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2008 (4) TMI 273

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....the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure on gifts amounting to Rs. 10,58,855/- was not of the nature of advertisement failing within the purview of Section 37(3) of the Income-tax Act read Rule 6B of the Income-tax Rules and was of the nature of a trade discount?. 3. Whether the Tribunal was right in holding that the payments made by the assessee to its employees under the nomenclature 'Good Work Reward' did not constitute bonus within the meaning of Section 36(1)(ii) of the Income-tax Act,1961 and were allowable as normal business expenditure under section 37?" 4. Insofar as the first question is concerned, the Assessee had entered into a Technical Collaboration Agreement with M/s Riken Piston Ring Ind. Co. Ltd. of Japan (for short 'Riken') for the manufacture of piston rings. The agreement was really in two parts: one to provide comprehensive technical know-how and the other dealing with technical assistance by Riken to the Assessee for manufacturing and selling the product known as piston rings. We are only concerned with the transfer of know-how. We have gone through the Agreement with the assistance of learned cou....

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....furnished by Riken to the Assessee pursuant to the Agreement. 11. Clause 11.0 of the Agreement lays down that the right of the Assessee to market any of the products manufactured under the Agreement would cease upon its expiry or termination. 12. The validity of the Agreement was for a period of five years and that is mentioned in clause 15.0 of the Agreement, but it could be terminated before the expiry of that period in the event of any default by any of the parties as mentioned in clause 17.0 of the Agreement. 13. On the expiry or termination of the Agreement, whether by efflux of time or by its termination by the parties, the Assessee would have a perpetual non-exclusive right to manufacture the products under the Agreement without further payments. 14. Under these circumstances, the question that has arisen for consideration is whether the amount paid by the Assessee to Riken is a revenue expenditure or not. To answer this question, it is necessary for us to determine as to whether what was transferred to the Assessee was only a right to use the technical know-how or was it a sale of know-how to the Assessee in perpetuity. 15. The leading decision on the subject is Commis....

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....19. One of the terms of the agreement entered into between the parties concerned itself with the placing of limitations on the right of the assessee in dealing with know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how. 20. The Supreme Court interpreted this to mean that the right pertained more to the use of the know-how than to its exclusive acquisition by the assessee. The Supreme Court also noted that there is no single definitive criterion which by itself is determinative of the question whether a particular outlay was revenue in nature. What is relevant is to see the intended object and effect of the agreement between the parties, considered in a common sense manner having regard to business realities. The Supreme Court noted that in a given case, the test of 'enduring benefit' might break down as laid down by the Supreme Court in Commissioner of Income Tax vs. Associated Cement Companies Ltd., [1988] 172 ITR 257. 21. In Triveni Engineering Works Ltd. vs. Commissioner of Income Tax, New Delhi, [1982] 136 ITR 340, a Division Bench of this Court dealt with an agreement entered into between the assessee and a company in U.K. where, in t....

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....pment and scientific research, such drawings become obsolete and mere scraps of paper very soon unless they were updated. 25. Following the law laid down by the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692 and despite the use of the words 'to sell outright', the Division Bench came to the conclusion that the assessee had merely obtained a licence for limited use of the knowledge and information possessed by the British company. 26. Learned counsel for the Revenue relied upon Scientific Engineering House P. Ltd. vs. Commissioner of Income Tax, [1986] 157 ITR 86 (SC). But we find that the controversy in that case is not quite apposite to the controversy in the present case. This is clear from the question of law that was framed in that decision. The question of law framed reads as follows (page 88) :- "Whether, on the facts and in the circumstances of the case and on a true interpretation of the collaboration agreements between the assessee and M/s Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000/- by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset?" 27. On a reading of th....

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....ns, drawings, documents, specifications etc. furnished by Riken to the Assessee. Even though the Assessee was entitled to use the name of Riken in the marketing of its products but that right would cease upon the expiry or termination of the agreement. 33. As already noted, the Agreement was valid only for a period of five years but could be terminated earlier. There is no magic in the word 'sold' used in clause 5.0 of the Agreement because on a reading of the Agreement as a whole, it appears to us that what was transferred to the Assessee was only a right to use the technical know-how of Riken and there was no sale of the technical know-how which the Assessee could exploit. The Assesee's rights were hedged in with all sorts of conditions, clearly making it a case of right to use the technology and not sale of the technical know-how. 34. That being our conclusion, we are in agreement with the view expressed by the Tribunal that there was no sale of technical know-how by Riken to the Assessee and therefore, the payment made by the Assessee to Riken was a revenue expenditure. 35. Accordingly, Question No.1 is answered in the affirmative, in favour of the Assessee and against the R....

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....egory of 'advertisement' as understood for the purposes of Rule 6B of the Rules. 40. In Commissioner of Income Tax vs. Modi Spinning and Weaving Mills Co.  Ltd. [1993] 202 ITR 708, a Division Bench of this Court held that Rule 6B of the Rules would apply only when there is presentation of articles by way of advertisement. If this is so, insofar as the present case is concerned, since we have held that the gifts given by the dealers to their customers were not in the nature of advertisement, they would not fall within the financial limits as laid down under Rule 6B of the Rules. 41. Under these circumstances, the second question is answered in the affirmative, in favour of the Assessee and against the Revenue. 42. The third question that has been referred for our consideration relates to 'good work reward' and whether it constitutes bonus within the meaning of the Section 36(1)(ii) of the Act. 43. The Tribunal has noted that the word 'bonus' has not been defined anywhere including in the Payment of Bonus Act, 1965. However, for the purpose of industrial law, four types of bonus have been recognized and they are as follows:- (a) Production bonus (b) Contractual bonus (c) ....