TaxTMI 
TaxTMI 
1978 (7) TMI 37
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....licensee a full licence to use the following patents registered in Luxembourg relating to high tensile steel wires and/or bars known as ' Ribbed Tor-steel' for reinforced concrete constructions Art. 2 During the period of this agreement: (a) Tor-Isteg and the licensee shall make available to each other all information in their respective possession relating to the working of and improvements to each of the patents. (b) Should the licensee or any of his employees, or any one else acting under any sub-licence granted by him with the written consent of Tor-Isteg make any improvement or addition to or discovery in respect of any of the patents, then the licensee will make a complete disclosure thereof, immediately that fact which comes to the notice of the licensee, to Tor-Isteg who will enjoy the full benefit thereof without any consideration therefor and utilise the improvement in any manner deemed fit by Tor-Isteg. Art. 3 (1) Tor-Isteg shall supply and disclose all technical, engineering and manufacturing information, including specifications, drawings, etc. (which may be in its possession) to the licensee as may be reaso....
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....entioned in art. 6, the repatriable amount mentioned therein being reduced accordingly by 50%. Art. 13 Tor-Isteg reserves the right to grant licence for the production of ribbed tor-steel in the Union of India to one or more prospective firms other than the licensee if and when Tor-Isteg considers it necessary in the interest of better utilisation of its patents." 5. In the relevant previous year the assessee paid Rs. 18,825 to the foreign company under art. 6(a) of the agreement. The ITO has disallowed the assessee's claim, namely, that this expenditure is allowable as a revenue expenditure. The AAC has allowed the claim but the Tribunal has rejected it. 6. I will now state the relevant facts found by the Tribunal. The foreign company has granted similar licences to five other Indian parties. "Ribbed tor-steel" is a new variety of twisted mild steel rod used in reinforced concrete constructions or structures. The assessee has not installed any new machinery for the purposes of manufacturing "ribbed tor-steel". It has manufactured those goods with the help of its existing machinery. And that this agreement was entered into by the assessee with a view to ....
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....a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays it." 12. Similarly, no useful purpose will be served in discussing the guidelines stated in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL) at page 192 of the report and in John Smith and Son v. Moore (H. M. Inspector of Taxes) [1921] 12 TC 266 (HL) at page 282 of the report, as the Supreme Court has already discussed them in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. 13. The cases of CIT v. Assam Oil Co. Ltd. [1977] 107 ITR 261 (Cal), IRC v. British Salmson Aero-Engines Ltd. [1938] 22 TC 29 ; [1939] 7 ITR 245 (CA), Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC), Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) and Moolchand Suganchand v. CIT [1972] 86 ITR 647 (SC) were decided on the terms of the respective leases and the agreement which are totally different from the terms of the agreement before us. 14. Therefore, the aforesaid cases have no application to the facts and circumstances of the case before us and, apart from it, in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, the Supreme Court said that each cas....
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....hnical knowledge under the collaboration agreement and the entire amount paid by the assessee as licence fee was allowable as a revenue expenditure. 19. In Mysore Kirloskar case [1968] 67 ITR 23 (Kar) it was held that the initial and lump sum payment under the first limb of cl. 12(i) of the collaboration agreement for supply of technical know-how for manufacturing two types of new machines was a capital expenditure. As the agreement did not provide for the return of the technical know-how, it was held that the assessee was entitled to use the technical knowledge even after the termination of that agreement and that the said "knowledge was acquired for manufacturing new types of machines, i.e., to bring into existence new business". 20. The terms of that agreement are not fully set out in the judgment. It is not a case on sale or assignment of of any licence to use any registered patent, design or trade mark. It relates to use of technical know-how for 15 years, provided the terms of that agreement were carried out by the assessee. Further, the amount payable under the first limb of cl. 12(i) of that agreement was an initial, predetermined and lump sum amount and that the said....
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....related to any capital value of any asset. 24. Furthermore, the case of CIT v. Devidas Vithaldas & Co. [1968] 68 ITR 388 (Bom), which was followed in Hylam case [1973] 87 ITR 310 (AP) has been reversed by the Supreme Court and its judgment is reported in [1972] 84 ITR 277 (Devidas Vithaldas & Co. v. CIT). 25. The second ground in Hylam case [1973] 87 ITR 310 (AP) is based on the fact that the second agreement did not provide for the return of the technical information, etc., after the termination of that agreement and, therefore, it was held that the assessee-company was entitled to use the technical know-how after the end of the period of the agreement. But with due respect we are unable to agree with it for the reasons stated later on. 26. Then, by following the Mysore Kirloskar case [1968] 67 ITR 23 (Kar) it was held that the special knowledge relating to the patented processes was not in respect of any product which Hylam company was manufacturing, "but it related to a new product" and "although allied in nature to the products that were being manufactured" by Hylam company, it was an "acquisition of an advantage or an asset for the extension" of its business. The Ciba....
