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TMI Blog1990 (6) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic viability. The Escorts and JCB were to bear their own costs in the development and manufacture of the prototype including the supply of parts, designs, transport charges and travelling expenses in respect of their separate obligations. JCB was to design a lengthen chasis for the prototype with such assistance by Escorts as would be necessary. Escorts, on the other hand, was to design a skid unit technically and economically capable of being fitted with the chasis designed by JCB. On being satisfied as to the technical, commercial and economic viability of the product, a joint venture agreement was executed on13th February, 1979 between JCB on the one part and Escorts on the other part. On having jointly developed the prototype the parties agreed to establish a joint company inIndia called as Escorts JCB Ltd. hereinafter referred to as 'JVC' for the purposes of manufacturing the product. By virtue of the said agreement JCB agreed to grant an exclusive licence to the joint venture company for the manufacture of the product inIndia. The JCB agreed to subscribe for the equity shares at 40 per cent of the total issued capital whereas Escorts agreed to subscribe for equity shares t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the agreement and the claim was allowed as revenue expenditure by the assessing officer. However, the CIT(A) in exercise of his powers u/s 263 had withdrawn the deduction of royalty. In appeal the ITAT has cancelled the order of CIT in consequence of which the order passed by the assessing officer for assessment year 1981-82 in allowing deduction of royalty to the assessee company as revenue expenditure stands restored. 4. For the assessment year 1982-83, the year in appeal, the assessing officer has rejected the claim of the assessee on the ground that the expenditure was incurred for acquiring a capital asset in the shape of technical know-how or data for technical assistance. According to the assessing officer there is no prohibition to the assessee for issuing sub-licence for the manufacture of the product. There is also no prohibition for the assessee to manufacture the items after the expiration of the agreement. Moreover, the assessing officer was of the view that the expenditure was related to the carrying on or conduct of the assessee's non-existent business and was not an integral part of the profit earning process. The assessing officer has relied upon the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel further pointed out that the assessee company by virtue of article 2.7 acknowledged the right of JCB to the exclusive use and ownership of trade marks and trade names. Referring to the decisions of the Delhi High Court in the cases of Shriram Refrigeration Industries Ltd., Triveni Engg. Works Ltd. and Shama Engine Valves Ltd., the learned counsel contended that the facts of assessee's case are almost identical with the facts of the cases referred to above before the Hon'ble Delhi High Court. In all the three cases referred to above payments for technical know-how irrespective of mode of payment have been held to be on revenue account. The learned A.R. pointed out that the Delhi High Court has followed the decision of the Hon'ble Supreme Court in the case of Ciba of India Ltd. in arriving at the decision. Shri Dinodia accordingly contended that the decisions of the jurisdictional High Court being directly applicable to the facts of this case may be followed and the orders of the assessing officer as well as that of the CIT(A) may be reversed. Referring to the contrary decision of the A.P. High Court in the case of Warner Hindusthan Ltd., the learned counsel contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he JVC had no right to pass on such document and information to third parties without the prior consent of JCB. The learned counsel further drew our attention to article 6 of the agreement to show that there was an obligation upon the company to keep the information relating to the product etc., as secret. Shri Dinodia vehemently argued that the secrecy clause in the agreement should clinch the issue in favour of the assessee as it would be a decisive factor to prove that the JCB did not transfer any asset to the assessee company absolutely. The learned counsel further pointed out that under Article 7 of the agreement the assessee could not sub-licence technical know-how, engineering design etc., without the prior consent of the JCB. Shri Dinodia accordingly contended that there was no absolute transfer of the technical know-how to the assessee company. Shri Dinodia referred to Article 10.2 of the agreement to show that the assessee company was not entitled to use the trade marks and trade names unless JCB remained a shareholder in the company. The learned counsel accordingly contended that this article makes it abundantly clear that the JCB had transferred to the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the decision of the Hon'ble Delhi High Court are not applicable to the facts of this case. The learned D.R. contended that under Article 7.2, the assessee company had the right of sub licensing. Admittedly there was a restriction of prior permission from the collaborator for grant of sub-licence to others but such a restriction was to ensure that the technology was not transferred to foreign countries. The learned D.R. further contended that the mode of payment is irrelevant. If the payment is made for acquiring an asset of enduring nature, the payment would be on capital account even if it is related to the sales for purposes of calculation. Since in this case the nature of transaction is to be taken into account and not the mode of payment, the payment of royalty is not permissible as a deduction on revenue account, Shri Bakshi contended. 8. The learned D.R. further contended that the technical know-how, licence and the services from the foreign company were acquired by the assessee company prior to commencement of business. Since entirely a new product was manufactured assessee has aquired an advantage of enduring nature. The learned D.R. relied upon the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. 11. On13th February, 1979, the foreign company, viz., J.C. Bamford Excavators Ltd. executed an agreement with a joint venture company, viz., Escorts JCB Ltd. By virtue of this agreement the foreign company JCB has granted the exclusive licence for theterritoryofIndiato the assessee company for the term of the agreement. The assessee company also agreed to provide technical assistance and technical documents for the purposes of manufacturing the product. Article 2.6 makes it obligatory for the assessee company to sell the product as JCB product. Even the colour painted on the product was to be on the instructions of JCB. The quality standards were to be met to the satisfaction of the foreign company JCB. Clause 2.7 which, in our view, has an important bearing on the subject is reproduced below : " JCB may in its absolute discretion permit the use of its registered trade mark or name in connection with the product and the JVC acknowledges the right of JCB to the exclusive use and ownership of such trade marks or name. " 12. It is evident from the above clause in the agreement that the ownership of trade marks is exclusively of JCB. Article 2.8 also provides that all te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade name unless foreign company remained a shareholder in the assessee company. It is evident from the article that the use of patent, trade name and trade mark was in consideration of share holdings by the foreign company and not in consideration of payment of royalty. This becomes evident from Article 4 of the agreement which provides for payment of royally. In this article it is clearly provided that royalty equal to 5 per cent of the net ex-factory sale price of the product would be payable to the foreign company for a period of 5 years subject to extension, in consideration of technical documents and assistance, technical services and know-how to be provided by the foreign company : Article 22.2 authorise the foreign company to terminate the agreement if there was a breach by the assessee company of its obligation. Article 22.4 provides that in the event of JCB terminating the agreement JVC would forthwith cease to manufacture the product and part thereof. In such event the assessee company was under an obligation to return the information relating to the product to JCB and not to keep any copy thereof and not to make use of it directly or indirectly. This article further pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate though, they end often by enslaving it. The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital or revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. There is also no single definite criterion which, by itself is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. " Referring to rapid advances in research and antibiotic medical micro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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