TaxTMI 
TaxTMI 
2005 (8) TMI 54
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....ssee entered into an agreement on April 11, 1984, with a company in West Germany (hereinafter referred to as "BMA"). The said company was engaged in the manufacture of machinery and equipment for the sugar industry. In the course of the assessment proceedings the Assessing Officer came across a claim for deduction to the tune of Rs. 15,16,766 being the amount payable to BMA "on account of acquisition of technical know-how". The Assessing Officer after an examination of the various clauses/articles of the agreement between the parties came to the conclusion that the assessee had acquired "a benefit of enduring nature" and the same represented capital expenditure. According to him the net result of the aforesaid agreement between the parties resulted in "absolute transfer of technical knowledge" and the assessee was free to manufacture the machinery specified in the said agreement even after its expiry. The Assessing Officer also held that the assessee became the absolute owner of technical know-how relating to the manufacture of cane sugar mills vis-a-vis the specifications described in the agreement. In coming to the aforesaid conclusions the Assessing Officer placed reliance on th....
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....692 (SC); (ii) Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 (Delhi); (iii) Kirloskar Pneumatic Co. Ltd. v. CIT [1982] 136 ITR 746 (Bom); (iv) CIT v. Bajaj Electricals Ltd. [1984] 148 ITR 83 (Bom); (v) Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28 (Bom); and (vi) CIT v. British India Corporation Ltd. [1987] 165 ITR 51 (SC). Learned counsel appearing on behalf of the assessee furnished a paper-book before the Commissioner of Income-tax (Appeals) and a copy of which was forwarded by the first appellate authority to the Assessing Officer inviting his comments. In para. 2.6 of the appellate order the Commissioner of Income-tax (Appeals) has reproduced the report furnished by the Assessing Officer as follows: "The case quoted by the assessee reported in Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 (Patna) appears to be directly applicable to the assessee's case. However, whether special leave petition has been filed by the Department against this Patna High Court judgment or not is yet to be ascertained. I have referred the matter to the Income-tax Officer 0udicial), Office of the Commissioner of Income-tax, Meerut, and would be submitt....
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.... he has categorically accepted that the decision of the hon'ble Patna High Court reported in Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 'directly applicable to the assessee's case.' In this view of the matter, we uphold the action of the Commissioner of Income-tax (Appeals) in treating the expenditure under the head 'Revenue' rather than under the head 'Capital'. The first ground in the Revenue's appeal is accordingly rejected." We have heard Sri A.N. Mahajan, learned standing counsel appearing on behalf of the Revenue and Sri R.R. Agarwal, learned counsel appearing for the assessee. Learned standing counsel, though he submitted that the expenditure incurred on account of technical know-how being enduring in nature as held by the assessing authority was of a capital nature, fairly submitted that the issue involved is covered by the decision of the Patna High Court in the case of Tata Robins Frazer Ltd. v. CIT reported in [1987] 165 ITR 347 against which special leave petition has been dismissed by the apex court. The dismissal of the special leave petition is reported in [1989] 177 ITR (St.) 17. Learned counsel for the assessee submitted that the issue involved is squa....
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....aid agreement, the assessee-company was allowed to make use of the technical know-how to manufacture the mill at its workshops in India, to sell the mill within India without any limitation and also to export the mill to countries other than Indonesia, Thailand, Srilanka, Iraq, Iran and Kenya as in these countries, BMA had made licensing agreements. In terms of article 4 of the agreement, the assessee-company was entitled to use the know-how for the purpose of performing this agreement only and keep such documentation confidential even after termination of the agreement. In terms of article 12 of the agreement, in case the item of manufacture is one which is patented in India, the payments of lump sum payments made by the assessee-company to BMA during the period of agreement shall also constitute full compensation for use of the patent rights till the expiry of life of the patent and the assessee-company shall be free to manufacture that item even after the expiry of this agreement without making any additional payments. In terms of article 13, BMA is ready to train one engineer of the assessee-company in general workshop and machinery fabrication and design work for a period of m....
