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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 ..... sessee-company agreed to pay as consideration 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&nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the orders of the AAC, both the assessee-company and the Revenue filed appeals and cross-objections before the Tribunal. The Revenue contended that the AAC erred in holding that 1/4th of the expenditure towards technical aid fees alone had to be considered as capital. The Tribunal after considering the various clauses in the collaboration agreement dated December 12, 1963, in extenso, came to the conclusion that as per the said clauses of the agreement, the technical knowledge that the assessee obtained through this agreement was an enduring advantage and benefit in so far as the same was available to the assessee for its manufacturing and industrial processes even after the termination of the agreement, and that in view of the decision of this court in Transformer & Switchgear Ltd. v. CIT [1976] 103 ITR 352, 1/4th of the technical aid fees has rightly been disallowed as relating to capital expenditure. In this view, the Tribunal upheld the order of the AAC relating to both the disallowance of 1/4th of the technical aid fees and 1/4th of the royalty amount. Aggrieved by the order of the Tribunal, both the Revenue and the assessee filed reference applications before the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n asset of a permanent nature and as such held to be capital in nature, but the fee referable to the user of the patents and designs was held to be revenue expenditure. Since the sum paid was a composite payment, 50% of the claim was disallowed as relating to capital expenditure. This was upheld by this court. The same view has been taken by this court in Fenner Woodroffe & Co. Ltd. v. CIT [1976] 102 ITR 665. In that case, this court held that it is the aim and object of the expenditure that would determine the character of the sum whether it is capital or revenue and that neither the source nor the manner of payment may be of any consequence. This court further held that, on the facts of that case, the amounts paid were not admissible as business expenditure under the I.T. Act, since the question of apportionment of the expenditure which was composite one was not referred to the High Court. This court has again considered a similar collaboration agreement between an Indian company and a foreign company containing similar terms as in the instant case in AL R. Electronic Components Ltd. v. CIT [1982] 136 ITR 305. It was held, in that case, that as the foreign company had undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tools, fixtures and patterns as are made in India and the schedule of the machine tools necessary for the production of the scheduled products. All drawings, specifications and other data aforesaid furnished to S. S. shall be in the English language with measurements shown in the system currently used by BRUSH but shall be the property of S.S. on the condition that S. S. hereby agrees to hold such property subject always to the continued fulfilment by S. S. of all the obligations contained in clause 6(c), 6(d), 23 & 25 of this Agreement and the period of ten years thereafter. The parties hereto shall from time to time draw up by mutual consultation time-table regarding the supply of BRUSH to S. S. of all drawings and specifications and other data hereinbefore referred to in respect of each type of the scheduled products. 5. BRUSH hereby agrees and undertakes that it will not during the continuance of this agreement manufacture in India any scheduled products or grant or furnish or make available to any other person, firm or company any manufacturing information, licences, rights and data for scheduled products in India. 6. S. S. hereby agrees with BRUSH at all times during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services to be rendered by BRUSH under this Agreement S. S. shall pay to BRUSH. (a) Such sum as after deductions required under India law shall equal pounds 20,000 sterling which sum shall be paid in equal instalments of pounds 4,000 sterling each, the first payment to be made three months after the date hereof and successful payments at intervals of twelve months after the due date of the first payment. " (b) (i) A royalty on all switchgear products and parts thereof sold by or on behalf of S. S. within India and at the rate of 21% on the net invoiced price of all low and at the rate of 5% on the net invoiced sales price of all high tension switchgear products and parts thereof. (ii) A royalty on all switchgear products and parts thereof sold by or on behalf of S. S. within the export territories at the rate of 7% on the net invoiced sales price thereof. (iii) In the event of any assemblies, components or its of such products as aforesaid being purchased by S. S. from BRUSH Then the total BRUSH invoiced price (excluding freight, carriage and insurance charges) of all such items shall be deducted from the total net invoiced sales price before calculating the royalty pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the same was available to the assessee for its manufacturing and industrial processes even after the termination of the agreement. The technical assistance contemplated in the agreement covers the establishment of the factory and the operation thereof for the manufacture of transformers of all kinds and types. The foreign company also makes available to the assessee its procedures, designs, experience and technical know-how in respect of the same. Though the duration of the agreement is five years, the assessee even after the expiry of the period, could use the methods of production, procedure, experiments, improvements which had been made available to them in pursuance of the agreement. Thus, the assessee had acquired a knowledge of enduring nature. Further, apart from the technical know-how supplied by the foreign company and the grant of patent rights, the foreign company has agreed not to manufacture in India any of the scheduled products or to grant or make available to any other person, firm or company any manufacturing information, licences, rights for any one of the scheduled products in India, thus conferring an exclusive benefit on the assessee-company to manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the Indian company acquired only technical knowledge from the foreign company and did not acquire any other right or advantage of an enduring nature for the purpose of its business, unlike the facts in this case. Here, in addition to the acquisition of technical knowledge, the assessee-company got an exclusive right to manufacture and sell its articles without any objection from anyone including the foreign company and this is clearly an advantage of enduring nature. It is well-established that even without acquisition of an asset, a right of a permanent advantage could be acquired and the cost of acquisition of such a right could be taken to be capital expenditure. In Regent Oil Co.Ltd. v.Strick (Inspector of Taxes)[1966] AC 295; [1969] 73 ITR 301 , the House of Lords had expressed the view that payments made by an assessee to secure exclusive sales stations are payments for permanent assets and for an enduring benefit, and, therefore, the expenditure is capital in nature. Lord Reid in that case observed thus (at page 312-313) : "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 .. ..... 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