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TMI Blog1979 (2) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Rs. 1,00,000 in the form of 10,000 equity shares of Rs. 10 each had been sought by the assessee company to be written off in 10 instalments and the amount of each instalment was claimed as Revenue expenditure in the relevant year. The ITO disallowed it treating it as capital expenditure and the AAC confirmed the said action of the ITO. The main point raised in all these appeals pertains to the said disallowance. These appeals were heard together and are disposed of, for convenience, by this common order. 2. The assessee company, on 16th Feb., 1968, entered into an agreement with Reinz Dichtugs Cubil, Now-UIm/Donou (hereinafter called Reiz) with a view to have foreign collaboration for the manufacture of compressed asbetos fibre sheets, and for this the assessee company sought the approval of the Central Government. The assessee company was informed in May. 1965, that the Government of India approved the assessee company's proposal to form a new company under the name and style of 'Reinz Dichtungs Cubil, West Germany, for taking up the manufacture of compressed absetes Fibre sheets, subject to the condition, Inter alia that the foreign firm may be paid a sum not exceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany the right to manufacture the said products inIndiaand was to deliver C.A.F. Material destined forIndiaonly to the Rupee company. The foreign firm was to supply in Germany to the Rupee company within two months after issue of the shares all appropriate technical literature, data, drawings, manufacturing process and other formula, information, advices and know-how for the manufacture of C.A.F. material After formulation of the Rupee company and its registration another formal agreement was had with the foreign firm in Feb., 1968. In this agreement the words sale in respect of the supply of secret process was dropped. The provision made in the bill was that 10,000 equity shares to Reinz shall be credited as fully paid up for secret process. The clause regarding the Reinz conferring exclusively to the Rupee company the right to manufacture the said products in India and to deliver C.A.F. material destined for India only to the Rupee company remained. The other provision that the Reinz shall be responsible for the supply in Germany to the Rupee company all appropriate technical, literary, data, drawings, manufacturing process and other formulae, information, advices and know-how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improvements devised by it in respect of the said products or own manufactured and if the same were patentatble, the Rupee company was to at once take such steps as may be necessary to have said patents registered at the cost of the Rupee company. At Reinz request, the Rupee company was also to take out letters patent in countries outsideIndiaat the expense of Reinz. The rupee company was to grant to Reinz a completely un-conditional, free of charge and exclusive licence for European countries and to avoid utilizing or exploiting the patents in such countries. Reinz was to advise the Rupee company of modifications or improvements made by Reinz in respect of the said products or its manufactures and the Rupee company was to introduce such modifications or improvements into the said products manufactured by it as soon as possible, if such introduction did not involve replacement of its plant or additional equipment to the plant. Throughout the period for which the agreement was to run the Rupee company was to use its best endeavours to promote and increase the sales of the said products inIndia. In consideration of the great of the manufacturing rights and the right to use the trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total payment was of Rs. 1,00,000 and that the first instalment written off in this year was of Rs. 9,288 relating to the period27th March, 1970to28th Feb., 71. This was the first year of operation of the assessee company. The AAC referred to the agreement dt. 25th March, 1966 between the Indian (Rupee company) and the foreign firm Reinz and observed that it was the payment of Rs. 1,00,000 in the form of 10,000 equity shares of Rs. 10 each that was being written off in 10 instalments and was being claimed as Revenue expenditure. The AAC further observed that the payment of Rs. 1,00,000 was for the purchase of secret process which remained un-effected even after termination of the agreement. The only condition laid down in the agreement was that no trade secrets of the manufacturing knowledge shall be disclosed to any other person, firm or company. The AAC further observed that after the termination of the agreement only the drawings, design, literature etc. were to be returned to Reinz and the trade name Reinz was also not to be used any more but that there was no mention of the return of the secret process. According to the AAC the Rupee company could continue making use of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licensing agreement and that after the termination of the licensing agreement, it was not to be open to the assessee company to use the drawings and all the technical information supplied by the foreign firm for its own purpose and it could not hand over, make assessable for inspection or otherwise in fact to other parties those drawings or technical information either during the continuance of the agreement or after its termination. In the matter before the Gujarat High Court, the point