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TMI Blog2017 (2) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Company shall be free to manufacture that item even after expiry of the collaboration agreement without making any additional payments. Assessee claimed that royalty payment is part of percentage of selling price of product and not for acquiring technical know-how of manufactured licensed product having enduring benefit. These facts available on record have not been disputed and we have not been shown any authority so as to justify to take a different view than what has been taken by Tribunal. - Decided in favour of Assessee - Income Tax Appeal No. 143 of 2005 - - - Dated:- 9-1-2017 - Hon'ble Sudhir Agarwal And Hon'ble Ravindra Nath Mishra-II, JJ. For the Appellant : D.D. Chopra, Manish Mishra JUDGMENT 1. Heard Sri Manish Mishra, Advocate, for appellant and perused the record. 2. This appeal under Section 260-A of Income Tax Act, 1961 (hereinafter referred to as Act, 1961 ) arising from judgment and order dated 28.02.2005 passed by Income Tax Appellate Tribunal, Lucknow Bench, Lucknow (hereinafter referred to as Tribunal ) in Income Tax Appeal No. 596/Alld/95 and Income Tax Appeal No. 450/Alld/95 Tribunal was admitted on following two substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , A.A. made assessment order under Section 143(3) on 08.03.1991. 8. Assessee had claimed payment of ''Royalty' of ₹ 18,20,227/- as ''revenue expenditure' but A.A. did not accept it and treated as ''Capital Expenditure' and added to the total income. 9. Assessee preferred appeal before Commissioner of Income Tax (Appeals)-II, Lucknow (hereinafter referred to as CIT(A) ) who reversed the view taken by A.A. in respect to aforesaid amount of ''Royalty' and. accepted claim set up by Assessee that it is ''capital expenditure'. Against this part of order of CIT(A), and some other aspects, Revenue as well as Assessee both preferred Income Tax Appeal No. 596/ Alld/1995 and Income Tax Appeal No. 450/Alld/1995, respectively, before Tribunal. Tribunal confirmed the view taken by CIT(A) and rejected appeal preferred by Revenue on this aspect. Present appeal, therefore, has been preferred by Revenue against aforesaid decisions of CIT(A) and Tribunal and confined to the question whether amount of ''Royalty' paid by Assessee to Foreign Company should be treated as capital expenditure or revenue expenditure . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring benefit was obtained. Payment of ''Royalty' has a direct nexus with the carrying on or conduct of business of Assessee, and, commercially considered, it had to be treated as an integral part of profit-making process. The expenditure was ''Revenue' in nature. Tribunal said, since it is an agreement for five years, whereafter Assessee had to return all relevant material relating to know-how, acquired through Agreement, there was no advantage of enduring benefit obtained by Assessee and, hence, in view of Delhi High Court, the view taken by CIT(A) was correct. 13. Basic facts with regard to relevant Clauses of agreement as discussed in the judgment of Tribunal are not disputed before us. Learned counsel appearing for Revenue submitted that in view of Supreme Court's judgment in Jonas Woodhead and Sons (India) Ltd. Vs. Commissioner of Income Tax 1997 (224) ITR 342 and Southern Switch Gear Ltd. Vs. Commissioner of Income Tax and another 1998 (232) ITR 359; and, Kerala High Court's judgment in Commissioner of Income Tax Vs. Polyformalin (P.) Ltd. 1986 (161) ITR 36 (Kerala) payment of ''Royalty' and acquisition of technical know-how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een Swiss company and Assessee in consideration of payment of technical and research contribution for the use of Indian patents and or trade marks to communicate the results of its research work, in so far as they relate to the products which were already manufactured or processed or sold by Assessee. Court held that 'Royalty' payment made by Assessee were revenue expenditure and, for this purpose, it held that secret processes were not sold by Swiss company to Assessee. Further, the reasons that prevailed with the Court to hold 'Royalty' payment as 'Revenue Expenditure', are: (a) licence was for a period of five years, liable to be terminated in certain eventualities even before expiry of the period; (b) object of the agreement was to obtain the benefit of technical assistance for running the business; (c) licence was granted to Assessee subject to rights actually granted or which may be granted after the date of agreement to other persons; (d) Assessee was expressly prohibited from divulging confidential information to third parties without consent of Swiss company; (e) there was no transfer of fruits of research once and for all; the Swiss company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. Then matter came to High Court who also upheld view taken by Tribunal with the reasoning that expenditure was not related to business activity of Assessee. With respect to one amount which Assessee contributed on the request of Collector for construction of dam and connecting road, Supreme Court upheld the view of Courts below that it was as a good citizen and not connected with the business of Assessee, hence disallowable under section 10(2)(xv). With respect to another item, which Assessee paid under Sugarcane Development Scheme, Court followed the test laid down in British Insulated and Helsby Cables Ltd. Vs. Atherton 10 TC 155 where learned Law Lord Cave L.C. stated When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital and said that this test is a well known test for distinguishing capital and revenue expenditure but not of universal application. It must yield where there are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f machine and also to sell all relative jigs, fixtures, tools, gauges, raw materials and special parts as ordered at their normal commercial retail value. The agreement also required foreign collaborator to furnish all technical information with the latest modifications and standards, for this Assessee was to pay certain amount to foreign collaborator on signing of agreement and Royalty subsequently. Court said that in order to decide whether a particular expenditure is Capital or Revenue , there is no rule of thumb or test of principle or universal application. In fact dividing line between two is very thin. The scrutiny is to be made in respect of the nature and character of the business, the object for which expenditure has been incurred and it is not an individual test but totality or cumulative effect of all the relevant facts and