TaxTMI 
TaxTMI 
1977 (11) TMI 37
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....Steyr-Daimler-Puch Aktiengesellschaft, Steyr, to which the Tribunal has referred as " Steyr " but we shall hereafter refer to the said company as the " Austrian company ". The copy of the agreement is annexed to the statement of the case as annexure " A ". By the said agreement the Austrian company Agreed to furnish to the assessee-company the required drawings and technical data necessary for the manufacture of cylindrical and tapered roller bearings. These drawings included manufacturing plans containing technical data regarding the necessary manufacturing facilities, devices as well as gauges and the drawings and the technical data was to comply with the latest state of engineering which was used by the Austrian company. The Austrian company under the terms of the agreement was also bound to give technical advice in such a way the company continuously received information about the state of ball bearing engineering and international standard as well as exchange of views dealing with the required quality, the modern inspection procedures and requirements of the customers on the bearing to be manufactured. The Austrian company had agreed to depute at the request of the assessee-co....
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.... of the said period of ten years Steyr permits the company to continue the licensed production and the sale of the bearings above referred to. Should for any reason premature ending of this contract take place the company shall return all the furnished documents immediately to Steyr." There were other clauses in the agreement under which the personnel of the assessee had to be trained by the Austrian company and under clause 9 it is provided that all technical documents furnished to the company would remain the property of the assessee-company and the assessee-company was under obligation to treat the information contained in the specifications, designs, plans, etc., strictly confidential. One of the terms of the agreement was that the Austrian company agreed to apply and take equity shares of the company for an amount of 2.5 million Austrian shillings and the Austrian company was entitled to appoint one director on the company's board and also an adviser to the managing director. Now, in respect of the calendar year 1962, the guaranteed royalty of 13,000 equivalent to Rs. 1,35,343 was not charged by the assessee to the profit and loss account but was claimed by it as an allowan....
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.... appeal the Tribunal took the view that the right to use the know-how, etc., and that too for an indefinite period, and acquisition of a capital asset should be distinguished from the other benefits under the agreement like user of patents and receiving continuous advice and assistance for manufacture including information embodying the fruits of further research. The Tribunal, therefore, split up the amount of royalty on a rough and ready estimate and took the view that it would be proper to allocate 50% of the sum of pounds 13,000 as pure licensing royalty while the balance of 50% should be attributed to acquisition of a capital asset. It was urged before the Tribunal that if a portion of Rs. 1,35,343 was to be treated as capital expenditure, then the cost should be allowed to be added to the original cost of the assets consisting of the machinery, but the Tribunal taking the view that the machinery was not put to use in the year of assessment in question, decided that it was not necessary to give any final decision in that behalf. With regard to the disallowance of Rs. 21,842 which alone was the subject-matter of the appeal and which related to the foreign tour expenses of the t....
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....ccording to the learned counsel, the company bad already started production and was manufacturing ball bearings but that with a view to expand the business a new project was undertaken and a new line of manufacture was entered upon and the company wanted to undertake the manufacture of cylindrical roller bearings and tapered roller bearings. The manufacture of these new kinds of bearings, according to the counsel, was intended to expand the existing business of the company with a consequential increase in the profits of the company and, therefore, according to the learned counsel, merely making available the know-how and the specialised advice tendered by the Austrian company from time to time could not be said to amount to acquisition of an asset of an enduring character. Consequently, according to the learned counsel, the payment made in order to obtain such advice and consultation from time to time as well as the technical know-how could not partake of capital expenditure but that since it was expenditure incurred for the purposes of expansion of an existing factory, it properly partook of revenue expenditure and that the taxing authorities were, therefore, in error in disallowi....
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....to be made to the Austrian company was merely payment made with a view to acquire certain technical knowledge for a limited purpose. It was really in the nature of fees paid for being allowed to use knowledge belonging to others for a limited purpose with a possibility of the agreement coming to an end even before the expiry of the full length of 10 years in which case the designs and the other documents containing the know-how had to be returned to the Austrian company. Whether such availability of know-how for a temporary period would result in acquisition of an asset of an enduring character was the very question which the Supreme Court was called upon to deal with in the case of Ciba Company [1968] 69 ITR 692. In that case, Ciba Ltd. was a Swiss company and the pharmaceutical section of the said company in India was taken over by the assessee, Ciba of India Ltd. (hereinafter referred to as the " Indian company "). There was an agreement between the Indian company and the Swiss company by which the Swiss company undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products di....