for consideration was whether the payment made to the foreign firm constituted sale price. Their Lordships of the Gujarat High Court observed that in view of the restrictions placed on the assessee company, it was not possible to say that the property in the workshop drawings etc. for which the consideration was set out in cl. 18, passed to the assessee company. Since the property in the goods in question, namely, workshop drawings etc., supplied by the foreign firm did not pass from the foreign firm to the assessee company there could be no sale of those goods; and there being no sale, it could not be said that the assessee company purchased these workshop drawings etc. The amount referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the Supreme Court's decision in CIT vs. CIBA of India Limited(3). The learned Departmental Representative, on the other hand, stated that there were no material changes between the two agreements and that the payment of Rs. 1,00,000 was the price for the secret process which was to become the property of the assessee company. It was further stated that as per the government ofIndia's letter dt. 25th May, 1975 the mention was that in consideration for the technical 'know-how' etc. to be supplied by the foreign firm, the foreign be paid a sum not exceeding Rs. 1,00,000 may in the form of free shares. The learned Departmental Representative further stated that explanation 2 in s. 9 of the IT Act referes to royalty and the secret process was something different. The learned Departmental Representative further referred to the provisions of s. 44 D and stated that it contemplated of royalty or fees for technical services and did not cover the payment made for acquiring a secret process. According to the learned Departmental Representative the secret formulae was paid for once for all and the asset acquired was of enduring benefits. The learned counsel for the assessee stated in rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness, it would be properly attributable to capital and would be of the nature of capital expenditure. If, on the other hand, it was made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it would be a revenue expenditure. If any such asset or advantage for the enduring benefit of the business was thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it was a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. Reliance in this regard is had on the Supreme Court's decision in Ram Avlamb Cement Company Ltd., vs. CIT(4) and Lahore High Court's Full Bench decision in Banarsi Dass Jgaan Nath(5). A similar view was taken by the Calcutta High Court in the case of CIT vs. Aluminium Corporation of India Ltd.(6) Calcutta It was observed there that whether a particular e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o how the raw materials were to be utilised and how the goods were to be manufactured. The formulae, therefore, became a part of the manufacturing process without the aid of which the goods could not be manufactured. It became at par with the other items of raw material. For example if a Westerner was to be taught as to how a Chapati was to be manufactured or cooked, he was not to be told only in respect of the flour and water and the firm but also as to what was the formula for mixing the flour and the water and how the mixture was to be flattened and then put on the stove and finally directly on the coal fire or the gas fire for some time. The formula, here was as much to the part in the manufacture of the Chapati as the flour and the water. If any payment was made for acquiring the formula, the expenditure would be so related to the manufacturing process of the Chapati that it might be regarded as an integral part of the profit making process in case the Chapaties after being manufactured were to be put on sale. Further there was to be periodical inspections by the foreign firm in the case of the assessee company before us and the assessee company had to maintain a proper standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made periodically. In Jeffrey vs. Rolls royce Ltd.(7) payment received for licencing a foreign Government to manufacture aero-engines with the accumulated technical knowledge of the taxpayer and for supplying the necessary information and drawings, and for advising the foreign Government as to improvements and modifications in manufacture and design, instructing the licencee's personnel in their words and for releasing members of their own staff to assist in the manufacture of engines by the licencee, was held to be received on revenue account of the taxpayers's trade. In CIT vs Ciba of India Ltd.(3) a Swiss company undertook to deliver to its Indian subsidiary assessee company all processes, formulae, scientific data, working rules and prescription pertating to the manufacture or processing of products discovered and developed in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliography information, pamphlets or drafts, which might be useful to introduce licensed preparations and to promote their sale in India. It was held, on facts, that the royalty, agreed to be paid by the assessee at a percentage of their slae was allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, any more than a teacher sells his knowledge or skill to his pupil [Also see : CIT vs. Hindusthan General Electricla Corporation Ltd.(13), holding that the expenditure for getting know-how was of a revenue nature]. Having regard to all the facts and circumstances of the case, we are, it is held, inclined to agree that the payment of the amount of Rs. 1,00,000 in instalments over a period of 10 years called for being allowed as a revenue deduction in the relevant years and we order accordingly. 