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TMI Blog1979 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be allowed in full. This agreement had the approval of the Govt. of India and was effective from January 1, 1966. But, under the direction of the Govt. of India, a, supplemental agreement on June 2, 1969, conferred retrospective effect to the agreement with effect from April 1, 1964. The U.K. company was engaged in the manufacture of complete brake systems for the automobile and non-automobile units comprising foundation brakes, master cylinders, wheel cylinders, brake seals, brake hoses and component parts and service tools for all such equipment. The U.K. company was in possession of technical information relating to the above types of equipment. It also obtained patents in India in respect of several items of equipment. The assessee started to manufacture brakes and other items and, therefore, entered into an agreement of collaboration with the U.K. company. By cl. 3 of the agreement, the U.K. company granted to the assessee the exclusive right and licence to make use, exercise and vend the licensed devices and parts there-of within the licensed territory, i.e., India. There was also a non-exclusive right to export or sell for export outside India any of the licensed devi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsent of the grantor (U.K. company), during the continuance of the licence or at any time after its termination, disclose to any third party any manufacturing information supplied to or acquired by the licensee (Indian company) except such information as was made available to the general public by or with the consent of the U.K. company. The U.K. company had also certain obligations to discharge and they are described in cl. 8. In cl. 8(a) it was provided that in consideration of the payments mentioned in cl. 7, the U.K. company would, at the request of the Indian company, deliver to the Indian company copies of such working drawings as it had, related to the licensed devices, and would render to the Indian company its servants or workmen such instruction, information and assistance as was available with the U.K. company and which was necessary or proper for enabling the Indian company to manufacture such devices to the best advantage. Similarly, the U.K. company had also to communicate and explain any improvements or addition to the licensed devices whether patented or not by the U.K. company and if the improvements were patented, the U.K. company would apply for patents in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar question, came to the conclusion that the technical aid fee paid under the agreement constituted revenue and not capital expenditure. In the course of its order it referred to a decision of it in I.T.A. Nos. 514 to 517 (Madras) of 1969-70 dated December 31, 1971, to this court and the judgment of this court was reported as CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338. However, at the time when the Tribunal disposed of the appeal, it did not have the benefit of the judgment of this court and, therefore, it followed its own earlier order. The only question is whether the expenditure incurred as and by way of what is called technical aid fee is liable to be disallowed to the-extent of 50% on the ground that it was, capital in nature. The decision in CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338 was rendered in construing an agreement with identical terms. In that case also, on a consideration of the various clauses in the agreement, the AAC and the Tribunal had held that the entire technical aid fees was allowable as a revenue expenditure. One of the questions that came up before this court for consideration was whether the disallowance as made by the ITO to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above were emphasised by the learned counsel for the revenue as showing that the assessee had obtained an enduring benefit by paying the fees contemplated under cl. 7 of the agreement. This identical term appeared also in the agreement construed in CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338 (Mad). Specific reference was made to these terms at p. 341. It was noticed that the provisions of cls. 7(3) and 8(b) were in the nature of reciprocal provision with regard to the improvements that may be made by either party which had to be communicated to each other. In spite of this, this court held that there was, no capital element in the payment. Even after considering the submission of the learned counsel for the revenue we are not satisfied that the obligation to make available the improvements has anything to do with the consideration set out in cl. 7. As pointed out in the earlier judgment these are only reciprocal provisions for sharing the knowledge about the improvements and no consideration is to be paid therefor by either party. The consideration, if any, in the respective clauses cancels each other. The consideration set in cl. 7 is only for the drawing, assistance, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bition relating to the non-user of the trade name and the permission to continue the business by the newly formed company related to some other agreement. Even assuming that the agreement contemplated by the said clause is the agreement with which we are now concerned, still we do not consider that there is any capital element in the payment with which we are now concerned. The payment in the present case is for specific purposes and not for, acquisition of any knowledge of a permanent nature with which the assessees could carry on its business ; and any person who enters into a collaboration agreement would necessarily acquire some knowledge during the process of manufacture carried on with the help of the collaboration agreement. Knowledge acquired cannot be disgorged and ordinarily forms part of the equipment of the person concerned. It is not for the acquisition of the knowledge, but for application thereof, that the consideration is paid. The real test that has to be applied to cases like this to find out whether the consideration was statedly for any such enduring purposes or merely for the help rendered during the period of the agreement. In the present case, the considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the continued use free of charge of all information made available by the foreign company during the period of the validity of the agreement. Particularly, in the light of this provision and the possible indefinite period of the agreement, it was held that there was a capital element in the payment. There was no other clause in the agreement which could throw light on the relationship between the parties as to how the manufacture would be carried on after the expiry of the agreement. The decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 has been followed in CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338 (Mad), and the present case also does fall within the scope of the decision of the Supreme Court. In our opinion, in the present case, the assessee had only a licence for a limited period for making use of the technical knowledge of the foreign company with the right to use the patent, etc., and by reason of this agreement, the Indian company did not acquire any kind of assets or an advantage of an enduring nature which would introduce a capital element into the consideration. The result is that the question referred to us is answered as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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