1979 (2) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Whether the technical aid fee paid by the assessee to Joseph Lucas (Industries) Ltd. of the U.K. under the collaboration agreement dated May 4, 1966, is allowable as business expenditure or whether the whole or any part of it (not exceeding 50% thereof) is liable to disallowance as capital expenditure.

Summary of Judgment:

Issue 1: Allowability of Technical Aid Fee as Business Expenditure
The relevant assessment years are 1967-68, 1968-69, and 1969-70. The assessee, engaged in the manufacture and sale of brake equipment for automobiles, entered into a collaboration agreement with Joseph Lucas (Industries) Ltd. of the U.K. on May 4, 1966, which was effective from January 1, 1966, and retrospectively from April 1, 1964, under a supplemental agreement dated June 2, 1969. The agreement granted the assessee exclusive rights to use and vend the licensed devices in India and non-exclusive rights to export. The consideration included a fee of 1.5% of the factory cost for technical services and a royalty of 2% for the license and rights granted.

The ITO allowed royalty payments as deductions but disallowed 50% of the technical aid fees, treating it as capital expenditure. The AAC reversed this, holding the expenditure as revenue in nature, not capital, as it was for the use of knowledge, not acquisition of an asset. The Tribunal upheld the AAC's decision, referencing a similar case (CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338) where the technical aid fee was deemed revenue expenditure.

Consideration of Clause 8(b)
The revenue's counsel argued that clause 8(b) indicated an enduring benefit, as it required the U.K. company to share improvements with the assessee without additional payment. However, this clause was reciprocal, requiring both parties to share improvements, and did not introduce a capital element into the payment. The consideration in clause 7 was for drawings, assistance, etc., not for enduring benefits.

Reference to Assessment Order for 1965-66
The revenue's counsel also referred to an agreement clause allowing the assessee to continue manufacturing with acquired technical information post-agreement, suggesting an enduring benefit. However, the court noted that the specific agreement was not before them, and even if it were, the payment was for specific purposes during the agreement period, not for acquiring permanent knowledge.

Comparison with Other Cases
The court distinguished this case from Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890, where the agreement allowed indefinite use of information post-agreement, indicating a capital element. In contrast, the present case involved a limited period license for using technical knowledge, aligning with the Supreme Court's decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692.

Conclusion:
The court concluded that the technical aid fee constituted a revenue expenditure, not capital, as the assessee did not acquire any enduring asset or advantage. The question was answered in favor of the assessee, allowing the entire technical aid fee as a revenue expenditure. The assessee was entitled to costs, with counsels' fee set at Rs. 500 one set.