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TMI Blog1984 (6) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement is for the purpose of supplying technical knowhow for the manufacture of machines of the Mazza type as are in the commercial operation at J-M's plant at Denison, Texas, United States of America. It is also mentioned in one of the clauses that J-M would give technical training to a reasonable extent in the manufacture of products, i.e., pipes and pipe couplings. The consideration for the agreement was also stipulated. The assessee paid the amount to J-M and this was the subject-matter of a claim by the assessee for the assessment year 1966-67. The matter ultimately went before the Tribunal before whom it was agreed that the amount need not be allowed as a revenue expenditure if depreciation is allowed on the plant and machinery including the amount involved as per the agreement with J-M. This plea was accepted by the Tribunal with the result that the amount paid by the assessee to J-M was treated as cost of plant and machinery on which the assessee was allowed depreciation and development rebate. The machinery was set up ultimately with technical know-how from J-M and the assessee started production of pressure pipes from October, 1965. While so, the assessee entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CP as guides in preparing its own such sales literature, provided, however, that HACP shall not distribute, reproduce for distribution, or copy the same in whole or in part for distribution, to others without the prior written consent of J-M; and Granting permission for HACP in its advertising and sales literature regarding products, and upon products and packages and samples thereof, to use any of the following expressions A. 'Manufactured by the Johns-Manville Process' or B. 'Manufactured in accordance with specifications of Johns-Manville or C. 'Manufactured in accordance with Johns-Manville Technique' or D. 'Any other phrase of similar import, upon obtaining prior approval of J-M' ; on condition that HACP will not use either the initials 'J-M' or the name 'Johns-Manville' in a trade mark sense indicating that J-M is the source of the products produced by HACP; provided that J-M shall have the right at any time in its sole discretion to cancel the rights granted to HACP by this Paragraph 1.125 if the products manufactured by HACP shall, in the sole judgment of J-M, not in fact be manufactured in accordance with specifications and techniques of J-M, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets of enduring nature and there is no difference between the earlier agreement and the subsequent agreement. On this finding, he held that the sum of Rs. 5,04,799 should be disallowed and directed the ITO to pass necessary and consequential orders. The matter was carried in appeal to the Income-tax Appellate Tribunal. The Tribunal after comparing the two agreements clause by clause held that the second agreement was altogether different and it was only entered into for the purpose of improving and maintaining the quality of the products already manufactured by the assessee and has nothing to do with the installation of plant and machinery or for manufacture of any capital assets. Accordingly, the assessee's claim was allowed and the order of the Commissioner was set aside. On these facts, the above question was referred for our opinion at the instance of the Revenue. The main contention of Mr. M. Suryanarayana Murthy, the learned counsel for the Revenue, is that the two agreements are of the same nature and if the expenditure incurred under the terms of the earlier agreement was treated as capital expenditure, there is no reason why a departure should be made in the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal advice in connection with the installation and construction of the building and machinery in the second agreement. But that was only to see that the machinery already installed is properly laid out and what was contemplated was only advice to a reasonable extent to give the benefits of maximum production. In our view, the dominant intention of the second agreement is to get technical assistance and experience in the manufacture of products and not for erecting any machinery and plant as was done in the first agreement. Clause 1. 122 quoted above refers only to matters in connection with the manufacture of products. Clause 1.123 requires J.M provide the results of research which again relates to the manufacture of the products. Clause 1.124 relates to sales and sales literature and clause 1. 125 speaks about the advertisement and sales literature regarding products. Though some rights are given by J-M for using their names on the products, it was stipulated under clause 1. 125 that the name should not be used as a trade mark so as to indicate that J-M is the source of the product produced by the assessee. No trade mark or patent right was assigned., No doubt there is a similar c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciding factor whether it is a capital or revenue expenditure is neither the source nor the manner of payment. But since there was no limitation in the agreements as to its endurability and the assessee could use the technical data even after the period of ten years and deal with it as if it was their own asset, the amounts paid constituted capital expenditure. In Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad), the agreement was for giving technical assistance of inventions and designs relating to railway wagons owned by the British company. One of the clauses provided that after the expiry of the agreement, the assessee would be free from any obligation to pay any amount to the foreign company while the assessee-company would have the continued views free of charge of all information made available by the foreign company during the period of the validity of the agreement On these facts, it was held that the expenditure was capital in nature. In Jonas Woodhead Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad) [FB], the agreement with the English company was for the supply of all technical information and know-how relating to the setting up of plants suitable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the two types of the machinery manufactured by the assessee under the agreements were entirely new agreements which were patented by collaborators and the same was not in production line of the assessee before entering into such agreements, that the payments were made to secure an enduring advantage and, therefore, the expenditure incurred in connection therewith was capital expenditure. On a reference, a Full Bench of our High Court to which one of us (Amareswari J.) was a party, held that the expenditure incurred had a direct nexus or relation to the carrying on or conduct of the business of the assessee and, therefore, it had to be treated as an integral part of the profit-making process. The very object of payment of royalty based upon the production and sale of the products manufactured by the assessee was to obtain manufacturing licence and technical knowhow including drawings, designs, specifications and other technical information, to enable the assessee to make and sell the products indicated in the agreements. Merely because the agreements provided that the assessee shall be entitled to retain technical know-how, designs, drawings, etc., even after the expiry of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was thus so related to the carrying on of the business that it would have to be regarded as an integral part of the profitmaking process and, hence, the expenditure was held to be revenue in nature. The Full Bench of our High Court in Praga Tools Ltd.'s case [1980] 123 ITR 773, relied upon this case in arriving at the conclusion that the expenditure was revenue in nature. A Full Bench of the Karnataka High Court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443, held that the acquisition of the right to draw upon the technical knowledge of the foreign companies for a limited period of 15 years for the purpose of carrying on its business does not amount to acquiring any asset or advantage of an enduring nature for the benefit of its business and the payments made by the assessee under the agreements to the foreign collaborator were revenue in nature. The object of the agreements therein which was for a period of 15 years was to obtain the benefit of technical assistance for running the business and the permission therein was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreements to other persons though outside India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation meticulously distinct and separate, one connected with the initial setting up of the factory and the other connected with the running of the factory. The fact that the assessee was not bound to return the knowledge acquired during the contract period and that it was in a position to keep for itself the said knowledge only served the assessee to run its business as efficiently after the contract period as it did during the period. Consequently, no part of the fees paid could be disallowed as having any capital element in it. On the principles laid down in Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP) [FB], CIT v. Oblum Electrical Industries (P.) Ltd. [1981] 127 ITR 409 (AP) and CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678 (Mad), we have no hesitation in holding that the Tribunal was justified in treating the expenditure as a revenue expenditure. In fact, the Madras High Court had taken a slightly different view from its earlier decisions in Fenner Woodroffe Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad), Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) and Jonas Woodhead Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad) [FB]. Then we have the unreport ..... X X X X Extracts X X X X X X X X Extracts X X X X
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