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TMI Blog1979 (7) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... the entirety of Rs. 20,81,446 and Rs. 29,35,251 paid by the assessee to the foreign collaborators by way of royalty in accordance with clause 13(ii) of the collaboration agreement dated December 5, 1955, is allowable as revenue expenditure for the assessment years 1968-69 and 1969-70, respectively ? 2. Whether Rs. 32,00,000 and Rs. 15,82,127 being the profit estimated to have been derived by the assessee by the sale of imported spare parts, should also be taken as profit attributable to the priority industry for the purpose of granting relief to the assessee under section 80-1 of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70, respectively ? " The only question in the first set of references and the first question in the second set of references arise on identical facts. The assessee is a company incorporated on April 7, 1949. It originally carried on business in the sale of Austin cars and truck spares. Later on, it started manufacturing automobile trucks and for that purpose it entered into a collaboration agreement on December 5, 1955, with M/s. Leyland Motors Ltd., U.K. On the same day, a financial agreement was also entered into between the same pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and spare parts on which manufacturing work is carried out in India and are produced by the assessee during such financial year. In the income-tax assessments for the assessment years 1957-58 to 1969-70, the assessee claimed the full amount of royalty so paid under cl. 13 of the collaboration agreement excluding the price paid for designs and drawings. For the assessment years 1957-58 to 1964-65, the amount was first allowed as deduction. But, later on, these assessments were reopened and in the reassessment proceedings for 1957-58 to 1964-65, and in the original assessments for 1965-66 to 1969-70, the ITO held that out of the claim for deduction of royalty, 25% thereof was not admissible as, according to him, to that extent there was a capital element in the payment. The assessee appealed to the. AAC against this disallowance of 25% of the royalty paid. The AAC found that the royalty had been paid only for the user of the technical knowledge as well as the foreign collaborator's trade name calculated on the basis of production, and that the assessee had paid the royalty not for acquiring any permanent asset but only to earn its profit by making use of the information provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally as to the manufacture which can be immediately undertaken by Ashok and the prospects of sub-contracting and purchasing the proprietary items in India. During such visits Leyland shall be responsible for the salary of such engineers and staff and Ashok shall bear only the cost of their passages to and from India and reasonable and proper expenses appropriate to their position during their absence from Leyland factories ...... 13. (i) Ashok will pay to Leyland an annual premium at the rate of pounds 5,000 per annum for a period of five years from the date of this agreement by way of royalty for the supply of technical information, use of Leyland Patents, supply of standard velographs, technical data machine loading and other similar and necessary technical information normally supplied by Leyland in accordance with their practice in other countries. The first such premium shall be paid on the execution of this agreement and thereafter annually in advance on each anniversary thereof. These premiums do not include the price of special designs or drawings which may be prepared by Leyland at the request of Ashok and which shall be paid for by Ashok at a price to be certified by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd staff of U. K. were to visit India for a period of approximately not less than three months and not more than 12 months to make proposal for the progressive layout of the factory and its running and to investigate the position generally as to the manufacture which could be immediately undertaken by the assesseecompany and the prospects of sub-contracting and purchasing the proprietary items. In his submission, the consideration under cl. 13 which does not specify any particular service as such for which the consideration is provided, should be understood as providing a composite consideration, one for the purpose of supplying the necessary data relating to the layout of the factory and the other for the purpose of supplying information regarding the manufacture and the carrying on of the business. Clause 11, as it is extracted, would show that it is a self-contained provision. As to what is to be done with reference to the visits of the planning engineers and staff Who visit India in accordance with that clause is provided in the latter part of cl. 11 itself. During such visits the assessee had to bear only the cost of their passages to and from India, and reasonable and prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, even though the sum of pounds 5,000 is referred to as " premium " payable for a period of five years, still it is referred to only as " royalty " and the royalty is for the supply of technical information, use of Leyland patents, etc. In sub-cl. (ii), the expression used is " royalty ". In both, the payments are of a recurring nature. The nature of the consideration being thus only for the purpose of supplying technical information and use of Leyland patents, etc., the amount can only be treated as having a revenue character. The Tribunal did not, therefore, commit any error in holding that the entire payment was liable to be allowed as deduction. The Tribunal has, in the course of its order, given various other reasons in support of its conclusion for allowing the amount. We agree with the reasoning of the Tribunal only as far as this aspect is concerned and we pronounce no opinion on the other reasons in the Tribunal's order, The only question in T.C. No. 452 of 1975, etc., and the first question in T.C. No. 459 of 1975, etc., are answered in the affirmative and in favour of the assessee. With reference to the second question which arises in the second set of refer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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