TaxTMI 
TaxTMI 
TaxTMI 
1985 (11) TMI 1
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....P.) Ltd. (hereinafter called " the assessee ") manufactures scientific instruments and apparatus like dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements, one dated March 15, 1961, and the other dated March 31, 1961, with M/s. Metrimpex Hungarian Trading Company, Budapest, for undertaking the manufacture of microscopes and theodolites, under which the said foreign collaborator, in consideration of payment of Rs. 80,000 each (Rs. 1,60,000 under both the agreements together), agreed to supply to the assessee all the, technical know-how required for the manufacture of these instruments. The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the assessee thereunder acquired the right to manufacture in India under its own trade mark and name but under the licence-MOM Hungary-of the foreign supplier, the said instruments and the right to sell the same in India. To enable the assessee to manufacture these instruments in India in the manner just indicated, the foreign collaborator, inter alia, agreed to render " documentation service " by supplying to the ass....
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.... the supply of designs, drawings, charts, etc., that the services to be rendered by the foreign collaborator covered a wide field and that the supply of designs, charts, drawings, etc., was incidental and only in furtherance of other services which the foreign collaborator was expected to render. It further took the view that since the supply of designs, drawings, charts, etc., was only incidental and the payment of Rs. 1,60,000 could not entirely be held to represent the purchase price of those documents, it was unnecessary for them to go into the question whether the said documents fell within the meaning of the expression " books " and whether depreciation was, therefore, admissible thereon. The Tribunal, however, held that the agreements showed that some of the services which the foreign collaborator was required to render to the assessee were on revenue account (as, for example, the provision which required the foreign collaborator to depute their experts to correct any flaws or irregularities that might be encountered in the course of the production) and that, therefore, the payment of Rs. 1,60,000 was partly on capital account and partly on revenue account. As the appeal was....
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....t mainly represent the purchase price of the designs, drawings, charts, etc., as contended by the assessee, that the rendering of " documentation service " was incidental, that no part of the expenditure was on revenue account but the whole of it was of a capital nature bringing into existence an asset of enduring benefit to the assessee, but what was brought into existence was a non-depreciable asset and, therefore, the assessee was not entitled to any relief in the case. In other words, by its judgment dated January 7, 1973, the High Court held that the assessee was not entitled to any relief either by way of depreciation allowance or on account of revenue expenditure. Following the aforesaid decision rendered by the High Court in relation to the assessment year 1966-67, the assessee was denied similar relief claimed by it in the two subsequent assessment years 1968-69 and 1969-70. The instant appeals are preferred by the assessee challenging the High Court's view. In support of the appeals, counsel for the assessee accepted the High Court's view that no part of the expenditure (Rs. 80,000 under each of the two agreements) was on revenue account and the whole of it was of capit....
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.... a depreciable asset ? The answer to the former question depends upon the proper interpretation of the terms and conditions of the two agreements while the answer to the latter depends upon whether a capital asset like the technical know-how acquired in the shape of drawings, designs, charts, plans, processing data and other literature which formed the basis for the business of manufacturing the instruments in question would fall within the wide and inclusive definition of "plant " given in section 43(3) of the Income-tax Act, 1961. Turning to the first question, having regard to the relevant terms of the two agreements, we find it very difficult to accept the view concurrently expressed by the Tribunal and the High Court that the " documentation service " undertaken to be rendered by the foreign collaborator to the assessee was incidental or that the payment of Rs. 1,60,000 could not be regarded as being mainly for and by way of purchase price of the drawings, designs, charts, plans and all the documents comprised in "documentation service " specified in clause 3 of the agreements. Such view as will be shown presently runs counter to the express language contained in clauses 3 an....
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....ayment to be made by the assessee and the manner thereof to which we will refer in detail later. Clause 10 indicated a five-year period commencing from a certain date during which the agreements were to remain in force. The rest of the clauses dealing with assignability and other topics are not material. On the issue under consideration, clauses 3 and 6(a) are very material and they run thus "3. Supplies: Vendor shall supply to purchaser in accordance with the terms laid down in clause 6 hereunder: (a) One complete set of up-to-date, correct and legibly reproducible manufacturing drawings and full processing documents of all components of the instrument and lists of parts in metric system in English language, this full documentation will comprise of one complete list of up-to-date, correct and legibly reproducible drawings in metric system and English language of all jigs, fixtures, special tools, special guage and special machine used and built by MOM for manufacture, assembly, inspection and testing of the component parts of the theodolites. (b) One complete and up-to-date list, including complete specifications of raw material required for the component parts of the theodolit....
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....cessing 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 of Rs. 80,000 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. The next question is whether such a capital asset is a depreciable asset or not ? Under section 32, depreciation allowance is, subject to the provisions of section 34, permissible only in respect of certain assets specifie....
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....Act which was similar to the definition given in section 43(3) of the 1961 Act and this court after approving the definition of plant given by Lindley L.J. in Yarmouth v. France [1887] 19 QBD 647, as expounded in Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681 (CA), held that sanitary and pipeline fittings fell within the definition of plant. In IRC v. Barclay, Curle & Co. Ltd. [1970] 76 ITR 62 (HL), the House of Lords held that a dry dock, since it fulfilled the function of a plant, must be held to be a plant. Lord Reid considered the part which at dry dock played in the assessee-company's operations and observed (at p. 67): " It seems to me that every part of this dry dock plays an essential part ...... The whole dock is, I think, the means by which, or plant wit which, the operation is performed. " Lord Guest indicated a functional test in these words : " In order to decide whether a particular subject is an apparatus ' it seems obvious that an enquiry has to be made as to what operation it performs. The functional test is, therefore, essential at any rate as preliminary. " In other words, the test would be: Does the article fulfil the function of a plant in the assesse....