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....re and not capital expenditure. The Patna High Court had also considered the decision of the apex court in the case of Scientific Engineering House P. Ltd. v. CIT reported in [1986] 157 ITR 86 and distinguished the same as not applicable to the facts of the case. In the case of Tata Robins Frazer Ltd. v. CIT reported in [1987] 165 ITR 347 the Patna High Court held as follows (headnote): "That the second set of agreements was intended to enable the assessee to manufacture and sell specified equipment and services. It provided for activity which could be regarded as profit earning activity. The agreements did not provide for return of the documents and knowledge supplied by the foreign companies. This, however, would not result in the assessee acquiring an enduring benefit because knowledge that had once been acquired could not in its very nature be returned and, secondly, the know-how would pale into obsolescence with the passage of time. It was significant that the trademarks of the foreign companies had been transferred only for the duration of the agreement. Thereafter, the assessee could neither use the patents and trademarks nor were the foreign companies required to give....
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.... merely because the assessee who had entered into a contract with regard to know-how is entitled to use it even after the agreement has expired would not mean that he has acquired a benefit of an enduring nature. An agreement of foreign collaboration where foreign know-how is availed of in lieu of payment does not stand on the same footing as protected rights under a registered patent. Whether the payment is made before the start of the manufacture or is made because of the recurring liability under the agreement makes no difference to the nature of the transaction." In the case of Premier Automobiles Ltd. v. CIT reported in [1984] 150 ITR 28, the Bombay High Court held as follows: "Technical know-how and technical advice cannot, in these days of technological and scientific development and consequent changes in production techniques, be treated as a capital asset and the technical know-how made available under an agreement does not stand on the same footing as protected rights under a registered patent." In the case of CIT v. British India Corporation Ltd. reported in [1987] 165 ITR 51, the hon'ble Supreme Court has affirmed the decision of this court in the case of Briti....
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....Alembic Chemical Works Co. Ltd. v. CIT reported in 22 [1989] 177 ITR 377, the apex court laid down the test of "enduring benefit". In this case the assessee was engaged in the manufacturing of antibiotics and pharmaceuticals with a view to increase the yield. The assessee negotiated with a reputed Japanese enterprise engaged in the manufacture of antibiotics, who had agreed to supply the assessee subcultures of Meiji's most suitable penicillin producing strains, in a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow sheet of the process in the pilot plant and the design and specifications of the main equipment in such pilot plant, and to arrange for the training of the assessee's representative in Meiji's plant in Japan for a period of two years for which no payment was made. It was claimed as revenue expenditure. The claim of the assessee was disallowed being treated as capital expenditure. The matter went to the apex court and the apex court reversed the decision of the High Court and held as follows: "'(i) It would be unrealistic to ignore the rapid advances in research in antibiotic me....
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....lities. In a given case, the test of 'enduring benefit' might break down." In the case of CIT v. Kirloskar Pneumatic Co. Ltd. reported in [1993] 202 ITR 309 (Bom), the assessee was engaged in the business of manufacture and sales of air compressors, pneumatic tools, etc., and paid technical fees to W of U.K. and cost of drawings paid to T of U.S.A. and claimed it as revenue expenditure. The Division Bench of the Bombay High Court has allowed the claim as revenue expenditure and held as follows: "So far as the first there questions are concerned, the real dispute is whether under the facts and circumstances of the case, technical fees and cost of drawings paid by the assessee is revenue expenditure or capital expenditure. The Tribunal, on a consideration of materials before it, held it to be revenue expenditure. The case of the Revenue is that it is capital expenditure as, according to it, the assessee derived enduring benefit from the payments made in question. According to the assessee, it is revenue expenditure. In support of its contention, the assessee relies on a decision of this court in its own case in respect of earlier years reported in Kirloskar Pneumatic Co. Ltd. v....