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TMI Blog1974 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... By virtue of an agreement between the Associated Electrical Industries (India) Private Ltd., hereinafter referred to as " the agent-company ", and the Associated Electrical Industries Ltd., London, hereinafter referred to as " the English company ", the agent-company had the right to technical and manufacturing information, designs and data emanating from the English company. The assessee at the relevant time was carrying on business in the manufacture of various electrical equipments and components like electric motors, etc. The manufactured items were sold entirely to the agent-company by the assessee and the agent-company in its turn effected sales in accordance with an agreement dated the 21st December, 1960, between the assessee and the agent-company. The recital of the said agreement states that the company and the agent were desirous of entering into certain arrangements relating to the manufacture and sale of goods coming within the scope of the agreement. The agreement provided, inter alia, as follows : " (1) The scope of this agreement shall be such that electrical and allied goods as may from time to time be manufactured by the company by arrangement between the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that these expenses did not stand in the same footing as expenses for raw materials or even expenses of an expert for the purpose of production. These expenses had been incurred prior to production. In the circumstances, he upheld the order of the Income-tax Officer. The assessee, thereafter, appealed to the Tribunal. It was submitted before the Tribunal that the whole of Rs. 22.039 should be allowed as deduction under section 37 of the Income-tax Act, 1961, corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922. It was further argued in the alternative that if the amount represented capital expenditure then the amount should be allowed under section 35(1)(iv) of the, 1961 Act corresponding to section 10(2)(xiv) of the Indian Income-tax Act, 1922. The Tribunal came to the conclusion that the expenditure incurred in connection with obtaining the design and the technical information could not be said to be of capital nature in a case of this kind. Therefore, the Tribunal was unable to uphold the view taken by the revenue. The Tribunal was further of the opinion that the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of products discovered and developed in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts which might be useful to introduce licensed preparations and to promote their sale in India. It granted to the assessee full and sole right and licence under the patent listed in the agreement to make, use, exercise and vend the inventions specified therein in India and also a licence to use certain specified trade marks in the territory subject to any existing licence which third parties held at the date of the agreement, or, which the Swiss company might grant to third parties thereafter. In consideration of the right to receive scientific and technical assistance the assessee agreed to make contributions of 5%, 3% and 2%, respectively, of the net sales price of the products sold by the assessee towards-- (i) technical consultancy and technical service rendered and research work done, (ii) cost of raw material used for experimental work, and (iii) royalties on trade marks used by the assessee. The assessee agreed-- (a) not to divulge to third parties without the consent of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harmaceutical products, upon the technical knowledge of the Swiss company for a limited period ; by making that technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature, for the benefit of the business. The Supreme Court referred to the relevant English authorities on this point and came to the aforesaid conclusion. These principles, though in slightly different circumstances, have been applied by this court in the case of Commissioner of Income-tax v. Hindus that ; General Electrical Corporation Ltd.. It had occasion to consider this question in relation to know-how. The court was of the opinion that one of the primary rules for determining whether a particular expenditure was revenue or capital expenditure was, from the terms of the agreement between the parties and from the surrounding circumstances, to find out what was the purpose for which it was being incurred. It was held that if the expenditure was so related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit earning process, it should be held to be revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, would amount to acquisition of an advantage or an asset for the extension of the assessee's business. In the case of Commissioner of Income-tax v. Aluminium Corporation of India Ltd. this court had occasion to consider this question and was of the opinion that whether a particular expenditure was capital expenditure or revenue expenditure should be judged by applying correct legal principles from a commercial point of view. It was held that one of the primary rules for determining whether an expenditure was revenue or capital in nature was related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit making process, it might be held to be revenue expenditure. If the purpose was acquisition of an asset or right of a permanent nature the possession whereof was condition precedent to the commencement or continuance of the business, the expenditure would be capital in nature. It appears to us that in order to determine the question which arises often and presents difficulties in answering whether an expenditure incurred by the assessee is of capital or revenue in nature, the following principles may have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these should be returned to the company viz., Associated Electrical Industries Ltd., London. Therefore, the assessee had merely the use of this licence for a limited period of time and for certain limited purpose, i.e., to use it for the manufacture of its motors for the purpose of mainly selling it to the Associated Electrical Industries (India) Private Ltd. It should be borne in mind that for this purpose no new machinery was acquired or no new machinery was installed. The new types of things manufactured were improvements over the existing machinery. It has further to be borne in mind as found by the Tribunal that the assessee was manufacturing similar items of motors and the present design covered only one type of manufacture of goods by the assessee. In these circumstances it appears to us that the assessee did not have any asset or advantage or right of enduring nature. On the. other hand, what the assessee was getting was something which was necessary, in the profit earning process of the assessee. In the aforesaid view of the matter, we are of the opinion that the Tribunal was right in coming to the conclusion that it did. We will, however, shortly refer to those cases t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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