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TMI Blog1979 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were agreed to be rendered by M/s. Daimler Benz. The summary thereof as given in the affidavit filed by the director-in-charge of Telco before the ITO the correctness of which is not disputed on behalf of the revenue, is as follows : " (a) Technical advice, information and assistance as may be reasonably required by Telco concerning the layout of additional factory buildings, etc., and selection and arrangement of plant, equipment, etc., for setting up the automotive division at Tatanagar. (b) Grant to Telco on an exclusive basis for India the manufacturing rights, together with patents, patent rights, secret and other processes relating to the manufacture of automotive products. (c) Supply of drawings and designs and full technical information required for the manufacture of automotive products. (d) Communicate all technical information relating to improvements and developments in the manufacturing process. (e) Supply of all jigs, tools and fixtures required by Telco (or at the option of Telco, drawings or designs of such jigs, tools and fixtures) for the manufacture of automotive products. (f) Supply to Telco from time to time such parts and components as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1969, on which date the agreement was to come to an end, the Telco was entitled to continue its manufacture, but that they should cease to use the trade name of Tata-Mercedes Benz. Since the learned counsel for the revenue has based some argument on this particular clause, we reproduce it as follows : " 36. On the expiry or termination of this agreement for any cause Telco shall have the right to continue in the field of automotive manufacture with the benefit of all technical information and experience acquired by it in terms of this agreement, but shall not be entitled to use any trade mark or name licensed to it as provided for in clause 24(d). " The assessee had also entered into another agreement with a Belgian company by name Societe Anonyme Usiness Emile Henricot (hereinafter referred to as " M/s. Henricot ") as the Telco desired to secure competent technical advice, information and assistance in Europe to bring the Telco steel foundry when completed into full and efficient operation as early as possible and to design and manufacture therein on an economical and efficient basis the maximum possible tonnage of sound steel castings of all sizes, shapes and specification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by M/s. Henricot as provided in the agreement dated 11th April, 1956, were as follows : " (a) A sum of two million, five hundred thousand (2,500,000) Belgian Francs in each of the first five years of the agreement to be payable in four equal quarterly instalments, the first such instalment to be paid on the 1st day of September, one thousand nine hundred and fifty-five and thereafter : (b) a sum of five million, one hundred and sixty-six thousand six hundred and sixty-six (5,166,666) Belgian Francs in each of the three years, following the first five years of the agreement to be payable in four equal quarterly instalments, the first such instalment to be paid on the 1st day of September, one thousand nine hundred and sixty. " In the assessment year 1959-60, the payments made by Telco to M/s. Daimler Benz and M/s. Henricot were as follows : 1. Ratio in share of profits paid to M/s. Daimler Benz Rs. 29,59,608. 2. Technical fees to M/s. Henricot Rs. 2,99,158. The agreement with M/s. Henricot provided for facilities for training in Henricot's Belgian plant and establishments of such Indian employees of Telco as may be deputed by Telco for such training. The total numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user of the technical know-how as well as the trade name. In respect of the payments made to M/s. Henricot, the Tribunal found that no capital asset as such had been acquired from M/s. Henricot and that under the agreement with M/s. Henricot the assessee had acquired merely the right to trade for the purpose of carrying on its business upon the technical knowledge of M/s. Henricot in regard to the foundry business. This, according to the Tribunal, could not be said to be acquisition of any capital asset, but that it was mere user of it. Therefore, according to the Tribunal, the moneys paid to M/s. Henricot was also revenue expenses. With regard to the amount spent in training Telco personnel with M/s. Henricot, the Tribunal took the view that the expenditure was incurred not for acquiring or bringing into existence an asset or capital of enduring nature to the business but was made for running the business with a view to produce more products and with a view to run the business more efficiently so as to produce higher profits. Thus, the expenditure incurred in respect of all the three items referred to above was held allowable as revenue expenditure. Out of this order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1st April, 1954, and ending with 31st March, 1969. Sub-clause (2) of cl. 34, however, provided that any of the parties may terminate the agreement by giving six months' previous notice in writing in case of a serious breach of its terms and conditions by the other. party or parties to the agreement. Under what circumstances a serious breach of the agreement thereof deemed to have been committed were also specified, but a reference to that part of the clause is not material to the disposal of the reference. Another clause on which particular reliance was placed was cl. 36, which provided that on expiry or termination of the agreement for any cause Telco shall have the right to continue in the field of automotive manufacture with the benefit of all the technical information and experience acquired by it in terms of this agreement, but shall not be entitled to use any trade mark or name licensed to it as provided for in cl. 24(d). Relying on the stipulated period of 15 years and the provisions enabling Telco to continue the use of technical information and experience acquired by it under the agreement even after the agreement has been terminated, it was contended that since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Moolgaonkar had filed before the ITO affidavits explaining the nature of the services rendered by the two companies and these affidavits are annexed to the statement of the case ;is annexs. " C " and " C-1 "). The affidavit in respect of services rendered by M/s. Daimler Benz is annex. " C " and the affidavit in respect of services rendered by M/s. Henricot is annex. " C-1". In respect of both these companies it is stated by Mr. Moolgaonkar that no patent or patent rights or licences have been transferred or assigned to Telco by either M/s. Henricot or M/s. Daimler Benz. With regard to the services rendered by M/s. Daimler Benz, it is stated in the affidavit that M/s. Daimler Benz have not given any technical advice, information or assistance to Telco concerning the layout of the factory and buildings, extensions, etc., for the automotive division and the entire work of designing and erection of the various factory buildings, etc., and the lay out of the automotive division were carried out by Telco's own personnel. It is then stated that the plant and machinery required for the automotive division were and are supplied to