TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 126
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....failed to appreciate that Assessing Officer had rightly distinguished the decision of the Bombay High Court in CIT Vs. Tata Engineering and Locomotives Co. Pvt. Ltd. 123 ITR 538 relied upon by the assessee and has rightly treated the amount of royalty as capital expenditure relying upon the order passed by the Apex Court in M/s Scientific Engineering House reported in 157 ITR 86. 3. In the present case, from the facts, as emerged from record, it is clear that "technical know-how" remained property of Foreign Company and Assessee has only right to use the same on payment of royalty to the said Company. 4. The dispute relates to Assessment Year 1988-89. The facts in brief, necessary for determination of aforesaid questions may be narrated as under. 5. The respondent-Assessee entered into an agreement with M/S CEAT, CAVI Italy (hereinafter referred to as "Foreign Company") for providing technical know-how in the manufacture of its products. It is called Technical Collaboration Agreement whereunder Assessee agreed to pay one time Technical know-how fee of Rs. 18,20,227/- and ''Royalty' at 2 per cent of net ex-factory-selling price of the product. 6. The aforesaid '&....
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....e non-exclusive right to manufacture, use and sell products in India under the rights of patent, owned or controlled by Licensor i.e. Foreign Company. 11. Licensor, however, agreed to grant license to use know-how, as itemized in Exhibit-B, attached to the Agreement. Assessee was to get salary of its employee from Licensor and necessary expenses were to be borne on this aspect. Article 5.1 provides lump-sum payment in US Dollars, two lacs, in three installments, before commencement of commercial production. Article 5.2 of Agreement provides that at the end of each accounting period, ''Royalty' shall be paid, equal to 2 per cent of net ex -factory selling price of all the licensed products, manufactured and sold by Assessee-Comapny, commencing with commercial production's starting date and would continue for a period of five years. Article 6 provides for imparting further information to Assessee in respect of new inventions, methods, processes, materials etc. in the said technology. Article 7 provides secrecy clause and Article 9 provides that on termination of agreement, Assessee shall return to Licensor all written technical information, design, drawing, plans, sp....
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....al know-how fee in a recent judgment dated 21.12.2016 in Income Tax Appeal No. 503 of 2008 (Commissioner of Income Tax, Ghaziabad Vs. M/S Honda Siel Cars India Ltd.) and other connected matters. 15. The term 'Revenue Expenditure' as such is not defined in the Act, 1961. Thus term 'Revenue Expenditure' was explained in Assam Bengal Cement Co. Ltd. Versus Commissioner of Income Tax, AIR 1955 SC 89 (at page 96) as under: "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is 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 is a revenue expenditure." (Emphasis added) 16. In Commissioner of Income Tax vs. Ciba of India Limited (1968) 69 ITR 692 (SC), a question arose, whether payment made by Assessee to Ciba Limited, Basle, pursuant to agreement dated 17.12.1947 is an admissible deduction under Section 10(2)(xii) of Income Tax Act 1922. Ciba of India Limited was original....
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.... of technical knowledge of Swiss company with right to use patents and trade works of that company by making that technical knowledge available. Swiss company did not part with any asset of its business nor did the Assessee acquire any assets or part in the nature of benefits or advantage. 17. In L.B. Sugar Factory and Oil Mills (P) Ltd, Pilibhit Vs. Commissioner of Income Tax, U.P Lucknow (1980) 125 ITR 293(SC), the question was considered in a different but interesting context. Assessee was a sugar factory engaged in manufacture and sale of crystal sugar at Pilibhit, State of U.P. In 1952-53, a dam was to be constructed by State of U.P at a place called Deoni. A road, Deoni Dam-Majhala was constructed connecting Deoni Dam with Majhala. Collector requested Assessee to make some contribution towards construction of Deoni Dam and Deoni Dam-Majhala Road pursuant whereto Assessee contributed certain amount. Assessee also contributed some amount towards meeting the cost of construction of roads in the area around its factory under a Sugar Cane Development Scheme promoted by State of U.P. as part of Second Five Year Plan. Assessee claimed deduction on both the amounts it had contribute....
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....o endurance at all. Court relied on its earlier decision in Empire Jute Company Ltd. Versus Commissioner of Income Tax (1980) 124 ITR 1 (SC) that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. Court further said as under: "It is not every advantage of enduring nature acquired by an Assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only whether the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the Assessee's business operations or enabling management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though advantage may endure for an indefinite future." 18. It was therefore, held that the expenditure incurred in the scheme was on revenue account and not capital. Hence, it was ....
