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TMI Blog2007 (11) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... fully following the same, we uphold the orders of the departmental authorities and dismiss the ground. 3. The second ground is directed against the disallowance of the technical know-how fees of Rs. 2,71,55,312. The question is whether it is capital or revenue in nature. It is necessary to refer to the agreement entered into between the assessee and the Austrian company by name Plansee Tizit on 20-6-1994, a copy of which is at pages 77 to 128 of the paper book filed by the assessee. The Austrian company is engaged in the manufacture and sale of hard metal tools, a line which is similar to the line of manufacture engaged in by the assessee. At this juncture, it is necessary to state that there was a company by name India Hard Metals Limited (IHM) which was manufacturing hard metal tools in India. This company was amalgamated with the assessee-company in the previous year relating to the assessment year 1994-95. Therefore, the business of the manufacture of hard metal tools became part of the business of the assessee-company from the assessment year 1994-95. The technical collaboration agreement was entered into after the amalgamation. Under Article 2.1 of the agreement, the Aust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed by the Assessing Officer as deduction. It was also the responsibility of the Austrian company to impart technical training to the technical personnel of the assessee at the factory of the Austrian company. Under Article 5.3 of the agreement, the Austrian company, at the request of the assessee, was to cooperate with the assessee in research and development activities undertaken by the assessee in relation to the hard metal tools. Article 6 appears under the heading "Manufacturing facilities". Under Article 6.1, it was clarified that in case any manufacturing facilities were to be supplied by the Austrian company to the assessee, the terms and conditions of such supply including the consideration to be paid by the assessee will be separately agreed upon by both the parties. This made it clear that the technical know-how supplied under the present agreement was different from the manufacturing facilities which the Austrian company may be required to supply in future. Article 7.1 clarify that the assessee shall be solely responsible for the quality of the products manufactured and the Austrian company was not responsible for the same or does not warranty or guarantee the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is prohibited from filing any application in any country for legal recognition of the IPR in respect of any patent or other statutory industrial property right in the event that such application seeks to incorporate or is based on the know-how furnished to it by the Austrian company under the contract. Under Article 16.1, the assessee is obliged to recognise the trademark of the Austrian company and to jointly specify the same in the products manufactured. Article 16.3 gives the Austrian company the right to require the assessee to suspend or discontinue the use of such trademark and the assessee is obliged to comply with the same. Article 17 speaks of the validity and infringement of the IPRs and generally provides that the assessee will not do anything directly or indirectly contesting the validity of the IPR or impairing the value thereof. Article 18 prohibits the assessee from competing with the Austrian company with respect to the manufacture of the products. Article 19.1 requires the assessee to use the know-how only for the purposes of this contract. During the term of the contract or even after the expiration or termination thereof, the assessee shall not use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary for the manufacture of the product and only under strict control and supervision of the assessee. Article 5.1( i ) which we have quoted earlier reiterates that the assessee was merely granted a right to use the IPR of the Austrian company for the manufacture and assemble of the products. Any manufacturing facilities, as distinct from supply of technical know-how, which were to be provided by the Austrian company were to be separately agreed upon as regards their terms and conditions and will not found part of the technical know-how to be provided under the agreement. Since the assessee was to use the technical know-how and the proprietary rights therein continued to be vested in the Austrian company, it was provided that the assessee shall be responsible for the quality of the products over which the Austrian company had rights of supervision and any expenditure in submitting the products for the inspection of the Austrian company was to be brone by the assessee. There was no royalty payment under the agreement and royalty was to be paid under the terms and conditions prescribed in Articles 13.4 to 13.11 only if a joint venture company could not be established within 12 to 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during advantage has been obtained by the assessee under the agreement. The know-how can be continued to be used by the assessee only if the agreement expires at the end of the 8 years period. Even here, the trademark cannot be used. If on the contrary the agreement is terminated, the assessee cannot use the know-how thereafter. The income-tax authorities have sought to raise two points. The first is that the agreement is entered into in connection with the setting up of a new business and hence the expenditure incurred by the assessee is capital in nature. We have already seen that the company by name Indian Hard Metals Ltd., which was the assessee s subsidiary, was amalgamated with the assessee-company in the previous year relevant to the assessment year 1994-95 and thus the manufacture of hard metal tools became part of the assessee s business in that year. Therefore, the business of manufacture of hard metal tools cannot be said to be a new business in the year under consideration. In Triveni Engineering Works Ltd. v. CIT [1982] 136 ITR 340 (Delhi), it was held by the Hon ble Delhi High Court that if there is no absolute parting of the secret processes and technical knowled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring benefit. Rejecting this argument, it was held by Hon ble Justice Sethuraman, speaking for the Division Bench, that any person who enters into a collaboration agreement would necessarily acquire some knowledge during the process of manufacture carried on with the help of the collaboration agreement. "Knowledge acquired cannot be disgorged and ordinarily forms part of the equipment