TaxTMI 
TaxTMI 
1979 (2) TMI 129
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.... this period was to be with the prior approval of the Central Government. The payment of Rs. 1,00,000 in the form of 10,000 equity shares of Rs. 10 each had been sought by the assessee company to be written off in 10 instalments and the amount of each instalment was claimed as Revenue expenditure in the relevant year. The ITO disallowed it treating it as capital expenditure and the AAC confirmed the said action of the ITO. The main point raised in all these appeals pertains to the said disallowance. These appeals were heard together and are disposed of, for convenience, by this common order. 2. The assessee company, on 16th Feb., 1968, entered into an agreement with Reinz Dichtugs Cubil, Now-UIm/Donou (hereinafter called Reiz) with a view to have foreign collaboration for the manufacture of compressed asbetos fibre sheets, and for this the assessee company sought the approval of the Central Government. The assessee company was informed in May. 1965, that the Government of India approved the assessee company's proposal to form a new company under the name and style of 'Reinz Dichtungs Cubil, West Germany, for taking up the manufacture of compressed absetes Fibre sheets, subject t....
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....to the Rupee Company. The foreign company was to confer exclusively to the Rupee company the right to manufacture the said products inIndiaand was to deliver C.A.F. Material destined forIndiaonly to the Rupee company. The foreign firm was to supply in Germany to the Rupee company within two months after issue of the shares all appropriate technical literature, data, drawings, manufacturing process and other formula, information, advices and know-how for the manufacture of C.A.F. material After formulation of the Rupee company and its registration another formal agreement was had with the foreign firm in Feb., 1968. In this agreement the words sale in respect of the supply of secret process was dropped. The provision made in the bill was that 10,000 equity shares to Reinz shall be credited as fully paid up for secret process. The clause regarding the Reinz conferring exclusively to the Rupee company the right to manufacture the said products in India and to deliver C.A.F. material destined for India only to the Rupee company remained. The other provision that the Reinz shall be responsible for the supply in Germany to the Rupee company all appropriate technical, literary, data, draw....
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....onths by the Rupee company. The Rupee company was to advise Reinz of all technical improvements devised by it in respect of the said products or own manufactured and if the same were patentatble, the Rupee company was to at once take such steps as may be necessary to have said patents registered at the cost of the Rupee company. At Reinz request, the Rupee company was also to take out letters patent in countries outsideIndiaat the expense of Reinz. The rupee company was to grant to Reinz a completely un-conditional, free of charge and exclusive licence for European countries and to avoid utilizing or exploiting the patents in such countries. Reinz was to advise the Rupee company of modifications or improvements made by Reinz in respect of the said products or its manufactures and the Rupee company was to introduce such modifications or improvements into the said products manufactured by it as soon as possible, if such introduction did not involve replacement of its plant or additional equipment to the plant. Throughout the period for which the agreement was to run the Rupee company was to use its best endeavours to promote and increase the sales of the said products inIndia. In con....
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....tion. The assessee took the matter in appeal before the AAC. The AAC observed that the total payment was of Rs. 1,00,000 and that the first instalment written off in this year was of Rs. 9,288 relating to the period27th March, 1970to28th Feb., 71. This was the first year of operation of the assessee company. The AAC referred to the agreement dt. 25th March, 1966 between the Indian (Rupee company) and the foreign firm Reinz and observed that it was the payment of Rs. 1,00,000 in the form of 10,000 equity shares of Rs. 10 each that was being written off in 10 instalments and was being claimed as Revenue expenditure. The AAC further observed that the payment of Rs. 1,00,000 was for the purchase of secret process which remained un-effected even after termination of the agreement. The only condition laid down in the agreement was that no trade secrets of the manufacturing knowledge shall be disclosed to any other person, firm or company. The AAC further observed that after the termination of the agreement only the drawings, design, literature etc. were to be returned to Reinz and the trade name Reinz was also not to be used any more but that there was no mention of the return of the sec....
