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TMI Blog1997 (12) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Rs. 9,40,250 to M.H.I. under the technical collaboration agreement and claimed the same as revenue expenditure to be deductible from the business income for the assessment year 1975-76 and the Income-tax Officer initially allowed the claim of deduction of the assessee which was debited to the profit and loss account under the head, technical know-how charges. The Income-tax Officer, subsequently, reopened the assessment, and in the reassessment proceedings, he called for the agreement of technical collaboration and after considering the terms of the agreement of technical collaboration, he came to the conclusion that the assessee had acquired assets of an enduring nature, as the assessee had the right to use the technical know-how even after the expiry of the agreement, and, therefore, he held that the payment of Rs. 9,40,250 was capital in nature and not admissible as revenue expenditure, He also disallowed the claim of the assessee towards the transaction made towards income. The assessee preferred an appeal challenging the order of reassessment made by the Income-tax Officer both on the ground of jurisdiction and on the merits of the case. The Commissioner of Income-tax (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee for the technical know-how should be regarded as capital expenditure. He also produced a copy of the technical collaboration agreement entered into between M. H. I and the assessee dated April 10, 1972, and referred to the relevant articles. He submitted that the agreement was entered into for adopting better production methods and for improving the quality and for taking up the manufacture of other types of products and the assessee was granted only a licence and, therefore, it cannot be stated that the assessee obtained an enduring advantage and acquired assets which are capital in nature. He submitted that under article 6 of the agreement, the assessee had a right to use the technical information for the manufacture of the products even after the expiry of the agreement, but the assessee was not entitled to mark the products as provided under article 9 of the agreement and, therefore, the payment made is revenue in nature. He placed reliance on a decision of this court in CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678 and submitted that the technical information obtained by the assessee was for running the business and, therefore, it must be regarded as reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity and taking up the manufacture of other types of products. Under article 2, the assessee was granted an exclusive licence and right to use and obtain the technical assistance and training of technical personnel for the purpose of manufacture of products in India and selling the products. We have seen the nature of technical information provided under article 3 of the agreement and a study of article 3 indicates that the assessee was keen on the production of the products and other matters connected with the manufacture of the products. The technical assistance required to be re matted by the assessee and training the personnel in the foreign Country. It is permissible for M. H. I. to depute its technicians for the purpose of carrying out the works relating to the manufacture of the products. Though the agreement makes a distinction between the payments of consideration the assessee was required to pay a lump sum for the first three years and from the commencement of the fourth year, the assessee agreed to pay royalty at a fixed percentage on the sales and it is apparent that the assessee was required to pay a lump sum in the initial years as there would be teething problems duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature. That apart, the nature of the agreement is such that it could not be stated that the assessee had acquired absolutely any asset and merely because a lump sum amount was paid, it is not possible to hold that it will assume a different character of acquisition of knowledge. A study of various articles of the agreement also shows that the assessee had mere access to the information which was essential for carrying on its business activities and for running its business efficiently and it is not ' of much significance that some of the products manufactured by the assessee are new products. Another significant aspect that is noticed is that the assessee has an existing business and even assuming that certain new products are manufactured with the aid an assistance of the technical knowledge obtained under the technical collaboration agreement, it cannot be stated that the assessee obtained a new plant with a complete new process and complete new technology for the manufacture of the products. The test laid down by the Supreme Court in Jonas Woodhead and Sons (India) Ltd.'s case [1997] 224 ITR 342, that whether the assessee obtained a new plant with complete new process and ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actional element or other of a capital nature, merely on the score that the resulting benefit or advantage tends to pay in the business. This, however, is not the law." The decision makes it clear that where the expenditure had an impact on the running of the business, the expenditure should be regarded as revenue expenditure and, on the other hand, if the nature of the advantage derived from the agreement enures in the capital field of the assessee, then the expenditure can be regarded as capital in nature. It is inevitable that in any collaboration agreement the knowledge acquired would enure beyond the contract period but that would not by itself show that the expenditure should be regarded as capital in nature. But, where the knowledge acquired was used to run the business efficiently even after the contract period, the payment made for the use of the knowledge is liable to be regarded as revenue in nature. Therefore, we are of the view that the Tribunal was not correct in holding that the amount is capital in nature as there is no prohibition against the assessee from using the technical knowledge even after the contract period. A similar view was also taken by the Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors on June 26, 1961, and the commercial production started in October, 1964, and the business was set up in the accounting year ending September, 1965. The question that arose before the Delhi High Court was whether a sum of Rs. 2,39,084 paid towards collaboration agreement can be regarded as revenue expenditure. The Delhi High Court held that the object of the agreement was to obtain the benefit of technical assistance for the running of the business and it could not be stated that the assessee had acquired any knowledge or asset of enduring nature. The facts of the decision of the Delhi High Court, in our opinion, are similar to the facts of the case and in the collaboration agreement in the instant case, the assessee had only a licence and there was no parting of any secret formula in favour of the assessee-company and the assessee had merely, an access to certain technical information regarding production and improving the quality of the products and, therefore, the payment cannot be said to be capital in nature. The decision of the Supreme Court in Jonas Woodhead and Sons (India) Ltd.'s case [1997] 224 ITR 342, relates to a case where the payment was made for the setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exigencies on the basis of which the agreement had been entered into. We have carefully perused the terms of the agreement and the various articles of the agreement clearly show that the assessee was given only a licence and had access to the information for the running of the business of the assessee. No doubt, as found by the Commissioner (Appeals), the agreement was for a new product, but on that factor, it cannot be stated that the assessee acquired an enduring advantage in the capital field. Therefore, we are of the opinion that the Tribunal was not justified in holding that the amount paid under the agreement should be regarded as capital expenditure. Hence, we are of the view that the second question in so far as it relates to the payment of technical know-how, should be answered in favour of the assessee. Learned counsel for the assessee had not seriously disputed the finding of the Appellate Tribunal regarding the reopening of the assessment under section 147(b) of the Act and the view of the Appellate Tribunal that the expenditure on gratuity was not allowable. In fine, we answer the questions of law referred to us as under : First question of law : It is answere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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