whether it is of revenue or capital nature. This court in Mysore Kirloskar Ltd. v. Commissioner of Income-tax [1968) 67 ITR 23 (Mys) distinguished Ciba's case [1965] 57 ITR 428 (Bom) on the two grounds, viz., that the period of agreement in Ciba's case [1965] 57 ITR 428 (Bom) was only for a period of five years, and that the knowledge acquired by research would be outmoded in months or years in pharmaceutical industry and could not, therefore, be said to be an asset of capital nature. Both these criteria, in our opinion, are not determina ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
