1975 (3) TMI 17

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....re of the transformers. Whereas Transformer and Switchgear desires that Dominit should render technical aid and assistance for the establishment, the starting of work and operating of the factory that is to be established at Madras and that Dominit for this purpose should make available to Transformer & Switchgear its procedures, designs, experiences and technical know-how and whereas Dominit is prepared to do so, if compensated by the assignment of Transformer & Switchgear shares in accordance with the following provisions of the agreement : Art. 1 : The contract matter is the manufacture of transformers of all kinds and types ...... Art. 3 : Dominit agrees to grant Transformer & Switchgear technical aid and assistance in the field hereinbefore defined as to the contract matter for the establishment, the starting of work and the operation of the factory which is to be established at Madras by Transformer and Switchgear in accordance with article 2 hereof. The grant of the technical aid and assistance includes : (a) the complete communication to Transformer & Switchgear of all inventions, procedures, designs, methods of manufacture, experience and technical know-h....

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....ntract matter, improvements, etc., thereto. All communications between the parties which are marked 'confidential' and which are in respect of turnover, calculations, drawings, construction designs and business connections are also to be kept strictly secret. Dominit undertakes not in India to manufacture, nor there to have manufactured by third persons or firms in the manufacture of the products of the contract matter in so far and inasmuch as Transformer & Switchgear manufactures these products in the course of this agreement. Dominit also undertakes not to offer or to deliver the products mentioned in the first sentence of this paragraph to any third party in India unless such offer or delivery were made upon request by or with the express consent of Transformer & Switchgear. Transformer & Switchgear undertakes not outside India to manufacture nor there to have manufactured by third persons or firms, nor to assist such persons or firms either technically or financially in the manufacture of, the products in the field of the contract matter manufactured by Transformer & Switchgear. Transformer & Switchgear also undertakes not to offer or to deliver the products of the contract ma....

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....te it by one year's written notice to be served upon the other party. In the event of any Dominit's patents, rights from applications or registered designs still existing in India at the time of termination of this agreement the right of Transformer & Switchgear in future to use the still existing industrial protection rights shall end. Provided always that the notice has been served by Transformer & Switchgear or that the termination of this agreement is due to faulty acts of Transformer & Switchgear. In case notice of termination is served by Dominit or in case the termination of the agreement is due to faulty acts of Dominit, Transformer & Switchgear shall be entitled to use those Dominit patents, rights from patent applications or registered designs in India in the field of the contract matter until such time when they run out. Patentable secret procedures shall be treated alike to patents in the meaning of the provisions. After termination of this agreement Dominit shall again be free to manufacture and sell products of the contract matter in India. However, the manufacture and export restrictions imposed upon Transformer & Switchgear for the countries outside India shall r....

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....ration of the work ; secondly, giving technical know-how for the manufacture ; and thirdly, grant of right to use the licences, patents, etc. In the view of the Tribunal the fee paid for the first category of assistance was capital in nature. Since the assessee was never manufacturing transformer at any earlier stage and they were starting manufacturing them for the first time, the grant of technical know-how resulted in bringing into existence a new business and a new source of income and amounted to acquisition of an asset or an advantage of an enduring nature for the benefit of the assessee and that, therefore, the fee paid for the second category of assistance was also capital. The fee paid for the third category was revenue in nature. Since the fee paid to Dominit under the agreement covered all these three types of assistance it was a composite payment and that the Income-tax Officer was, therefore, justified in disallowing 50% as capital expenditure. At the instance of the assessee the following question has been referred : " Whether, on the facts and in the circumstances of the case, and the terms of the agreement, the treatment of 50% of the licence fees paid by the ass....