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....ompany ; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The assessee was oil that account a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade-marks of that company. " Negativing the argument on behalf of the revenue that the expenditure incurred by the assessee was of a capital nature, the Supreme Court observed thus at page 700 : " The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period : by making that technical knowledge available the Swiss company did not part with any asset of its business nor did the assessee acquire, any asset or advantage of an enduring nature for the benefit of its business. " The salient features of the agreement which indicated that the Swiss company had not sold the secret processes to the Indian company were set out by the Supreme Court as follows at page 701 : " The following facts which emerge from the agreemen....
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....ing up the payment of royalty. In view of the finding which we have recorded in respect of the first question, the second question referred by the Tribunal does not arise and need not be answered. Coming to the third question relating to the cost of foreign tour amounting to Rs. 21,842, it is contended by Mr. Mehta, appearing on behalf of the assessee, that the expenditure was incurred in respect of the authorised trips by the chairman of the company, the managing director of the company and the technical adviser of the company. Our attention has been invited to the resolution of the company, which is marked as annexure " F ", passed on 15th February, 1962, at the board meeting. By that resolution the chairman, Mr. Desai, and the managing director, Mr. D. S. Gandhi, were authorised to accept any changes in the two drafts of the agreement, namely, collaboration agreement and licence and loan agreement, which may be mutually acceptable between the company and the Austrian company. The chairman and the managing director were authorised to go to Austria and finalise the agreement and execute the same on behalf of the company. They were also authorised to persuade the Austrian compan....
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..... It has to be borne in mind that if a collaboration agreement was to be entered into with a foreign firm, for the finalisation of the terms properly authorised high officers would have to be sent, especially the plans for expansion appeared to be substantially big. As will appear, this expansion necessitated increasing the capital of the company by a large amount. If the result of the agreement itself was not the acquisition of a capital asset, as we have earlier found, it is difficult to countenance an argument that expenditure in the form of travelling expenses which clearly were incidental to the main purpose of securing a profitable arid a feasible collaboration agreement would partake of the nature of capital expenditure. No hard and fast rule can be laid down as to whether a given expenditure call be classified as revenue expenditure or capital expenditure. But taking into consideration the generally broadly accepted test of an acquisition of an asset of enduring character, even that test, in our view, is not satisfied, because in view of the decision of the Supreme Court, to which we have referred earlier, securing access to and use of the technical know-how cannot be said ....
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....of the Supreme Court in Ciba Company's case [1968] 69 ITR 692. It is clear that this decision supports the assessee and the view taken by the Gujarat High Court has our respectful concurrence. Once the view taken by the Supreme Court in Ciba Company 's case [1968] 69 ITR 692 is given effect to and it is held that in making payment for taking advantage of know-how from a foreign firm, there is no transfer or acquisition of an asset, in our view, the most logical conclusion which must follow without any difficulty is that any expenditure incurred in connection with such an exploratory mission or a visit intended to finalise a collaboration agreement in the form of travelling expenses will also have to be treated as revenue expenditure. Merely because one of the purposes of the visit was incidentally to find out which would be the proper machinery to use for the purpose of expansion would not necessarily make it a visit intended solely for that purpose because the primary purpose of the visit was the finalisation of the collaboration agreement. Even if incidentally some machinery has been selected as proper and suitable for the new project, we are not inclined to take the view that th....
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....ection therewith could also not be treated as a capital expenditure. The other decision is that of the Gujarat High Court in Ambika Mills Ltd. v. Commissioner of Income-tax [1964] 54 ITR 167. That decision also dealt with expenditure incurred on account of travelling abroad. The object of the tour in that case undertaken by the director and the superintendent of the company's mills was found to be to replace the old, out of date and obsolete machinery used in the textile mills of the assessee-company by the more modern ones and, therefore, the Tribunal had taken the view that the expenditure incurred related to the fixed framework of the profit-making apparatus of the assessee-company and not to the co-ordination of business and, was, therefore, capital expenditure. The conclusion of the Division Bench of the Gujarat High Court is to be found in the last but one paragraph of the judgment, which reads as follows : " The finding of fact by the Tribunal, though of an intermediate fact as to the object of the two tours, cannot, as we have already held, be said to be either perverse or not based on evidence or lacking in sanctity and, therefore, we would not be justified in interferin....