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....cencing agreement concerned and it was to be used only through the continuance of the licensing agreement and that after the termination of the licensing agreement, it was not to be open to the assessee company to use the drawings and all the technical information supplied by the foreign firm for its own purpose and it could not hand over, make assessable for inspection or otherwise in fact to other parties those drawings or technical information either during the continuance of the agreement or after its termination. In the matter before the Gujarat High Court, the point for consideration was whether the payment made to the foreign firm constituted sale price. Their Lordships of the Gujarat High Court observed that in view of the restrictions placed on the assessee company, it was not possible to say that the property in the workshop drawings etc. for which the consideration was set out in cl. 18, passed to the assessee company. Since the property in the goods in question, namely, workshop drawings etc., supplied by the foreign firm did not pass from the foreign firm to the assessee company there could be no sale of those goods; and there being no sale, it could not be said that t....
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....led for being allowed as a deduction. The learned counsel for the assessee also relied on the Supreme Court's decision in CIT vs. CIBA of India Limited(3). The learned Departmental Representative, on the other hand, stated that there were no material changes between the two agreements and that the payment of Rs. 1,00,000 was the price for the secret process which was to become the property of the assessee company. It was further stated that as per the government ofIndia's letter dt. 25th May, 1975 the mention was that in consideration for the technical 'know-how' etc. to be supplied by the foreign firm, the foreign be paid a sum not exceeding Rs. 1,00,000 may in the form of free shares. The learned Departmental Representative further stated that explanation 2 in s. 9 of the IT Act referes to royalty and the secret process was something different. The learned Departmental Representative further referred to the provisions of s. 44 D and stated that it contemplated of royalty or fees for technical services and did not cover the payment made for acquiring a secret process. According to the learned Departmental Representative the secret formulae was paid for once for all and the asset a....
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....ng or bringing into existence an asset or advantage for the enduring benefit of the business, it would be properly attributable to capital and would be of the nature of capital expenditure. If, on the other hand, it was made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it would be a revenue expenditure. If any such asset or advantage for the enduring benefit of the business was thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it was a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. Reliance in this regard is had on the Supreme Court's decision in Ram Avlamb Cement Company Ltd., vs. CIT(4) and Lahore High Court's Full Bench decision in Banarsi Dass Jgaan Nath(5). A similar view was taken by the Calcutta High Court in the case of CIT vs. Aluminium Co....
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....ld of knowledge also. There is another aspect of the matter. The formulae showed as to how the raw materials were to be utilised and how the goods were to be manufactured. The formulae, therefore, became a part of the manufacturing process without the aid of which the goods could not be manufactured. It became at par with the other items of raw material. For example if a Westerner was to be taught as to how a Chapati was to be manufactured or cooked, he was not to be told only in respect of the flour and water and the firm but also as to what was the formula for mixing the flour and the water and how the mixture was to be flattened and then put on the stove and finally directly on the coal fire or the gas fire for some time. The formula, here was as much to the part in the manufacture of the Chapati as the flour and the water. If any payment was made for acquiring the formula, the expenditure would be so related to the manufacturing process of the Chapati that it might be regarded as an integral part of the profit making process in case the Chapaties after being manufactured were to be put on sale. Further there was to be periodical inspections by the foreign firm in the case of th....
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....ce profits and it was immaterial whether the payment was made once and for all or was made periodically. In Jeffrey vs. Rolls royce Ltd.(7) payment received for licencing a foreign Government to manufacture aero-engines with the accumulated technical knowledge of the taxpayer and for supplying the necessary information and drawings, and for advising the foreign Government as to improvements and modifications in manufacture and design, instructing the licencee's personnel in their words and for releasing members of their own staff to assist in the manufacture of engines by the licencee, was held to be received on revenue account of the taxpayers's trade. In CIT vs Ciba of India Ltd.(3) a Swiss company undertook to deliver to its Indian subsidiary assessee company all processes, formulae, scientific data, working rules and prescription pertating to the manufacture or processing of products discovered and developed in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliography information, pamphlets or drafts, which might be useful to introduce licensed preparations and to promote their sale in India. It was held, on facts, that t....