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....nefit of the business is thus acquired or brought into existence it would be immaterial whether the source of 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 is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence." 20. It also referred to the decision of Supreme Court in Gotan Lime Syndicate versus Commissioner of Income Tax (1966) 59 ITR 718, wherein it was held that expenditure incurred to secure an enduring advantage must not invariably be treated as capital expenditure and royalty payment including dead-rent, which has no direct nexus for securing an enduring benefit but has relation to the raw material viz. lime deposits, was held to be a "Revenue Expenditure". Court found that under the agreement, amount paid by Assessee at the time of signing was not claimed to be 'Revenue Expenditure'. However, the amount paid towards 'royalty' was for the benefit of business and, therefore, should be treated to be a "Revenue Expend....
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....nd therefore, to the extent, services qualified for 'Revenue' account, may be allowed to be deducted and rest may be added. In appeal Supreme Court considered the question, whether 'Technical know-how' in the shape of drawings, designs, charts, plans, processing data and other literature falls within the definition of "Plant". It replied aforesaid question by referring to judgments and reasonings in Yarmouth v.France (1987)19 QBD 647, a case in which it was decided that a cart horse was plant within the meaning of section 1(1) of the Employers' Liability Act, 1880. It was held: "There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business." 22. Court also referred and approved decision in Commissioner of Income tax Vs. Elecon Engineering Company Ltd., (1974) 96 ITR 672 (Guj) wherein it was held that drawings and patterns which constitute know-how and are fundamental to Assessee's manufacturi....
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....to some earlier judgments, Court culled out certain principles laid down therein to determine, whether expenditure of Assessee was 'Capital Expenditure' or 'Revenue Expenditure' and said : "(i) When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital ( referred to British Insulated Helsby Cables Ltd. v. Atherton, [1926] AC 205). (ii) If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is 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 is a revenue expenditure. (iii) The aim and object of the expenditure would determine the character of the expenditure whether it is ....
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....Court looked into the process of making antibiotics and penicillin and observed that Indian company was already engaged in the preparation of antibiotics since long. In the background facts, Court held, it cannot be said that the area of improvisation by obtaining know how from foreign collaboration was not a part of improvisation of existing business or that the entire gamut of existing manufacturing operations for the commercial production of penicillin in the Assessee's existing plant had become obsolete or inappropriate in relation to exploitation of the new sub-cultures of the high yielding strains of penicillin. It cannot be said that mere introduction of new bio-synthetic source required erection and commissioning of a totally new and different type of plant and machinery. Adding the fact that agreement placed limitations on the right of assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how inclined towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. Hence, payment was to be treated as "Revenue Expenditure". 27. In M/s Jonas Woodhead & Sons....
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.... 28. Relying on tests laid down in the earlier authorities including Alembic Chemical Works Co. Ltd, vs Commissioner Of Income Tax (supra), Court decided the issue against Assessee observing that under the agreement with foreign firm Assessee had to set up a new business and foreign firm had not only furnished information and technical know-how but also rendered valuable services in setting-up of the factory itself and even after expiry of agreement, there is no embargo on Assessee to continue to manufacture the product in question. Court held that merely because payment is required to be made at a certain percentage of the rates of gross turnover of the products of Assessee as 'Royalty', it cannot be said that the entire payment is a 'Revenue Expenditure'. 29. In Commissioner of Income Tax, Hyderabad versus Warner Hindustan Ltd. 1998 (9) SCC 533, Court did not examine this aspect in detail since the amount involved in dispute was small. Hence, it is not an authority on the question whether technical fee paid to a foreign company would be a ''Capital Expenditure' or ''Revenue Expenditure'. 30. In Commissioner of Income Tax versus I.A.E.C (P....
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...., not permanently, and not for establishment of any plant or machinery but for manufacture of equipment and machinery for Cane Sugar Plant. Hence, it was not of enduring nature and a ''Revenue Expenditure' and not ''Capital Expenditure'. This decision evidently makes it clear that therein agreement and parting of Technical know-how was not for establishment of plant and machinery but for manufacture of equipment and machinery of Cane Sugar Plant which was a distinguishing feature. 32. The judgment relied by the Revenue in Southern Switch Gear Ltd. Vs. Commissioner of Income Tax and another (supra) is a short order passed by Supreme Court dismissing appeal preferred by Assessee and confirming the order of High Court. It reads as under: "We have perused the order of the High Court. We have also seen the agreement. We are not persuaded to hold that the view taken by the High Court is erroneous, the appeals are dismissed. There will be no order as to costs." 33. From the aforesaid judgment, it is difficult to cull out any exposition of law laid down therein as such. However, in the Law Report, brief facts from judgment of Madras High Court judgment have been....