of the person concerned. It is not for the acquisition of the knowledge but for the application thereof that the consideration is paid. The real test that has to be applied to cases like this is to find out whether the consideration was statedly for any such enduring purposes or merely for the help rendered during the period of the agreement". In the present case, the assessee is authorised to use the knowledge and the IPR in the know-how eve after expiry of the agreement but not the trademark. If the agreement is terminated, the assessee has no authority to use the technical know-how or the IPR. Applying the judgment of the Madras High Court, we hold that the existence of a provision in the agreement enabling the assessee to use the knowledge obtained during the currency of the agreement even af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to spend the amount as it like. It was to be spent only as per the directions of the Government. The fund cannot be utilized for any other purpose except to construct a storage tank for molasses in accordance with the specifications given by the Government. If the assessee failed to collect such amount as directed in the aforesaid order, the Central Government is empowered to construct a molasses storage tank and recoup the construction charges from the assessee. Taking note of all these features and consequences of the control order, it was held by the Madras High Court that the amount never reached the assessee as its income and was diverted at the source itself by an overriding title. The decision of the Madras High Court in New Horizon Sugar Mills (P.) Ltd. ( supra ) was appealed against by the department to the Supreme Court but the same was dismissed as reported CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397 , by a judgment of three Judges of the Supreme Court following their earlier judgment in CIT v. Ambur Co-operative Sugar Mills Ltd. [2004] 269 ITR 398 (SC) (App.). In the present case, as found by the CIT(A), the amount has been collected by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the return of income for the assessment year 1994-95 and nothing more is required and the income-tax authorities are not right in law in reading into the clause a condition that even for the present assessment year the assessee has to file a similar certificate along with the return of income. Before us, the learned counsel for the assessee made a valiant attempt, relying on the order of the Delhi Bench of the Tribunal in Kelvinator of India Ltd. v. IAC [1988] 27 ITD 88 , to demonstrate that it is sufficient if the assessee had filed the certificate in the year in which the amalgamation took place and that the clause did not require such a certificate to be filed in the year in which set off is claimed in respect of the unabsorbed depreciation. We are however not able to accept the correctness of the argument of the learned counsel for the assessee in this behalf. It is the clear requirement of the clause that the assessee-company should furnish, along with the returned of income for the assessment year for which the set off is claimed, which means the assessment year 1995-96, the required certificate from the specified authority. It is not in dispute that the assessee has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand of the Assessing Officer that the judgment was rendered under the 1922 Act and is not applicable to the 1961 Act. He has not pointed out any provision in the 1961 Act which seeks to nullify the judgment of the Supreme Court. The CIT (Appeals) in our opinion has taken the correct view of the matter. He is also right in not attaching any importance to the fact that the assessee did not debit the expenses in the profit and loss account but chose to reduce the same from the share premium account. It is permissible under section 78(2)( c ) of the Companies Act to utilize the share premium account for certain purposes and one such purpose is to write off the "expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company". The assessee has merely made use of this provision when it reduced the debenture issue expenses from the share premium account. That cannot stand in the way of its claiming the expenses in its return as a deduction on the strength of the judgment of the Supreme Court in India Cements Ltd. s case ( supra ). The manner in which entries are made in the books of account cannot control or decide the question of allowabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for termination of service as not business expenditure. With reference to the payment of retrenchment compensation or compensation for termination of the service, it was observed that the company would be benefited as it was possible for it to earn more profits as a consequence of the reduction in the wage bill. The Assessing Officer appears to have taken a wholly contradictory view when he said that the assessee obtained an enduring benefit in the form of a reduced wage bill. In the case of CIT v. Malayalam Plantation Ltd. [1964] 53 ITR 140 , the Supreme Court examined the scope of the expression "for the purposes of the business" and the following passage, which has become the locus classicus on the question, may be usefully reproduced : "The aforesaid discussion leads to the following result : The expression for the purpose of the business is wider in scope than the expression for the purpose of earning profits . Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future) the company could not be said to have acquired any enduring benefit or income-yielding asset. In this case, the Supreme Court has cited the judgment of the Court of Appeal in England in B.W. Noble Ltd. v. Mitchell [1927] 11 Tax Cases 372, where Rowlatt, J. observed that in the ordinary case a payment to get rid of a servant when it is not expedient to keep him in the interests of the trade would be a deductible expenditure. It was observed that "a payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage". The logic, as noted by the same noble Law Lord in Anglo Persian Oil Co. Ltd. v. Dale [1931] 16 Tax Cases 253, is that if the payment relieves the assessee of the liability to pay recurring revenue payments in future - payments which are chargeable to revenue account "in the plainest possible way" - and if that is the onerous contract that is got rid off the payment would be revenue expenditure. It is difficult to resist the temptation to reproduce the very words of the noble Law Lord : "The question is not merely getting rid of an onerous contract, but an onerous contract for what ..... X X X X Extracts X X X X X X X X Extracts X X X X
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