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....be, a receipt on capital account. But imparting "know-how" for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil [Also see : CIT vs. Hindusthan General Electricla Corporation Ltd.(13), holding that the expenditure for getting know-how was of a revenue nature]. Having regard to all the facts and circumstances of the case, we are, it is held, inclined to agree that the payment of the amount of Rs. 1,00,000 in instalments over a period of 10 years called for being allowed as a revenue deduction in the relevant years and we order accordingly. 6. The next objection of the assessee is regarding the disallowance of Rs. 4,792 claimed as water development charges. This objection pertains to the year, 1971-72 1972-73 and 1973-74. A sum Rs. 4,792 each year was disallowed in these relevant years from out of the rates and taxes account which was paid as water development charges and licence fee. The payment was to Gaziabad Improvement Trust. Water bills of the company were being paid separately. The payment of Rs. 4,792 was made four times over a period of four years in instalments. The Department considered that the payments were in fact development ....
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....e assessee company in India and the installation of the equipment and all other matters necessary therefor. The assessee company was to pay to such expert (engineer) and to the other technical staff accompanying him the salary which they would normally received in West Germany during their stay in India and also to pay their return air passage as well as incidental travelling expenses and to also provide free accommodation, food and medical attention that such engineer or other technical staff may require. The expert was to use his best endeavour to train sufficient staff of the assessee company inIndiato carry on subsequent manufacture. The AAC issued enhancement notice to the assessee company for further disallowing the salary paid to the foreign technician in addition to the disallowance of expenses incurred during his stay inIndia. The foreign technician had arrived inIndiaon21st Feb., 1970and he left on6th June, 1970. It was claimed that production was started on27th March, 1970. The AAC, however, referred to a certain report of the assessee submitted to the Directorate General of Technical Development, Udyog Bhavan,New Delhifor the month of April, 1970 in which the assessee h....
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....: ----------------------------------------------------------------- 1. Out of Travelling Expenses : a) Actual Expenses incurred for 3 days stay at Bombay 327.78 b) Air ticket from Delhi to West Germany 2,826.00 c) Air freight for unaccompanied baggage and Rs. 179.00 customs clearings. 31015.00 2. Out of Misc. Expenses : Hotel charges from 1st Feb., 1970 to 6th June, 1970. 5,708.86 &....
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....owed as a deduction in 1973-74. The remaining amount of Rs. 278 was on account of entertainment of the foreign customers on three occasions. The amount involved was too small to be taken as lavish entertainment and shall be allowed as deduction. In 1974-75, a sum of Rs. 3,919 included only two items of entertainment namely of Rs. 1,066 on account of a party given to Japan Delegation to introduce them to the Indian customers and trade representatives and Rs. 333 in respect of a party given by the assessee company in honour of Mr. M.I. Sheikh of Western Export Manchester Ltd., England. The other expenses included in Rs. 3,919 were the hotel bills. A sum of Rs. 1,399 only shall stand disallowed and the balance sum of Rs. 2,520 shall be allowed as a deduction in this year. 11. In the result, the appeals for the years 1971-72, 1972-73, 1973-74 and 1974-75 are partly allowed and the appeal for the year 1975-76 is allowed. Per D.S. Meenakshi Sundaram, J.M. I have carefully perused the order of my learned Brother Shri K.P. Bhatnagar with great respect I regret my inability to agree with him on the main point at issue in this batch of appeals that the amount of Rs. 1,00,000 paid by....
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....he said Collaboration Agreement so far as it relates to the Rupee Company subject to certain amendments as set out hereunder: (i) the authorised capital of the Rupee company shall be Rs. 25 lakhs divided into 1,50,000 equity shares of Rs. 10 each and shares of the value of Rs. 10,00,000 shall be unclassified shares and out of the aforesaid the first issue of capital will be restricted to Rs. 1,50,000 equity shares of Rs. 10 each of which Rs. 37,500 shares shall be called "A" Equity shares and Rs. 1,12,500 "B" Equity Shares. (ii) The aforesaid 'A' Equity shares and 'B' Equity shares have been and/or shall be allotted in the manner and for the consideration following and the provisions hereinafter contained shall be applicable to these 'A' and 'B' Equity Shares. (A) Rs. 10,000 'A' Equity Shares to REINZ and/or its nominees credited as fully paid up for secret process. (B) Rs. 27,500 'A' Equity Shares to REINZ and/or its nominees against cash subscription by REINZ for financing the import of machinery by the Rupee Company". 25. In consideration of the grant of the manufacturing rights and the right to use the trade name and trade mark of REINZ and the technical and othe....
