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TMI Blog1982 (4) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. 3. The assessee-company was incorporated for the purpose of carrying on of the business of manufacture of cycle chains and automobile chains. There was an agreement between Diamond Chain Co. Inc., USA, a corporation organised and existing under the laws of the State of Indiana, US, shortly referred to as ' Diamond ', and TII, a company incorporated under the Companies Act, 1956, in India (' TII '), dated 11-10-1961. In this agreement, it is stated that ' Diamond ' has for many years been engaged in the manufacture of power-transmission chain and sprockets and other products described as ' subject products ' and has accumulated knowledge and experience in that field ; that it is the owner of a diamond shaped (rhomboidal) figure and of the word ' Diamond ' as trade-marks or subject products which are widely known and accepted ; that TII desires to engage in the business of manufacturing and selling subject products and to receive the benefit of Diamond's knowledge and experience and the use of such trade-marks and Diamond desires to be associated with TII in such business, all by means of a separate Indian Ltd. company owned by TII and Diamond ; and that for such purpose, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive right of manufacture, use and sell subject products under the said trademarks in India and 600 equity shares of the par value of Rs. 100 per share in consideration of the Diamond supplying to the assessee with its existing engineering data and technical information designed to enable the assessee to produce and sell subject products, such as information in regard to machinery, tools, appliances, methods and techniques employed by Diamond in manufacture and sale of such products, drawings and specifications pertaining to the structure of subject products, and information in regard to sources of supply for raw materials, supplies, machinery and equipment required for the production of subject products. The information, copies, notes, sketches, etc., to be supplied by Diamond were to be held in strict confidence by the assessee and were not to be disclosed to anyone except employees thereof and where appropriate to sales agents and then also only to the extent necessary. Diamond also agreed to arrange for instruction and training in the manufacture of chains and allied products of the assessee's representatives on the assessee giving necessary information to Diamond, details as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Southern Structurals Ltd. [1977] 110 ITR 890 (Mad.), Antifriction Bearings Corpn. Ltd. v. CIT [1978] 114 ITR 335 (Bom.), Indian Telephone Industries Ltd. v. CIT [1979] 117 ITR 682 (Kar.), CIT v. Tata Engg. Locomotive Co. (P.) Ltd. [1980] 123 ITR 538 (Bom.), Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP) (FB) and Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 (Delhi). 6. The learned departmental representative, on the other hand, relied on the remand report of the AAC. He further referred to the recitals in the preamble of the agreement between Diamond and TII, where the third recital shows, according to him, that the purpose is the manufacture and sale of certain commodities. It is further submitted by him that what is exchanged for the technical know-how is the shares of the assessee-company, which is a capital asset. Reference is made and reliance placed on the following decisions--Fenner Woodroffe Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad.), Southern Structurals Ltd.'s case, Jonas Woodhead Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad.) (FB) and Shriram Refrigeration Industries Ltd.'s case. He also made reference to the commentary on Income-tax by Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l its existing permits from the Government or agencies thereof to manufacture and sell the products, etc. The technical information, data, drawings and specifications and other services to be provided by the two companies, Diamond and TII, no doubt, are intended to assist in the production or manufacture of the articles and goods contemplated by the parties. The agreements, in our view, contemplate continuous and uninterrupted feeding and supply of such technical information, data, etc., pertaining to the products to be manufactured. The facts and circumstances in the present case in which the assessee has sought to secure for itself the said technical information, data, particulars, specifications, etc., are totally different from the facts and circumstances in which the assessees in the various decisions relied on have contracted to secure such information, data, particulars, specifications, drawings, etc., and this distinction, in fact, in our view, vitally affects the question in issue before us in this appeal. 8. We shall first of all consider the Supreme Court decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, which appears to be a leading case. Even assuming that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies to the facts of the case because the terms of the agreement extracted in the report appeared to be more or less similar to the one considered in the Supreme Court decision. 