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.

SC held the lump-sum payments to the foreign collaborator were wholly for acquisition of technical know-how embodied in drawings, designs, charts, plans, ... Documentation service as principal contractual obligation - acquisition of technical know-how in the form of drawings, designs, charts, plans and processing data - capital expenditure versus revenue expenditure - definition of 'plant' and ejusdem generis scope - functional test for plant as tool of trade - depreciable asset under section 32 read with section 43(3)Documentation service as principal contractual obligation - acquisition of technical know-how in the form of drawings, designs, charts, plans and processing data - capital expenditure versus revenue expenditure - The payment of Rs. 1,60,000 was principally for and constituted the purchase price of the documentation supplied under the agreements and was a capital expenditure. - HELD THAT: - On a true construction of clauses 3 and 6(a) of the two collaboration agreements, the rendition of the complete sets of documents (the 'documentation service') was the main service to be rendered and clause 6(a) expressly states that the lumpsum payment was for the services defined as the documentation listed in clause 3. Other services (training, deputation of experts, technical assistance) were either conditional on the purchaser's request and costed separately, or incidental, so that the lump sum was principally for acquisition of the documents and attendant technical know-how. Consequently the expenditure was of capital character, resulting in acquisition of a capital asset consisting of technical know-how embodied in the supplied documentation.Payment of Rs. 1,60,000 was wholly attributable to the acquisition of the documentation/technical know-how and was capital expenditure.Definition of 'plant' and ejusdem generis scope - functional test for plant as tool of trade - depreciable asset under section 32 read with section 43(3) - The technical know-how acquired in the form of drawings, designs, charts, plans, processing data and other literature falls within the wide definition of 'plant' and is a depreciable asset. - HELD THAT: - Applying the functional test endorsed in the authorities, plant includes apparatus or tools used by a businessman to carry on his business and need not be confined to mechanical devices. The supplied documentation, taken collectively as a book, functioned as the basic tools of the assessee's trade enabling manufacture of the instruments and had a degree of enduring utility. Section 43(3)'s inclusive definition (which expressly includes 'books' and scientific apparatus) embraces such documentation embodying know-how. Authorities recognising non-traditional articles as plant support that drawings and patterns fundamental to manufacturing are plant. Therefore the capital asset so acquired is within the scope of 'plant' and is eligible for depreciation under the statutory scheme.The acquired technical documentation constitutes 'plant' for the purposes of the Act and is a depreciable asset.Final Conclusion: Appeals allowed. The Court held that the entire payment was for acquisition of the documentation/technical know-how (capital expenditure) and that the asset so acquired falls within the definition of 'plant' and is depreciable; parties to bear their respective costs. 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.