Telco by M/s. Daimler Benz on f.o.b. basis, as between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and equipment for setting up the auto division at Tatanagar. (ii) Grant to Telco on an exclusive basis in India, the manufacturing rights. (iii) Supply of drawings and designs and full technical information required for manufacture of auto products. (iv) Communication of all facts relating to improvements. Development in the manufacturing process. (v) Use of the name and trade marks of Daimler Benz, during the currency of the agreement. (vi) Provision of training facilities. " In reply to a question by the ITO, Mr. Moolgaonkar has positively stated that the payments made to M/s. Daimler Benz particularly related to use of the name and trade marks of M/s. Daimler Benz during the currency of the agreement and provision of training facilities. He further made a statement before the ITO, the correctness of which has not been disputed before us, that the main reason for entering into collaboration agreement was to secure training facilities and the right to use a well known trade name. He further stated that no proprietary right is claimed by Telco in the drawings, designs and technical data and processes and that the drawing is merely a shop language of what needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al if trucks of good quality had to be produced and no company would allow its name to be lent to a product of another company, unless it is satisfied that the product which is sold under the name of such company, was of the required quality. Telco would also be interested in producing trucks of good quality which could be sold by the trade name of M/s. Daimler Benz and it, therefore, appears to us that Mr. Moolgaonkar was right when he stated before the ITO that the payment made under the agreement with M/s. Daimler Benz in effect was payment made for the use of the name and trade mark of M/s. Daimler Benz and making provision for training facilities. The period of the agreement was to run out after 15 years. Telco was, however, not going to stop manufacturing after that and if production of quality trucks was to continue, Telco was bound to see that its own personnel were properly trained with the know-how and possessed all the technical information necessary for the manufacture of a quality product. If the transaction embodied in the agreement is looked at commercially it looks to us as nothing more than obtaining the services of a consultancy so far as the supply of know-how is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Benz or M/s. Henricot. It is not possible for us to accept the argument that merely because a company, which has entered into a contract with regard to know-how, is entitled to use that know-how even after the agreement has expired, the benefit must be said to be of an enduring character. Agreement of foreign collaboration, where foreign know-how is availed of in lieu of payment, is in our view, in substance, a transaction of acquiring the necessary technical information with regard to technique of production. Instead of employing persons having knowledge of those techniques and utilising their knowledge, what is done is that technical know-how is acquired under a collaboration agreement. The fact that the same information is continuously used whether in the same form or in improved form will, therefore, not be relevant in deciding whether technical know-how obtained under such an agreement is a capital asset. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. There is no property right in a know-how which can be transferred just as it is, in a limited sense, in a patent. In any ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 692 (SC), in our view, it is apparent that the assessee-company had not acquired any asset or advantage of enduring nature for the benefit of its business. We may incidentally point out that we have considered in detail the decision in Ciba of India Ltd. [1968] 69 ITR 692 (SC) in Antifriction Bearings Corporation Ltd. v. CIT [1978] 114 ITR 335 (Bom) and we have held in that case that since in the payment for taking advantage of know-how from a foreign firm, there is no transfer or acquisition of an asset, it must follow that any expenditure incurred, in connection with an exploratory mission or a visit intended to finalise the collaboration agreement, in the form of travelling expenses, will also have to be treated as revenue expenditure. We may refer to the decision of the Calcutta High Court in CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243, where the Calcutta High Court has taken the view that there is no property right in " know-how " that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. It was pointed out in that case that special knowledge or skill can indeed ripen into a fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available by the foreign company during the period of the validity of the agreement. The Madras High Court on these facts held that the assessee had acquired an enduring benefit under the agreement and to that extent the amount paid was clearly capital in nature. The reason, according to the Madras High Court, was that though under cl. 2 of the agreement there was a certain amount of limitation on the assessee not being in a position to assign the benefits it obtained under the agreement, that would not take the case out of the ratio of the decision in Fenner Woodroffe Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad). Now, in the case of Fenner Woodroffe Co. Ltd. there was an agreement with the foreign company to make available the technical data relating to the manufacture of leather belting and also to permit the use of such technical data for the purpose of manufacture of the products. Certain amounts were paid to the foreign company in pursuance of this agreement and these payments were claimed as deductions for the respective assessment years. The High Court held in that case that there was no limitation in the agreement as to its endurability and the assessee could use the tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge regarding methods of production and in addition in case of M/s. Daimler Benz the payment was for the use of the trade name. The decision in the case of Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) merely followed the decision in Fenner Woodroffe Co.'s case [1976] 102 ITR 665 (Mad). Since we are inclined to dissent from the view taken in that case, it is not possible to hold on the strength of the authority in that case that the expenditure in question in respect of any of the agreements in question must be treated as capital expenditure. So far as the expenditure incurred on training of the employees of Telco is concerned, it is obvious that that expenditure was incurred with a view to give training to persons so as to achieve maximum and efficient production. The expenditure incurred on such training was undoubtedly closely related to the profit earning process, and, therefore, in our view, that would always be allowable as revenue expenditure. In this view of the matter, the question referred to us must be answered in the affirmative and in favour of the assessee. The assessee to get the costs of this reference from the revenue. - - TaxTMI - TMITax - Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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