10A. Similarly, in I.A.E.C. (Pumps) Ltd.'s case, the Madras High Court having regard to the various clauses of the agreement in that case with the foreign collaborator for use of licences and patents held that the payment therefor was only a licence fee and not the price for acquisition of any capital asset, applying the ratio of the Supreme Court decision in Ciba of India Ltd.'s case. 11. In Antifriction Bearings Corpn. Ltd.'s case, the payment of a guaranteed yearly royalty during the term of the contract for acquisition of know-how was held to be allowable as a business expenditure applying the ratio of the Supreme Court decision in Ciba of India Ltd.'s case. 12. In Indian Telephone Indus-tries Ltd.'s case, under a collaboration with a foreign company, which was for a period of seven years, the foreign company, shortly referred to ' Standard ', agreed to invest $ 1,250,000, of which the sum of $ 7,50,000 was to be in cash and the balance in know-how valued at $ 500,000 in the share capital of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure because it was found that the assessee had acquired an enduring benefit under the agreement. The High Court noticed on a perusal of the agreement that the assessee had entered into an agreement with the foreign collaborator ' Metro ' not only for the purpose of getting participation in the equity capital of the assessee, but also for getting technical assistance from the company. After noticing the fact that the agreement contemplated mutual obligations, the High Court noticed that according to clause 4 of the agreement, considered to be crucial in the matter of consideration of the assessee's claim for allowance, that (sic) it provided that after the expiry of the agreement, the assessee will be free from any further obligation to pay any further amount to the foreign company while the assessee would have the continued use free of charge of all information made available by the foreign company during the period of the validity of the agreement. 16. In Fenner Woodroffe Co. Ltd.'s case, the assessee-company entered into an agreement for a period of ten years with a foreign company incorporated in England under which the foreign company agreed to make available the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was capital expenditure on the ground that the information and services were not confined only to the production of the licensed products but extended also to the setting up of the factory itself and, hence, had an element of capital expenditure imbedded in it. 18. In Shriram Refrigeration Industries Ltd.'s case, it was held that if the collaboration agreement results in the absolute transfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset of enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payments of a capital nature. 19. It will be noticed that in almost all the cases stated above, in which the payments claimed by the assessees were held to be allowable as a revenue expenditure, there was an existing business which was already being carried on and the collaboration agreements generally provided for a period during which the agreement was to be in force, and periodic or instalment payments were to be made in cash, which in a number of cases was based on either the value of the articles produced or manufactured or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such amendments ; (b) DIAMOND shall have the right so long as it shall be an equity share holder of CHAIN holding 25 per cent or more of the equity share capital of CHAIN to designate one director of CHAIN or if there shall at any time be five or more directors not so designated, two directors ; (c) no additional equity shares will be issued within eighteen months after the date of incorporation of CHAIN without written consent of DIAMOND which consent shall not be unreasonably withheld by DIAMOND ; (d) CHAIN will not incur any short-term or long-term borrowing in addition to that described in section 4, other than in the ordinary course of business or for proper business purposes of CHAIN at interest rates not in excess of these applying at the time for comparable borrowings." According to clause 6, the parties intend that production of CHAIN both as to volume and types of products, shall be such as to meet, as the first priority the needs for original equipment produced by TII and its present and future subsidiaries (TI Miller Private Ltd. is stated to be at the relevant time the only present subsidiary) in the designated area. According to clause 7, the parties further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or money contemplated, or carried out, in regard to the obligations of either TII or Diamond of supply of technical information or engineering data or other services by the two participant shareholders. The agreement and the allotment pursuant thereto of the shares of the assessee-company, relate, therefore, to the very framework or capital structure of the assessee-company and its existence and there is no payment of any sum or equivalent thereof for acquiring the technical know-how, engineering data or information. Even assuming that an expenditure incurred need not be in cash in a stipulated sum of money, but can include payment in kind by way of transfer of any property or assets, the transaction in the present case does not involve release or transfer to Diamond or to TII in return for supply of technical know-how, data, information, etc., of any asset or property owned by the assessee because the shares it allotted never constituted its asset or property as understood according to business, commercial or accounting principles and any one with a fair knowledge of company law knows that ordinarily a company cannot acquire or own its shares. The transaction merely gives to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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