6. The next objection of the assessee is regarding the disallowance of Rs. 4,792 claimed as water development charges. This objection pertains to the year, 1971-72 1972-73 and 1973-74. A sum Rs. 4,792 each year was disallowed in these relevant years from out of the rates and taxes account which was paid as water development charges and licence fee. The payment was to Gaziabad Improvement Trust. Water bills of the company were being paid separately. The payment of Rs. 4,792 was made four times over a period of four years in instalments. The Department considered that the payments were in fact development charges of land used for building a factory of the assessee company and that as such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary therefor. The assessee company was to pay to such expert (engineer) and to the other technical staff accompanying him the salary which they would normally received in West Germany during their stay in India and also to pay their return air passage as well as incidental travelling expenses and to also provide free accommodation, food and medical attention that such engineer or other technical staff may require. The expert was to use his best endeavour to train sufficient staff of the assessee company inIndiato carry on subsequent manufacture. The AAC issued enhancement notice to the assessee company for further disallowing the salary paid to the foreign technician in addition to the disallowance of expenses incurred during his stay inIndia. The foreign technician had arrived inIndiaon21st Feb., 1970and he left on6th June, 1970. It was claimed that production was started on27th March, 1970. The AAC, however, referred to a certain report of the assessee submitted to the Directorate General of Technical Development, Udyog Bhavan,New Delhifor the month of April, 1970 in which the assessee had stated that till 23rd of April, it was having experimental production resulting in ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Expenses : a) Actual Expenses incurred for 3 days stay at Bombay 327.78 b) Air ticket from Delhi to West Germany 2,826.00 c) Air freight for unaccompanied baggage and Rs. 179.00 customs clearings. 31015.00 2. Out of Misc. Expenses : Hotel charges from 1st Feb., 1970 to 6th June, 1970. 5,708.86 ---------- TOTAL 9,051.64 ---------------------------------------------------------------- We find force in the arguments of the learned counsel for the assessee that the assessee's report to the Director General of Technical Development did not indicate that the production was started only after 23rd of April, 1970. In fact, this report showed that production was already in progress. There had to be experimental production to obtain certain results in different phases and in different directions. There is nothing on record to show that in Feb., 1970 when the foreign technician arrived, the assessee company was not already having production. The expenditure of Rs. 9,051 cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gar with great respect I regret my inability to agree with him on the main point at issue in this batch of appeals that the amount of Rs. 1,00,000 paid by the appellant for acquiring the secret process and written off by it in instalments over a period of ten years should be allowed as Revenue expenditure in the relevant years. 2. It is seen from the published final accounts of the appellant company for these five years that this amount of Rs. 1,00,000 paid for acquiring the secret process is shown on the assets side of the balance-sheet under the following head: Deferred Revenue Expenditure: Technical know-how in respect of manufacturing process as on28th Feb., 1970. I agree with the learned counsel that this description of this payment in for the assessee's books is neither conclusive nor decision of the point at issue. But at the same time it shows as to how the assessee has treated it in its books of accounts. 3. Similarly the description of this amount has consideration for the technical know-how in the letters dt.25th May, 1965,8th Nov., 1965and25th Nov., 1965from the Government of India approving the proposal of the promoters of the appellant company for the techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In consideration of the grant of the manufacturing rights and the right to use the trade name and trade mark of REINZ and the technical and other assistance supplied or to be supplied by REINZ under this Agreement the rupee company shall in addition to the Rs. 37,500 'A' Equity Shares of Rs. 10 each as mentioned in Clause 2(ii) above pay to REINZ subject to Indian Income-tax a yearly royalty of 3 per cent (There percent) on the ex-factory selling price of the products for a period of ten years and subject to the condition that this payment in any one year shall not exceed DM Rs. 50,000 during the First Five Years and DM Rs. 45,000 during the next five years. The first annual payment of this royalty shall be due and payable to REINZ after twelve months of the date on which the production of the said products in the Rupee company began and the subsequent annual payments becoming due and payable every twelve months thereafter". 