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Issues Involved:
1. Whether the sum of Rs. 18,825 paid by the assessee to the foreign company as royalty and technical fee is a revenue expenditure or capital expenditure. 2. Interpretation of the agreement between the assessee and the foreign company. 3. Application of relevant case laws and principles to determine the nature of the expenditure. Issue-wise Detailed Analysis: 1. Nature of the Expenditure (Revenue vs. Capital): The primary issue is whether the payment of Rs. 18,825 by the assessee to the foreign company under Article 6(a) of the agreement is a revenue expenditure or capital expenditure. The Tribunal held that the payment was capital expenditure, as it enabled the assessee to start a new line of business, thereby acquiring an asset or advantage of an enduring nature. However, the Court concluded that the payment was a revenue expenditure, as the assessee did not acquire any capital asset or enduring benefit. The payment was made for the use of patents, technical knowledge, and trademarks, which remained the property of the foreign company. The expenditure was aimed at producing profits in the conduct of the assessee's business and was related to the annual production, making it a recurring and indefinite payment, not a capital outlay. 2. Interpretation of the Agreement: The agreement between the assessee and the foreign company granted the assessee a non-exclusive license to use patents, technical knowledge, and trademarks for manufacturing "ribbed tor-steel." The agreement did not transfer ownership of these assets to the assessee. The foreign company retained proprietary rights and could terminate the agreement upon certain conditions. The payment under Article 6(a) was not a lump sum or predetermined amount but was based on the annual production, indicating a revenue nature. The agreement was for an indefinite period and could be terminated at any time, further supporting the view that the payment was for a temporary benefit rather than an enduring advantage. 3. Application of Relevant Case Laws: The Court referred to several case laws to determine the nature of the expenditure: - CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC): The Supreme Court held that payments for technical assistance and use of patents were revenue expenditures as the assessee acquired a mere license, not an enduring benefit. - Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC): The Supreme Court emphasized that the aim and object of the expenditure determine its nature. - Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Kar) and Hylam Ltd. v. CIT [1973] 87 ITR 310 (AP): These cases were distinguished as they involved different facts and agreements. The Court disagreed with their conclusions, emphasizing that each case must be decided on its own facts and legal principles. - Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC): The Supreme Court held that not every enduring advantage results in capital expenditure. The Court concluded that the payment was a revenue expenditure, as it was for the use of trading assets of the foreign company, aimed at producing profits in the assessee's business. The expenditure did not bring into existence any asset or enduring benefit for the assessee's business. Conclusion: The Court answered the question in the negative, holding that the sum of Rs. 18,825 paid by the assessee to the foreign company was a revenue expenditure and, therefore, an admissible deduction. The judgment emphasized the importance of the aim and object of the expenditure and the nature of the agreement in determining whether an expenditure is capital or revenue.
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