1985 (11) TMI 1 - SC - Income Tax

Lump-sum payments for foreign know-how are capital expenditure forming 'plant' and qualify for depreciation under Section 32.

Scientific Engineering House Pvt. Limited Versus Commissioner of Income-Tax, AP

SC held the lump-sum payments to the foreign collaborator were wholly for acquisition of technical know-how embodied in drawings, designs, charts, plans, ... Depreciation allowance - documentation service - Whether, on true interpretation of the collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset ? - HELD THAT:- The tenor of the agreements clearly shows that the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the assessee and for acquiring such technical know-how through these documents, lump sum payment was made. In other words, the payment under each of the agreements was principally for rendition of ' documentation service '. It is, therefore, clear that this expenditure was incurred by the assessee as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in ' documentation service ' specified in clause 3. The expenditure, therefore, was undoubtedly of capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, etc., was acquired by the assessee. Whether technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature falls within the definition of ' plant '. - The purpose of rendering documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing theodolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments; in fact it is with the aid of these complete and up-to-date sets of documents that the assessee was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basic tools of the assessee's trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature falls within the definition of ' plant ' and is, therefore, a depreciable asset. The question framed at the commencement of this judgment is answered in favour of the assessee to the effect that the payment made by the assessee to the foreign collaborator was attributable wholly towards the acquisition of a depreciable asset. Issues Involved:1. Whether the payment of Rs. 1,60,000 was attributable partly or wholly towards the acquisition of a depreciable asset.2. Whether the expenditure was of a capital nature and brought into existence a depreciable asset.3. Whether the technical know-how acquired in the form of drawings, designs, charts, plans, and other literature falls within the definition of 'plant' under section 43(3) of the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Attribution of Payment Towards Depreciable Asset:The primary issue was whether the payment of Rs. 1,60,000 made by the assessee to the foreign collaborator, M/s. Metrimpex Hungarian Trading Company, Budapest, was partly or wholly attributable towards the acquisition of a depreciable asset. The assessee entered into two collaboration agreements with the foreign collaborator for the manufacture of scientific instruments, agreeing to pay Rs. 80,000 each under the agreements. The agreements stipulated that the foreign collaborator would provide technical know-how, including manufacturing drawings, processing documents, designs, charts, and plans. The Income-tax Officer initially held that the sum represented the price paid for acquiring technical know-how, which amounted to capital expenditure but did not bring into existence a tangible or depreciable asset. The Appellate Assistant Commissioner, however, held that the payments were for the outright purchase of documents, which collectively constituted a book, and allowed depreciation. The Tribunal later concluded that the payment was partly on capital account and partly on revenue account, confirming a deduction of Rs. 12,000 as revenue expenditure.2. Nature of Expenditure:The High Court, upon consideration, concluded that the payment did not mainly represent the purchase price of the designs, drawings, charts, etc., and that the documentation service was incidental. It held that the entire expenditure was of a capital nature, bringing into existence an asset of enduring benefit, but this asset was non-depreciable. The Supreme Court, however, found it difficult to accept this view, emphasizing that the documentation service was the principal service for which the payment was made. Clauses 3 and 6(a) of the agreements indicated that the lump sum payment was for the documentation service, which included the supply of manufacturing drawings, processing documents, and other technical literature. The Court held that the payment was indeed for the purchase of these documents, making the expenditure capital in nature, resulting in the acquisition of a capital asset.3. Definition of 'Plant':The next question was whether the capital asset acquired, i.e., the technical know-how in the form of drawings, designs, charts, plans, and other literature, fell within the definition of 'plant' under section 43(3) of the Income-tax Act, 1961. The Court referred to various precedents, including the classic definition of 'plant' given by Lindley L.J. in Yarmouth v. France, which included any apparatus used by a businessman for carrying on his business. The Court noted that the documents collectively constituted a 'book' and satisfied the functional test as they were essential tools for the assessee's manufacturing activity. The documents had a vital function in the manufacturing process and formed the basis of the business, qualifying as 'plant' under the Act. The Court agreed with the Gujarat High Court's decision in CIT v. Elecon Engineering Co. Ltd., which held that drawings and patterns fundamental to the manufacturing business are 'plant.'Conclusion:The Supreme Court concluded that the payment of Rs. 1,60,000 made by the assessee to the foreign collaborator was wholly attributable towards the acquisition of a depreciable asset. The technical know-how acquired in the shape of drawings, designs, charts, plans, and other literature fell within the definition of 'plant' and was, therefore, a depreciable asset. The appeals were allowed, and the question was answered in favor of the assessee.