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TMI Blog1989 (2) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant clauses of which will be noticed in detail later in the course of this judgment. Thereunder, provision was made for payment of royalty by the assessee to the foreign collaborator, B. F. Goodrich Chemical Company, in respect of what had been styled in the agreement as "accumulated know-how" and continuing know-how". In so far as the payment of royalty by the assessee for accumulated know-how furnished by B. F. Goodrich Chemical Company (hereinafter referred to as "B. F. Goodrich Company") is concerned, that has been capitalised in the books of the company and, therefore, the payment of royalty in respect of the "continuing know-how" furnished by B. F. Goodrich Company in terms of the agreement alone figures in these references. In the course of the assessment proceedings for the relevant assessment years, the Income-tax Officer disallowed 25% of the royalty payment made by the assessee on the ground of capital expenditure in the view that the continuing know-how secured to the assessee an advantage of enduring benefit. On appeal preferred by the assessee before the Appellate Assistant Commissioner, the AAC took the view that the payment of royalty was not to be considered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of continuing know-how, an item of capital expenditure. Reliance, in this connection, was placed by learned counsel on the decisions in M. R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305 (Mad) and CIT v. Southern Switchgear Ltd. [1984] 148 ITR 272 (Mad). On the other hand, learned counsel for the assessee submitted that the payment of royalty under the terms of the collaboration agreement for the acquisition of continuing know-how was only in the nature of acquiring knowledge and skill in respect of the latest technical advances in relation to the manufacturing activity undertaken by the assessee that would facilitate the assessee in the carrying on of its business of manufacture of P. V. C. resins in a manner which would be most advantageous to the assessee and the expenditure incurred in connection therewith, could not by any stretch of imagination be characterised to be capital expenditure, but that it would only be revenue expenditure and, therefore, the Tribunal was right in its conclusion. Our attention in this connection was drawn to the decisions in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; CIT v. Sundaram Clayton Ltd. [1982] 136 ITR 315 (Mad) and CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requested by the company for the equipping and operation of the said factory. (3) test and analyse PVC and related materials and ingredients for use in the manufacture thereof as the company may send to Cleveland, Ohio, U. S. A., from time to time, and report the results of such tests and analysis to the company. (4) provide, in the factories of B. F. Goodrich located in the United State of America and engaged in the manufacture of PVC and related materials, training of technical personnel for the company, and provide other engineering and technical personnel for the company and provide other engineering and technical services of a miscellaneous nature, relating to the production of PVC and related materials and which B. F. Goodrich may be in a position to furnish. (5) at any time within seven years from the date of this agreement, prepare or have prepared and furnish to the company, in the event it at any time during said seven years' period should decide to alter or enlarge its factory or expand its manufacture of PVC and related materials, such preliminary designs, drawings, blueprints, specifications and engineering and technical services as are necessary in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the amount of any such tax. The company, for the continuing know-how furnished by B. F. Goodrich under article 1-B hereof will pay B. F. Goodrich, on or before the last day of the month next following each calendar quarter, beginning with the calendar quarter in which the company makes its first invoiced sale and, thereafter, a royalty equal to three per cent (3%) of the company's net realised sales in the respective calendar quarter of all PVC and related materials manufactured by it during the term of this agreement, converted to the currency of the United States of America at the highest rate (that is to say, the largest unit of U. S. dollars for each Indian rupee) authorised by the Government of India and quoted by the Reserve Bank of India for U. S. dollar funds in exchange for currency of India on the date payment of the royalty is due as hereinabove provided. Said royalty shall be subject to any applicable tax in India. If payment of the royalty is not remitted on the due date as the result of action by the Government of India, the aforesaid conversion rate shall be such rate on the date the royalty is due or on the date of actual payment whichever is more favourable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intelligence or information, which might be employed by the assessee-company in its manufacturing activity for the better utilisation of its manufacturing activities by applying the latest developments and techniques. We are also unable to accept the contention of learned counsel for the Revenue that imparting of such information and knowledge relating to the latest developments and techniques in the manufacture would result in an enduring advantage to the assessee, as that could also be used even after the expiry of the period of agreement. Basically, under the agreement, what is intended to be imparted is only updated information and knowledge regarding methods of manufacture, which can be advantageously employed in the business of carrying on its manufacturing activity by the assesseecompany and the mere circumstance that such knowledge may be used by the assessee in the course of running of its business even after the expiry of the period of agreement, would not make it any the less manufacturing skill received by the assessee for purposes of improving its methods of manufacture for securing more efficient production of goods of high quality and economically as well. We also do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the products and that would suffice to distinguish that decision from the present one, and, therefore, that decision would be inapplicable here. In M. R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305 (Mad), under the terms of the collaboration agreement, there was an element of acquisition of right exploitable in future and it was, therefore, held that it did not relate to the running of the business. Such is not the position on the terms found in the agreement and referred to earlier. Under clause 9(a) of the agreement in that case, it was provided that assistance should be rendered in the construction of the factory, but no separate consideration was provided for such assistance and, therefore, it was held that a part of the consideration was liable to be ascribed to capital. On the other hand, in this case, as could be seen from the clauses referred to already, a part of the royalty payment, even under the terms of the agreement, has been provided for services to be rendered, which had also been capitalised. In other words, under the terms of the agreement in this case, a clear distinction is made between that portion of the royalty which is considered as capital an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678 (Mad), this court had occasion to consider the terms of a collaboration agreement entered into between the assessee and a foreign collaborator in relation to the nature of payment of royalty for consultancy services supplied by the foreign collaborator, from time to time, for running the factory and for the maintenance or production. On a consideration of the provisions in the agreement, it was held that the agreement itself maintained a distinction between the two aspects of collaboration, viz., one connected with the initial setting up of the factory and the other connected with the running of the factory and there was no question of payment of fee for the consultancy services being considered as having any capital element in it, but that the entire payment was allowable as a revenue outgoing. It would be useful in this connection to refer to the following observations at pages 683 and 684: "It may be conceded that what Mansfield or its resident engineer in India were imparting to the assessee on operational matters might tend to outlast, and endure beyond, the contract period. This, however, is a common characteristic of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (Mad), where, under the terms of the collaboration agreement, royalty was paid for purposes of obtaining relevant know-how for manufacture and sale of materials manufactured, part of which was disallowed by the Income-tax Officer, which was upheld by the Appellate Assistant Commissioner and confirmed by the Tribunal. On a consideration of the terms of the collaboration agreement in that case, this court pointed out, on a reference, that where the payment of royalty is purely for the purpose of obtaining the relevant know-how for the manufacture and sale of materials manufactured, such payments are not liable to be treated as capital expenditure. Emphasis was also laid on the quality of the expenditure incurred with reference to the object for which it was incurred and judged by that test, we are of the view that there is no capital element in the expenditure incurred in this case. Thus, on a consideration of the terms of the collaboration agreement, in the light of the principles laid down in the decisions referred above, the entire royalty payment made by the assessee in the relevant assessment years in question, in terms of the agreement for the acquisition of continuing techni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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