TaxTMI 
TaxTMI 
1998 (7) TMI 20
X X X X Extracts X X X X
X X X X Extracts X X X X
....o manufacture the products then based on its drawings and market the same in India and in consultation with the Swiss firm also export the products so manufactured. The products were entirely new products. The licensor was to check the equipment which was ordered by the assessee from Switzerland and in other countries in Europe. The licensor also undertook to give advice regarding the suitability of the equipment made in India required for installation in the newly established industry. Advice regarding the lay out and the manufacturing operation was also to be given. The products manufactured by the assessee in the newly established factory were to be tested by the licensor in its testing room in Basle in Switzerland. All drawings and docu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the agreement is specified as five years with a further declaration that the parties to the agreement intended to extend the period of agreement by another five years. The licensee was only required to refrain from disclosing any document, after the expiry of the term of the licence, but was not required to stop the manufacture of the products. It is evident from the several clauses in the agreement that it provides for the transfer of the know-how possessed by the licensor who was engaged in the manufacture of the products licensed to be manufactured by the assessee under this agreement, including the drawings required for the manufacture of the devices in India, without which drawings manufacture could not possibly commence as als....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e drawings and information is revenue expenditure. The Revenue contends that the depreciation ought not to have been allowed by the Tribunal on the amount of 80 per cent. of the technical fee paid, as according to the Revenue, drawings do not constitute plant on which depreciation can be allowed. One other question raised by the Revenue is the deletion of the sum of Rs. 70,251 by the Tribunal, that amount having been claimed by the assessee as entertainment expenditure. Counsel for the assessee submitted that the amounts paid by the assessee as technical know-how fee for drawings and information supplied by the Swiss licensor was not in the nature of capital expenditure as the assessee did not derive any enduring benefit and the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....echnical know-how at any particular stage in this fast changing era of medical science. Counsel's reliance on this decision in our opinion is wholly in apposite, as what was done by the assessee in this case was to acquire information and drawings required for setting up a completely new plant with a completely new process for the manufacture of a completely new product. The question is not whether as the assessee purchased drawings and know-how all purchases of drawings and know-how are required to be treated as revenue expenditure. As observed by the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT (1989] 177 ITR 377 : "The question in each case would necessarily be whether the tests relevant and significant in one set of cir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rely because the payment made was at certain percentage rate of the gross turnover of the product, was affirmed by the apex court. The disallowance of 25 per cent. of that sum as not being revenue expenditure was also affirmed by the Supreme Court. In the instant case, the payments made in the agreement towards revenue and capital expenditure have been categorised by the parties themselves. The revenue part being characterised as royalty and the capital part being provided for as payment in lumpsum for the know-how and information. Such know-how and information having been provided only after receipt of that payment. Counsel then relied upon the decision of the Supreme Court in CIT v. I. A. E. C. (Pumps) Ltd. [1998] 232 ITR 316. It wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evenue. The question referred to us, viz., whether out of the technical know-how fee of Rs. 1,92,145 paid by the assessee to Emile Hafely Company Ltd., under the agreement dated January 18, 1973, during the assessment years 1977-78 and 1978-79, twenty per cent. of that amount is allowable as revenue expenditure and the balance of 80 per cent. of that amount should be disallowed as capital expenditure is therefore to be answer against the assessee and in favour of the Revenue. As regards the question referred to us at the instance of the Revenue relating to the allowance of depreciation on the capital expenditure incurred for acquiring technical know-how in the form of drawings and whether the assessee is entitled to depreciation thereon ....