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TMI Blog1983 (3) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for the services rendered by the foreign company a lump sum of pounds 20,000 sterling payable in five equal instalments of pounds 4,000 sterling each, the first instalment to be paid three months after the date of the agreement and subsequent payments at intervals of 12 months from the first payment. For the year 1966-67, the assessee-company claimed the payment made to the foreign company as a revenue expenditure. The ITO, however, held that as the consideration paid in the form of royalty was an enduring benefit to the assessee, a part of it will have to be disallowed. He, therefore, deducted from the loss claimed by the assessee for the assessment year 1966-67, the technical collaboration fees and 1/4th of the royalty paid and similarly for the assessment years 1967-68, 1968-69, 1969-70 and 1971-72. The details of the disallowance for each of the years are given below. ------------------------------------------------------ Asst. year Disallowed technical Disallowed collaboration fees 1/4th royalty ------------------------------------------------------ Rs. Rs. 1966-67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the order of the Tribunal, both the Revenue and the assessee filed reference applications before the Tribunal and the Tribunal has referred the following common questions for the opinion of this court. " 1. Whether, on the facts and in the circumstances of the case, the entire claim of payment of technical aid fees and 1/4th of the royalty to the foreign collaborator under the collaboration agreement dated December 12, 1963, is liable to be disallowed ? 2. If the first question is answered in the negative, whether the disallowance of 1/4th of the above claim is justified ? " The first question comprises of two issues, one relating to the technical aid fees and other relating to the royalty. So far as the issue relating to the disallowance of the technical aid fees paid to the foreign collaborator is concerned, as already seen, the Tribunal has purported to follow the decision of this court in Transformer Switchgear Ltd. v. CIT [1976] 103 ITR 352, which was rendered with reference to an agreement containing similar clauses wherein this court has observed as under (at p. 357) : " As seen from the relevant portions of the agreement extracted above, the agreement cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic Components Ltd. v. CIT [1982] 136 ITR 305. It was held, in that case, that as the foreign company had undertaken to advise the assessee on the construction and equipment of its works and also on the processes and manufactures, and as the object of the expenditure was with reference to the erection of the factory, to that extent the payment would be disallowed as not relating to the carrying on of the business, and that if a portion of the consideration was attributable to the manufacture of fresh items, there will be an element of acquisition of a right exploitable in future and, hence, it would not relate to the running of the business, and that, therefore, the Tribunal was justified in its conclusion that 25% of the payment under the collaboration agreement has to be disallowed as being capital in nature. Keeping in view the principles laid down by this court in the above three cases, let us analyse the various clauses of the collaboration agreement dated December 12, 1963. The relevant and important clauses of the agreement are set out below: "BRUSH shall grant to S. S. under any letters patent owned by it or under letters patent under which it may be entitled to grant li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation, licences, rights and data for scheduled products in India. 6. S. S. hereby agrees with BRUSH at all times during the continuance of this Agreement: (a) To use its best endeavours to manufacture the scheduled products so as to meet the demands within India for the scheduled products to an adequate commercial extent and on reasonable terms and shall cause scheduled products so manufactured to be of such quality and in all respects in their respective kinds and shall give such service in respect thereof as will maintain the reputation of products associated with the name of BRUSH and as will not cause injury to the reputation of BRUSH.. (b) To affix or attach to or stamp, emboss or impress in a conspicuous place and in a permanent manner on all scheduled products manufactured or sold by S. S. the words following: " Manufactured under Licence from Brush Electrical Engineering Company Limited of England ". A similar statement shall appear with reasonable prominence in all literature, advertisements and other sales media of S. S. relating to the scheduled products. (c) To use all drawings, specifications, technical information and data supplied by BRUSH hereunde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carriage and insurance charges) of all such items shall be deducted from the total net invoiced sales price before calculating the royalty payable to BRUSH. 21. This agreement shall commence at and from the date of signature and subject to termination as provided in clause 22 shall remain in force for ten years and thereafter shall remain in force subject to either party giving the other notice in writing to terminate at any time. 23. Upon the termination of the agreement : (a) any licences, permissions, authorities granted by BRUSH in favour of S. S. in respect of any patent or similar rights shall determine and S. S. shall forthwith return to BRUSH all copies of drawings specifications, information and other data in the possession or under the control of S. S. and relating in whole or in part to the designs or inventions which are the subject of patent or similar rights owned or controlled by BRUSH in India. (b) S. S. hereby agrees to continue to observe the obligations contained in clauses 6(e) and 6(d) and 25 of this agreement throughout the period of ten years commencing upon the termination of this agreement but in all other respect, S.S. shall have the right to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation, licences, rights for any one of the scheduled products in India, thus conferring an exclusive benefit on the assessee-company to manufacture and sell the scheduled products. The conferment of an exclusive benefit to manufacture and sell the articles which are the subject-matter of the agreement cannot be said to be a part of a mere know-how agreement. The right to make or manufacture certain goods exclusively in India should be taken to be an independent right secured by the assessee from the foreign company which is of an enduring nature. Therefore, the principle laid down by this court in Transformer Switchgear Ltd. v. CIT [1976] 103 ITR 352, Fenner Woodroffe Co. Ltd. v. CIT [1976] 102 ITR 665 and M. R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305, straightaway applies, and, therefore, the entire technical fees cannot be allowed as a revenue expenditure. The learned counsel for the assessee relies on the decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443 (Kar) [FB] and Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP) [FB]. But these decisions do not assist the petitioner. In Mysore Ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question ...... So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle. " We have, therefore, to hold, following the above said decisions of this court that in this case, the Tribunal is right in holding that 25% of the technical fee has to be taken as a capital expenditure and as such cannot be allowed as a revenue expenditure. Coming to the second issue as to whether the Tribunal is right in upholding the disallowance of 25% of the royalty paid, the ITO, the appellate authority as well as the Tribunal have all concurrently held that the disallowance of 25% of the royalty is justified. Under the terms of the know-how agreement, the royalty is payable on ..... 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