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TMI Blog1980 (2) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... is useful for the purpose of manufacture of lightning arresters. Under cl. 1 of the agreement, the licence was granted for a term of 14 years from the 1st day of October, 1964, and comprised the right to use the invention for non-linear -resistor compound from conducting and semi-conducting materials such as graphite and silicon carbide covered, by Indian Patent No. 55282 at the grantee's own factory, and to sell the product manufactured in accordance with the said invention. This was in consideration of a payment of Rs. 5,000 by way of premium and payment of royalty as specified in the agreement. Under cl. 3(i) it was provided that a royalty of 2% on the net ex-factory sales of lightning arresters and other products arising from the explo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the transfer of the licence to the assessee-company along with all the assets and liabilities. The assessee paid a sum of Rs. 72,055 towards royalty to N.R.D.C. in terms of the original agreement. It claimed a deduction of this amount, but the ITO negatived it on the ground that there was no privity of contract between the assessee and N.R.D.C. and the expenditure was capital in nature. On appeal, the AAC held that there was a privity of contract, but he took the view that the claim for deduction should be made under s. 35A relating to the expenditure on acquisition of patent rights or copyrights. In accordance with this provision, he allowed the claim pro rata for 14 years. As against the said order the assessee preferred an appeal clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of business, the object for which the expenditure has been incurred and has to look into not only the record but to the surrounding circumstances to find out what is the real nature of the transaction from the commercial point of view. For this purpose different tests have been applied from time to time. It is sufficient if we refer to a recent decision of the Full Bench of this court in R.C. No. 11 5/76 dated November 19, 1979 (Praga Tools Ltd. v. CIT [1980] 123 ITR 773), in which there is an exhaustive discussion on this subject. In that case also, the assessee entered into a licence agreement with a foreign collaborator for the manufacture of a particular type of tool and cutter grinding machine for which the collaborator was to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a revenue expenditure. Where, however, the purpose and object of the expenditure is to acquire an asset or right of an enduring nature or of a permanent character it is a capital expenditure. The Full Bench referred to the leading decision of the Supreme Court in Ciba's case [1968] 69 ITR 692, wherein the Swiss company had granted to the assessee the full and sole right of licence under the patent to make use, exercise and vend the inventions specified in the agreement in India and also a licence to use some specified trade marks and deliver to the assessee all processes, formulae, scientific data, working rules, etc., and supply all scientific and technical know-how and assistance. The assessee in consideration of the aforesaid right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement provides for the use of know-how only for a period of, 14 years. After the end of that period the assessee cannot use the patent which is owned by N.R.D.C. The grantee cannot assign, mortgage, charge or grant sub-licence without the permission of N.R.D.C. even during the period of agreement. It is further provided that the grant is on a non-exclusive basis. The payment of royalty under cl. 3 of the agreement is only for a period of 14 years. The grantee has to pay 2% on the net ex-factory sales of lightning arresters and other products arising from the exploitation of the patent. Thus, as pointed out by the Tribunal, the payment of royalty is linked up with the sales. Having regard to all these circumstances and applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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