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....said facts emerging from the said agreement and that the stipulated payment was recurrent and dependent upon the sale and that too only for the period of the agreement, the Supreme Court held that the assessee did not acquire any asset or an enduring benefit for its business and that the amount paid by the assessee under that agreement to the Swiss company was a revenue expenditure. 33. It may now be noted here that Ciba of India was incorporated on December 13, 1947, as a subsidiary company of the Swiss company. On December 17, 1947, the agreement was entered into between Ciba of India and the Swiss company and thereafter on January 1, 1948, the pharmaceutical section of the Swiss company was taken over by Ciba of India and then it went into production. 34. Therefore, those products, as rightly pointed out by their Lordships of the Bombay High Court, were new products so far as Ciba of India was concerned and yet the Supreme Court did not even think it fit to take that factor into account for determining the said issue. Similarly, in Hindusthan General Electrical Corporation Ltd. case [1971] 81 ITR 243 (Cal), although the product was a new product, the Division Bench of this....
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....case of a shopkeeper: he sells khadi dhoties, then he sells khadi sarees too. On this fact alone it cannot even be suggested that he has either started a new line of business or has extended his business. 39. Further, the collaboration agreements of this nature are normally, if not universally, entered into with a view to manufacture goods. The quality of the goods produced by the use of technical know-how must always be different from the quality of the goods produced earlier without the aid of the technical know-how. In view of the qualitative changes in the goods, both the products cannot be the same and in that sense the goods produced with the aid of the technical know-how must be a new product. 40. A simple illustration will make the position clear. The Waterman fountain pens manufactured before the second world war are not the same fountain pens manufactured nowadays by that company. Their quality has completely changed and in that sense they are new products. And yet on no commercial principle can it be said that the Waterman company by manufacturing new fountain pens by utilising the scientific developments and the technical knowledge has either extended its business....
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....e agreement did not provide for return of such knowledge after its termination. It was held that the assessee was entitled to use the technical knowledge for ever and has, therefore, acquired an asset or enduring benefit for its business and that the remuneration paid by the assessee was a capital expenditure. 46. Now, in CIT v. Indian Oxygen Ltd. [1978] 112 ITR 1025 (Cal), the collaboration agreement did not provide for the return of any information, processes, etc., after the termination of the agreement. By citing the Fenner Woodroffe Co. case [1976] 102 ITR 665 (Mad), it was argued that the assessee was entitled to use the technical know-how after the termination of that agreement and has, therefore, acquired an enduring benefit for its business and accordingly the amount paid by the assessee for technical know-how was a capital expenditure. But, speaking for this court, I rejected those arguments. 47. It may be noted here that there is a typing mistake in, my said judgment which should be read as "clause 10(c)" in place of "clause 10(b)" of the agreement in the Fenner Woodroffe case [1976] 102 ITR 665 (Mad) which was distinguished as then advised. Mr.Sengupta submits tha....
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....2 and the provisions of arts. 2(b), 5(d), 8(a) and 11 of the agreement which is for an indefinite period and does not provide for the return of, the technical knowledge after the termination of the agreement, he argues that the assessee is entitled to use the patents, trade marks and the technical knowledge for an indefinite period and has thereby brought into existence these assets or advantages for the enduring benefit of its trade by incurring this expenditure and has also become the owner of these assets and, therefore, this amount paid by the assessee to the foreign company under art. 6(a) of the agreement is a capital expenditure. 53. Mr. Sengupta further argues that the exploitation of the patents and the technical knowledge cannot help the assessee in running its business carried on by it before entering into this agreement and, therefore, the expenditure incurred by the assessee under this article has not been incurred for running its business or working it with a view to produce profits but has been incurred with a view to acquire a right to produce and sell these goods and, therefore, it should be held that this expenditure is not a revenue expenditure. 54. But we ....
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.... making any payment and the foreign company will be entitled to use them in any manner it may deem fit. Under art. 4 the foreign company is to do everything to keep the patents in force and to obtain extensions thereof at its own cost. These two articles read together along with the other relevant articles conclusively show that the assessee has not become the owner of the patents or the technical knowledge and, as already stated, the technical knowledge here is like a manual or a guidebook for using the patents. 59. The agreement not being for any fixed period can be terminated by either party at any time by giving a reasonable notice to the other party. Further, art. 9 provides for an automatic termination of the agreement. Moreover, art. 8(b) overrides art. 8(a) of the agreement, because under art. 8(b) the foreign company is entitled to terminate the agreement if the assessee does not produce at least 5,000 tons of these goods during any calendar year except for the reasons beyond its control. In view of this right of the foreign company under art. 8(b) it cannot be said that the assessee has become the owner of these assets, because, as already stated, the assessee has no r....
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....may now be noted here that all the foregoing principles were overlooked in Mysore Kirloskar case [1968] 67 ITR 23 (Kar), in Hylam case [1973] 87 ITR 310 (AP) and in Fenner Woodroffe case [1976] 102 ITR 665 (Mad). And these are only some of the reasons for overruling the argument of Mr. Sengupta that we should follow these decisions. 66. Now, the agreement before us is for an indefinite period. The licence granted to the assessee to use the patents, technical knowledge and the trade mark is also for an indefinite period and it is terminable at any time. Where an advantage or benefit is terminable at any time at the volition of either party. it can never be regarded as an enduring advantage or benefit in the way a capital asset endures. 67. Further, art. 6(a) does not provide for payment of any lump sum amount. The expenditure under this article is not to be made "once and for all". It is also not an initial or a predetermined amount. This article does not also provide for payment of any maximum or minimum amount. If more is produced, more is payable. If less is produced, less is payable. And if nothing is produced, nothing is payable. 68. In other words, the amount payable ....