5. Reading the two clauses together as a whole, as contended by the appellant, it would be seen that these two clauses provide for three specific items of services to be rendered by REINZ to the appellant company and for each of these specific services, spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant company in its new factory depended and is being carried on. The irresistible conclusion that follows from the above is that this amount of Rs. 1,00,000 paid by the appellant in the form of shares represents the cost of acquisition of the secret process which is an intangible asset to the appellant company and therefore constitutes capital expenditure in its hands. The fact that the appellant itself writes off this amount in instalments for the period of ten years for which this collaboration agreement is to be in force establishes that this capital expenditure of Rs. 1,00,000 has brought into the existence an enduring benefit and advantage in the form of a secret process to the appellant company which would be available to it for the entire period of ten years of the Agreement. 8. I am inclined to agree with Shri C.V. Gupta, the learned Departmental Representative that the use of the "words in addition to" in cl. 25 brings out the true nature of the various items of consideration paid for by the appellant company to REINZ under this Agreement. 9. I am unable to accept the contention of Shri P.N. Chopra the learned counsel for the appellant that there was no enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of one's business or profession are expressly included within the meaning of the word "plant". Hence, there is no reason to exclude from the wide meaning of the term objects of similar nature such as drawings, patterns, designs etc. which like books, are the embodiments of know-how and serve the purpose of teaching at long range. Having regard to the legislative intent to give a wide meaning to the word "plant" material record of know-how (even assuming that know-how itself is intangible) is clearly included within the meaning of the word "plant" in s. 32. In Elecon Engineering co.'s case (1974)96 ITR 672(Guj) the assessee acquired drawings and patterns for the manufacture of gear units and conveyer idlers form foreign collaborators. The agreement between the assessee and the foreign collaborators provided that the assessee would receive "all existing and upto-date patterns, drawings and information which the authorised manufacturer requires". The Tribunal found as a matter of fact that the drawings and patterns formed the business of manufacturing the machinery in question, and we hold that the drawings and patterns by themselves did not perform any mechanical operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the matter may have to go back to the ITO for enabling the assessee to furnish the necessary particulars in conformity with the Act and the rules for allowance of such depreciation, I am inclined to accept the last contention of Shri C.V. Gupta. Accordingly I would set aside the orders of the authorities below in this point alone and restore the matter to the file of the ITO who is directed to allow an opportunity to the assessee to furnish the necessary particulars for allowing some depreciation in accordance with rules in respect of this amount of Rs. 1,00,000 paid for secret process which should be treated as "plant' for allowance of such depreciation. 12. In view of the discussion above I do not consider it necessary to examine the various decisions cited on both sides which in my view turned on their peculiar facts. 13. On other points disputed in these appeals. I respectfully agree with my learned Bother. 14. In the result all these appeals should be treated as partly allowed. Per V.P. Tevwari Vice President On there being a difference of opinion between the two learned Members, the following issue has been referred to me by the President under s. 255(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Judicial Member, however, did not agree for the reasons mentioned in this separate order and held that the expenditure was of a capital nature. He of course directed the allowance of permissible depreciation on the same according to law. Thus the short question for my consideration is, whether the expenses claimed by the assessee in regard to the aforesaid was of revenue nature spread over a period of 10 years or the same was of capital nature on which the permissible depreciation should be allowed. There is no dispute and possibly there cannot be any dispute on the legal proposition to the effect that the issue in each case has to be decided on the facts of the case. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it would be properly attributable to capital and as such would be a capital expenditure. On the contrary, if it was not made for the purpose of bringing into existence an asset or advantage but for running the business or working it with a view to produce the profits it would be a revenue expenditure. The question whether the source of the payment was a capital or the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to manufacture the said products inIndiaand will deliver CAF material destined forIndiaonly to the Rupee Company. 12. REINZ shall be responsible for the supply in Germany to the Rupee Company all appropriate technical literature, data, drawings, manufacturing processes and other formulae, information, advices and know how for the manufacture of CAF material or otherwise relating to the said project as may be reasonably required by the Rupee Company. 