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....at the machinery imported by it against the finance of Rs. 2,75,000 which was subscribed in cash by Reinz in accordance with item No. 2 mentioned above is not a capital asset but a Revenue expenditure. It is further clear that the omission of the words 'as sale price" which was in the original agreement dt.25th March, 1966from cl. 5(C)(ii)(A)(V) of the present agreement dt.16th Feb., 1968is quite consistent and in conformity with law as the amount of Rs. 1,00,000 was not paid in cash to Reinz by the appellant company but was given in the form of 10,000 fully paid up shares of the value of Rs. 1,00,000 as soon as the appellant company was incorporated on17th Jan., 1967. 7. In the background of these facts, I am of the considered view that there was a transfer of secret process, by Reinz to the appellant company in consideration for the allotment of Rs. 10,000 fully paid up shares of the face value of Rs. 1,00,000 and that this secret process acquired by the appellant company represented the foundation which the entire manufacturing activity of the appellant company in its new factory depended and is being carried on. The irresistible conclusion that follows from the above is that....
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....phrase "buildings, machinery, plant or furniture" occurring in s. 32 of the IT Act, 1961. s. 32 provides for depreciation of building, machinery, plant or furniture owned by the assessee and used for the purposes of business or profession and deductions for depreciation have to be allowed in accordance with the other provisions of s. 32 subject to the provisions of s. 34. We examined the entire legal position and held that know-how is a peculiar kind of asst. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of formulae, drawings, patterns, blue prints, specifications and so on. The material form it takes not only facilitates preservation, collection and ready reference but also makes it perceptible and visible and easily capable of being transmitted to others. Books which one consults to inform one's mind and thereby uses them in the course of one's business or profession are expressly included within the meaning of the word "plant". Hence, there is no reason....
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....uj) that the question that is to be considered in a case where the assessee before the Court is a recipient of the know-how is, whether in the case of the assessee who is a recipient of the know-how itself and the physical embodiments of these know-how in the shape of plans, decisions, workshop drawings, etc., are a capital asset or not in the cause of being "plant" and, therefore, was a capital asset, It is clear in the light of the decision in Electon Engineering Co.'s case (1974) 96 ITR 672 (Guj) that in the instant case also it must be held that the workshop drawings, manufacturing instructions, etc., for which the "selling prices" were paid by the assessee company were capital assets." 11. When we put this contention of the learned counsel to Shri C.V. Gupta, the learned Departmental Representative he fairly submitted that the same view has been expressed by the Gujarat High Court in its latest decision reported in 1977 Taxation vol. 48 September part s. 1 page 23 & 24 in the case of Addl. CIT vs. Baroda Electrical Motors(15). He, however, submitted that the matter may have to go back to the ITO for enabling the assessee to furnish the necessary particulars in conformity wi....
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....er cent on ex-ractory selling price of the products for a period of 10 years subject to certain conditions. The products were to be exported toPakistan,Burma,Ceylon,Afghanistan,Middle EastandFar Eastcountries. The agreement was to last for a period of 10 years and its continuance beyond this period was to be with the prior approval of the Central Government. The payment of Rs. 1 lac in the form of 10,000 equity shares of Rs. 10 each had been sought by the assessee company to be written off in 10 instalments and the amount of each instalment was claimed as revenue expenditure in the relevant years i.e. asst. yr. 1971-72 to 1975-76. The ITO disallowed the same treating it is capital expenditure and his action was confirmed by the AAC. The assessee thereupon came up in appeal to the Tribunal. The contentions of the parties are elaborately mentioned in the respective orders of the learned Members. The learned Accountant Member agreed with the contention of the assessee that the said expenditure was of a revenue nature and held that the same should be allowed. The learned Judicial Member, however, did not agree for the reasons mentioned in this separate order and held that the expenditu....
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....inery by the Rupee Company. (C) 1,12,500 `B' Equity shares to the said promoters and/or their nominees in the proportion as mentioned in Cl. 5(C)(ii)(B) of the said Collaboration Agreement. (iii) Except to the extent mentioned in this Agreement the `A' and `B' ordinary shares shall rank pari passu and will have the same rights and shall be subject to the same terms and conditions. 2. As long as REINZ and/or its nominees shall hold upto 25 per cent of the total issued capital of the Rupee Company for the time being, REINZ shall entitled to appoint one-quarter of the total number of Directors for the time being of The Rupee Company who shall be permanent Directors not liable to retire but shall be changed with the consent of REINZ and subject to the rights of REINZ reserved in this clause the remaining Directors in the Rupee Company shall be appointed at the Annual General Meeting each year, one of whom shall be the Managing Director on terms of service agreed upon between the Rupee Company and REINZ. 11. REINZ confers exclusively to the Rupee Company the right to manufacture the said products inIndiaand will deliver CAF material destined forIndiaonly to the Rupee Company. ....
