1969 (4) TMI 24 - HC - Income Tax

Under an agreement with foreign company assessee acquired certain rights to manufacture and sell in India products of Simplex design and to use the trade name Simplex on the terms and conditions therein mentioned - royalty paid for know-how and advice cannot be held to be of capital nature - allowable as deduction

Issues Involved:
1. Nature of the expenditure (capital or revenue) incurred by the assessee for royalty payments.
2. Interpretation of the agreement between the assessee and the foreign company regarding the use of trade marks and technical know-how.
3. Applicability of legal principles from precedent cases to determine the nature of the expenditure.

Issue-wise Detailed Analysis:

1. Nature of the Expenditure (Capital or Revenue):
- The primary issue was whether the sum of Rs. 13,938 paid by the assessee as royalty to the foreign company was a capital expenditure or a revenue expenditure. The Income-tax Officer initially disallowed the deduction of Rs. 13,938, deeming it a capital expenditure. However, the Appellate Assistant Commissioner and the Tribunal considered it a revenue expenditure, as it was dependent upon production and did not create any enduring asset.

2. Interpretation of the Agreement:
- The agreement dated May 21, 1956, between the assessee and the foreign company granted the assessee the right to use the foreign company's trade mark "Simplex" and acquire technical know-how. The agreement included various clauses detailing the terms of payment, use of trade marks, and the provision of technical assistance.
- Clause 3(a) required the assessee to pay for prints, designs, and other information annually. Clause 9(a) stipulated royalty payments based on production percentages.
- The Tribunal concluded that the assessee acquired the right to use the trade mark and technical know-how without owning them permanently. Payments were recurrent and tied to production, indicating a revenue nature.

3. Applicability of Legal Principles from Precedent Cases:
- The court referred to several precedent cases to determine the nature of the expenditure:
- In *Commissioner of Income-tax v. J. K. Industries (Private) Ltd.*, expenses incurred for exploring technical collaboration were considered business expenses as they aimed to increase earnings.
- In *Mysore Kirloskar Ltd. v. Commissioner of Income-tax*, payments for acquiring new manufacturing techniques were deemed capital expenditure as they were for new types of machines.
- The Supreme Court case of *Commissioner of Income-tax v. Ciba of India Ltd.* was particularly relevant. The court held that payments for technical assistance and use of patents and trade marks were revenue expenditures as they did not confer any enduring advantage or asset to the assessee.
- The court also referenced *Musker v. English Electric Co. Ltd.*, where payments for imparting "know-how" were considered income receipts, not capital.

Conclusion:
- The court concluded that the payments made by the assessee were revenue expenditures. The agreement provided technical know-how and the right to use the trade mark "Simplex" without transferring any enduring asset to the assessee. The payments were recurrent and linked to production, aligning with the principles established in precedent cases.
- The court answered the question in favor of the assessee, allowing the deduction of Rs. 13,938 as a revenue expenditure in computing business profits. The Commissioner was directed to pay the costs of the reference to the assessee.

Separate Judgments:
- Sabyasachi Mukharji J. concurred with the judgment delivered by Sankar Prasad Mitra J.

Summary:
The court determined that the sum of Rs. 13,938 paid by the assessee as royalty was a revenue expenditure, allowing its deduction in computing business profits. The agreement provided technical know-how and trade mark usage rights without transferring enduring assets, aligning with legal principles from precedent cases.

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