16. If the Rupee Company shall at any time of times during the validity of this Agreement desire to have a reasonable number of its staff, which will require the consent of both the parties hereunder, trained in the manufactures of the said products, then REINZ shall undertake the training of such staff in the factories of REINZ for a period to be mutually agreed upon per person. All travelling, living and other out-of pocket expenses and the salaries payable in respect of such staff shall be borne by the Rupee Company. 17. The Rupee Company, shall subject to the proviso herein contained be entitled to sell the said products manufactured by them under the terms of this Agreement in India and shall have the right of export ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and payable to REINZ after twelve months of the date on which the production of the said products in the Rupee Company began and the subsequent annual payments becoming due and payable every twelve months thereafter. 29. The Rupee Company shall not (and shall procure that its officers employers or agents do not) either before or after the termination of this Agreement disclose to any person, firm or Company any of the Trade secrets or manufacturing knowledge of REINZ which the may learn by virtue of this Agreement. After its termination they shall render up and return to REINZ all drawings, designs, literature or other matters in relation to the manufacture of the said products supplied to them hereunder. Likewise after termination of the Agreement the trade name REINZ shall not be used any more in any way, also the name of the Company is to be changed in that the name REINZ should disappear. 33. This agreement shall not be assignable by any party without the consent of the other. 38. This agreement shall be deemed to have become effective as from the 16th of Feb., 1968 last part and shall continue in force for a period of ten years from the commencement of production of sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn was that no trade secrets of the manufacturing knowledge shall be disclosed to any other person from our company. Only the drawings, designs and literatures etc. were to be returned to the REINZ. There was absolutely no mention of the return of the secret process. The terms and conditions of the agreement in my opinion have to be read as a whole and not piece-meal to find out the intention of the parties. In my opinion the first agreement in 1966 between the foreign company and the promoters would not clinch the issue and as a matter of fact would not be very relevant for our purpose also as the same was not between the foreign company and the assessee company. As a matter of fact both the learned Members seem to agree on this issue as to which is the proper agreement which could be looked into for the purpose of determination of the terms of the contract as the learned Judicial member has mentioned in its order that "I agree with the learned counsel that for the purpose of ascertaining the true nature of this payment we should look into the agreement dt.6th Feb., 1968entered into between the appellant company and the German Company "REINZ" in view of the specific provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company during the said period and the results achieved were to be exchanged amongst them. These results were to be applied to the goods manufactured. The assessee's representative after referring to the various terms of the agreement dt.16th Feb., 1968submitted that the treatment given by the assessee company to the said item is also a relevant factor for consideration. According to him it is incorrect to say that the consideration was for separate services to be rendered by the foreign company. As a matter of fact the consideration was for the total services which were in a compact form. In his submission there was no secret process as such, which was supplied by the foreign collaborators to the assessee company and whatsoever information data or details we re-supplied were to be utilised for manufacturing of goods. Such informations became a part of the manufacturing operations of the assessee without the aid of which the goods could not be manufactured. The same as such came at part with the items of transactions and it is incorrect to give a different treatments to this particular item of expenditure as compared to other items. After the termination of the agreement the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making use of the secret process to manufacture blades as the Rupee company is not going to close down on the termination of agreement." It is also stated therein that: "The issue of 10,000 shares of Rs. 10 each by the appellant to Reinz is not related to the assistance which is to be rendered in exchange of royalty. It is as a sale price of the secret process. The sale being an out-right one, the expenditure is not related to sales". He has also referred to a letter from the Government to show the terms and conditions on which the collaboration was agreed upon. He has also stated that in the copy of the account the assessee has himself mentioned "copy of account of secret process from8th Aug., 1968to28th Feb., 1975." The entry therein reads a below: "10,000 Equity Shares of Rs. 10 each fully paid up issued." It was mentioned that after the word `issued' there were certain narrations also, which has been erased and as much it could not be said that the same was not for supply of secret process. It was submitted that the case laws referred to by the assessee's representative are distinguishable as in none of them. The question of payment for secret process came for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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