9911796707
TMI Blog1997 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 1967-68 and 1968-69. The assessee, a limited company incorporated in March, 1963, to carry on the business of manufacture of automobiles springs, entered into an agreement with Jonas Woodhead and Sons Ltd. (hereinafter referred to as "the foreign company"), of the United Kingdom for manufacture of all types of springs and suspensions for road and rail vehicles. Under the terms and conditions of the agreement between the parties it was stipulated that the foreign firm will give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical knowhow relating to the setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other data and information necessary to manufacture the product and to set up proper and efficient plants. The said agreement between the parties also provided that in consideration of the information to be furnished and services to be rendered to the assessee by the foreign firm, the assessee shall pay a royalty at the rates of the licensed products turnover of the assessee to be calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of enduring nature acquired by the assessee which could be held to be capital expenditure. According to learned counsel, the payments made by the assessee to the foreign firm for the technical know how and assistance rendered by the said foreign firm enabled the assessee to carry on its business more efficiently and more profitably leaving fixed capital untouched and, therefore, the said payment or any part of it cannot be held to be a capital expenditure. In support of this contention, reliance was placed on the decision of this court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. According to learned counsel for the appellant, technical know-how or technical advice received from a foreign firm cannot be held to be a tangible asset and any payment made to the foreign firm for such know-how is nothing but revenue expenditure. Learned counsel places reliance on the decision of the Bombay High Court in CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538. Learned counsel also urged that the payment required to be made by the assessee to the foreign firm was merely for the better conduct and improvement of the existing business and as such was revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd. v. CIT [1989] 177 ITR 377 has indicated that "in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to form any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation". This court further held that there is no single definitive criterion which, by itself, is demarcative, whether a particular outlay is capital or revenue. And, therefore, the "once for all" test as well as the test of "enduring benefit" may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantage derived by an assessee under the agreement, the payment made by the assessee under the agreement, are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is capital expenditure or revenue expenditure. In the case of CIT v. CIBA of India Ltd. [1968] 69 ITR 692 (SC), the question for consideration was whether the contribution payable by the assessee at the rate of six per cent. of the net selling price of pharmaceuticals which the assessee produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a periodical payment at a certain percentage of the profits earned by the assessee from the said business would be treated in its entirety as capital expenditure or revenue expenditure. The Madras High Court came to the conclusion that the fixed sum paid towards part of the consideration will be capital payment, while the periodical payments of sums which are definite and which depend upon the future profits cannot be treated as capital expenditure. In other words, the court answered the question that since the payment in question to be made by the assessee was not related to any specified sum but a percentage of the profits to be earned which were indefinite in nature, such payment could be treated only as revenue expenditure. In the case of Agarwal Hardware Works (P.) Ltd. v. CIT [1980] 121 ITR 510 (Cal), the question for consideration before the Calcutta High Court was whether the payments made by the assessee to a foreign firm for use of certain patents would be capital expenditure or revenue expenditure. The Calcutta High Court on a consideration of the agreement between the parties came to the conclusion that since the patents are not usable after the termination of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as a part of the process of profit-earning. It was an outlay of business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on ; it was a part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. The court further observed as under : "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily be whether the tests relevant and significant 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 thought, 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 verities 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 definitive 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 commonsense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down." It would thus ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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