TMI Blog1976 (11) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... t the two parties agreed to form a new company for the manufacture in India of electrodes with a capital of Rs. 10 lakhs, of which Rs. 9 lakhs were to be subscribed. Under the said agreement the Panama company was to take 20% of the authorised capital. The new company was to be called M/s. J. B. Advani Oerlikon Electrodes Ltd. This company, which was subsequently formed, is the assessee-company. On the very same date, M/s. J. B. Advani Co. entered into another agreement with M/s. European Intercito Ltd. of Switzerland (which is hereinafter referred to as the " Swiss company "). The Swiss company was the owner of the patented process known as Oerlikon Intercito process for the manufacture of electrodes required in electric welding. The patent was available in India also. We shall have occasion to refer to the provisions of the said agreement in some detail later on. Under article 8 of the said agreement the licensee, in consideration of the rights transferred to it under the agreement and of the obligations assumed by the Swiss company, agreed to pay to the Swiss company a running royalty of 2% and a contribution of 3%. The agreement was to enure for a minimum period of fifteen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in patent rights belonging to it, and by article 2 a licence is granted to the licensee, the assessee-company, for the sole manufacturing and selling rights of the said process for India, Ceylon, Burma, China, Malaya Indonesia and the Far East ; these countries have been subsequently referred to in the agreement as the specified territory. Article 3 contains the rights and obligations particularly of the licensee as regards manufacturing of electrodes. Article 4 provides that, subject to an import licence being granted, the licensee is to order from an associate of the Swiss company a complete electrode manufacturing plant according to the schedule attached to the agreement. Article 6 provides that, during the tenure of the agreement, the Swiss company would place at the licensee's disposal all improvements in connection with the manufacture of welding electrodes and machinery free of charge. A reciprocal obligation is also assumed under the very clause by the licensee and the Swiss company is permitted, in its turn, to use the improvements communicated by the licensee to the Swiss company in Switzerland as well as in other countries. Article 8 provides for royalties and clause (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate in Switzerland with reference to the processes employed by the assessee in its manufacture ; in this correspondence various problems that arose in the course of manufacture in India have been referred to the Swiss company and its assistance is sought for the solution of such problems. The point sought to be made out was that although some wider research was carried on in Switzerland by the Swiss company, as far as the assessee-company was concerned it was merely utilising the facility afforded in Switzerland in the shape of laboratories, etc., in order to solve some of the difficulties encountered by the assessee in its own manufacture in India. It is necessary to refer in detail to the correspondence which is made part of the statement of the case as annexure " D " (collectively). But a perusal thereof would seem to bear out the point urged by the assessee before the Tribunal. In fact, if the later part of article 8(a) is carefully scrutinised, it is clear that the research work which may be sought for by the licensee was " in order to enable the licensee to the smooth running of his production and to meet the demands of the market ". It is obvious, therefore, that this w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 (Bom) was for a period of five years, whereas the agreement with the Swiss company was to enure for fifteen years. The learned counsel for the revenue before us took us through the judgment of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) as also through the observations of the Madras High Court in Fenner Woodroffe Co. Ltd. v. Commissioner of Income-tax [1976] 102 ITR 665 (Mad). The Madras High Court has also set out in its judgment the facts and the reasoning of the Andhra Pradesh High Court in Hylam Ltd. v. Commissioner of Income-tax [1973] 87 ITR 310 (AP). In our opinion it is unnecessary to try to apply the principles enunciated by the Supreme Court in Ciba's case [1968] 69 ITR 692 (SC) to the clause of the agreement in question. It is not possible to hold that the 3% contribution considered separately by itself is referable to the rights given to the licensee to use the Oerlikon Intercito process as well as the further obligation on the Swiss company under article 6 of the agreement to place at the licensee's disposal subsequent improvements in the said manufacturing process. As a matter of fact, the Commissioner seems to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a capital nature, the provisions contained in section 10(2)(xiv) do not come into the picture at all. Section 10(2)(xv) allows allowance being made in respect of " any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. " In our opinion, the contribution at the rate of 3% must be regarded as expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee as payment for some advisory or consultancy service and it cannot be regarded in the nature of capital expenditure. It may be pointed out that even in Hylam's case [1973] 87 ITR 310 (AP) the Andhra Pradesh High Court considered certain payments for consultancy service and allowed the assessee two-thirds of such payments after making apportionment between capital and revenue in the proportion of 1 : 2. The provisions contained in the later part of article 8(a) of the agreement would seem to be in the nature of payment made to the Swiss company for w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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