circumstances which would help in arriving at a particular inference. It referred to an extract from a Full Bench judgment of Lahore High Court in Benarsidas Jagannath, In re (1947) 15 ITR 185, which was approved in Assam Bengal Cement Co.Ltd. Vs. CIT (supra) which reads as under: If the expenditure is made for acquiring or bringing into exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Indian Company to Foreign Collaborator could be construed as acquisition of depreciable asset in terms of collaboration agreement. Indian company, M/s Scientific Engineering House (Pvt.) Ltd., was engaged in manufacture of Scientific Instruments and Apparatus like dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements dated 15.3.1961 and 31.3.1961 with M/s Metrimpex Hungarian Trading Company, Budapest for manufacture of microscopes and theodolites. Foreign Company agreed to supply Indian company all 'Technical know-how' required for manufacture of two instruments namely microscopes and theodolites. The object was to enable Assessee to manufacture said instruments of certain specifications. Assessee acquired right to manufacture in India, under its own trade mark, and name but under the licence-MOM Hungary-of the Foreign supplier, the said instruments, and right to sell the same in India. Assessing Officer held that payment made for acquiring 'Technical know-how' amount to 'Capital Expenditure' since no tangible or depreciable asset was brought into existence, hence no depreciation can be claimed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per millilitre, of 'cultured-broth'-with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by foreign company i.e Meiji. The negotiations culminated into an agreement dated 09.10.1953, whereunder Meiji, in consideration of the once for all payment of 50,000 U.S. Dollars agreed to supply to Assessee, the sub-cultures of the Meiji's most suitable penicillin-producing strains , the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow-sheet of the process on a pilot plant, the design and specifications of the main equipment in such pilot plant, arrange for the visits to and training at Assessee's expense, of technical representatives of the Assessee, Meiji's plant at Japan and to advise Assessee in the large scale manufacture of penicillin for a period, limited to 2 years from the effective date of the agreement. It was also stipulated that technical know-how supplied by Meiji was to be kept confidential and secret by Assessee. It was prohibited from parting with technical know-how in favour of others or to seek any patent for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular case, must depend on common sense rather than on strict application of any single legal principle. 26. Referring to B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) AC 224 (PC), Court in Alembic Chemical Works Co.Ltd. (supra) observed that solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances, some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all guiding features which must provide the ultimate answer. Court said that 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 need 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 emphasize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efficient plants. In lieu of the aforesaid information etc., Assessee was to pay 'Royalty' to the foreign company. Production of Assessee commenced on 01.01.1966 and 'Royalty' was to be paid to foreign company in terms of the agreement. Assessing Officer held payment to foreign company of an enduring nature and treated it to be a capital receipt . Assessee lost before Commissioner as well as Tribunal in appeal and also in High Court and therefore, in last, matter came to Supreme Court. The questions considered by Court, were (i) whether a particular payment made by an Assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether Assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; (ii) whether the improvisation made, is the part and parcel of existing business or a new business was set up with the so-called technical know-how for which payments were made; (iii) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... West German Company who was specialized in manufacture of machinery and equipment for Cane Sugar Industry. Assessee itself was a company engaged in the business of manufacture and sale of Sugar Machinery parts. Assessee was interested in acquiring 'Technical know-how' from foreign company on Cane Sugar Mills size, able to accommodate rollers upto a specific dimension and in furtherance thereof, agreement was executed wherein foreign company agreed to supply 'Technical know-how' in the form of workshop drawings, documentation for basic engineering on structural components and individual parts, not manufactured by foreign company itself, data on necessary special tools and special manufacturing techniques, assembly instructions, arrangement drawing of the mill, foundation and loading plan, operation and maintenance instructions, information on the storage of spare parts etc. The agreement allowed to make use of the 'Technical know-how' to manufacture the mill at its workshops in India, to sell the mill within India without any limitation and also to export the mill to Countries other than certain Counties mentioned in the agreement. Assessee was entitled to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id judgment shows that one fourth of total amount paid towards technical know-how fee was held capital and rest as revenue expenditure. 34. Kerala High Court in Commissioner of Income Tax Vs. Polyformalin (P.) Ltd. (supra) has looked into this aspect from a different angle. Relying on Supreme Court's judgment in Scientific Engineering House P. Ltd. Vs. CIT (supra), it has observed that expenditure incurred for acquisition of technical know-how by way of designs, drawings, charts, plans and other literature was capital in nature which would add to the cost of the plant and machinery and Assessee would be entitled to depreciation and development rebate. The Court held that documents will fall within the definition of plant and depreciable assets. It also followed a Gujrat High Court's Judgment in CIT Vs. Elecon Engineering Co. Ltd. 1974 (96) ITR 672 wherein also it was held that drawings and patterns which constitute know-how and are fundamental to the Assessee's manufacturing business are plant. That being so, it held that expenditure is of capital nature. 35. The question as to whether a particular payment made towards technical know-how fee or royalty to a Foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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