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....REINZ shall advise the Rupee Company of all modifications or improvements made by REINZ in respect of the said products or its manufacture and the Rupee Company shall introduce such modifications or improvements into the said products manufactured by it as soon as possible if such introduction shall not involve replacement of its plant or additional equipment to the plant. 25. In consideration of the grant of the manufacturing rights and the right to use the trade name and trade mark of REINZ and the technical and other assistance supplied or to be supplied by REINZ under this Agreement the Rupee Company shall in addition to the 37,500 `A' Equity Shares of Rs. 10 each as mentioned in Clause 2(ii) above pay to REINZ subject to Indian Income-tax a yearly royalty of 3 per cent (three percent) on the ex-factory selling price of the products for a period of ten years subject to the condition that this payment in any one year shall not exceed DM 50,000 during the first five years and DM 45,000 during the next five years. The first annual payment of this royalty shall be due and payable to REINZ after twelve months of the date on which the production of the said products in the Rupee C....
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....he assessee has written off Rs. 9,288 in its account books as would be clear from the profit and loss account for 1970-71, a copy of which has been furnished in the paper books as below:- "Deferred Revenue Expenditure: Technical know-how in respect of manufacturing process. 90,712 1,00,000." This was disallowed by the authorities below as according to them Rs. 1 lac was spent for the purchase of secret process, which remained unaffected even after the termination of the agreement. Thus according to them a benefit of enduring nature was obtained by the assessee by spending this amount and as such it would be capital expenditure. In the latter agreement it was pointed out that the words "as sale price" which was in the original agreement dt.25th March, 66has been dropped. This was so as the amount was not paid in cash to REINZ by the assessee company but was given in the form of 10,000 fully paid up equity shares of the value of Rs. 1 lac as soon as the company was incorporated on17th Jan., 1967. It was also noticed that in the latter agreement the only condition laid down was that no trade secrets of the manufacturing knowledge shall be disclosed to any other person from ou....
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.... an agreement for export outside. After the expiry of the agreement the drawings and formula had to be returned. Rather improvements which were to be acquired in the meantime were also to go back. The advise of the foreign company in the instant case lay in the technical advice, detailed drawings and other formula supplied by the foreign company to the assessee company. The payments made were of two types, one periodical in the shape of royalty, which is not in dispute and the other in the shape of 10,000 equity shares of Rs. 10 each. Since the agreement was to last for a period of 10 years probably this was spread over for the said period when both the payment and the agreement made between the parties was likely to come to an end. As already mentioned above there was no outright sale of any drawings or formula etc. These drawings and formula were to be supplied by the foreign firm throughout the period of agreement. There could not be said to be any sale of the drawings or any secret process. In fact research was to be continued by the foreign company and also by the assessee company during the said period and the results achieved were to be exchanged amongst them. These results ....
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....by the secret process and what benefit of enduring nature did it acquire from the same. As there is no mention of the return of secret process in the second agreement dt.16th Feb., 68it should be held that the information so received gave the assessee a benefit of enduring nature and as such the amount so spent should be held to be of capital nature. He also referred to the order of the AAC for the asst. yr. 1971-72 wherein it is mentioned that: "The payment of Rs. 1,00,000 is for purchase of secret process which remains unaffected even after the termination of the agreement. There is no baron the use of the secret process even after the termination of the agreement. The only condition as laid down by cl. 26 is that no trade secrets or manufacturing knowledge shall be disclosed to any other person, firm or company. Cl. 26 also states that after the termination of agreement all drawings designs literature shall be returned to Reinz and the trade name Reinz shall not be used any more. There is no mention of the secret process. It is obvious that the Rupee company shall continue making use of the secret process to manufacture blades as the Rupee company is not going to close down o....