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Gannon Norton Metal Diamond Dies Ltd. Vs. Commissioner of Income-tax. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 1 of 1976
Judge
Reported in(1987)61CTR(Bom)25; [1987]163ITR606(Bom)
ActsIncome Tax Act, 1961 - Sections 32, 33, 37, 37(1) and 43(3)
AppellantGannon Norton Metal Diamond Dies Ltd.
RespondentCommissioner of Income-tax.
Excerpt:
direct taxation - revenue expenditure - sections 32, 33, 37 and 43 (3) of income tax act, 1961 - whether expenditure incurred by assessee-company by way of payment of price to its foreign collaborators in terms of agreement or any part thereof is deductible as revenue expenditure in terms of section 37 (1) in respective assessment years - payment made by assessee for acquiring know-how relating to process of manufacturing - assessee did not obtain by expenditure any asset of enduring nature - assessee made payment for consultancy and acquired information or guidance - payment made by assessee fully allowable as revenue expenditure. - - hence, according to the tribunal, the assessee had clearly acquired an asset of an enduring nature and the expenditure incurred for the same was.....desai, j.1. this reference made at the instance of the assessee involves the oft-occurring and occasionally difficult question of deciding whether a particular item of expenditure should be designated as 'capital' or 'revenue'. allied to the question is the claim of the assessee, which is indicated in the second question referred to us, that in case the court holds that the expenditure cannot be designated as revenue expenditure and is to be held to be capital, then the assessee should be allowed depreciation on the same. a few facts may be stated.2. the assessee-company was incorporated on may 16, 1980. the object of the company was to manufacture diamond and tungsten carbide dies, plugs and tools for wire-drawing and other industries. the promoters of the assessee had been previously.....
Judgment:

Desai, J.

1. This reference made at the instance of the assessee involves the oft-occurring and occasionally difficult question of deciding whether a particular item of expenditure should be designated as 'capital' or 'revenue'. Allied to the question is the claim of the assessee, which is indicated in the second question referred to us, that in case the court holds that the expenditure cannot be designated as revenue expenditure and is to be held to be capital, then the assessee should be allowed depreciation on the same. A few facts may be stated.

2. The assessee-company was incorporated on May 16, 1980. The object of the company was to manufacture diamond and tungsten carbide dies, plugs and tools for wire-drawing and other industries. The promoters of the assessee had been previously importing wire-drawing dies from Sir James Farmer Norton & Co. Ltd. (hereinafter referred to as 'the English Company') and their associate Company Wire Drawing Dies (Manchester) Ltd. of U.K. (hereinafter referred to as 'the Die Company'). In 1959, correspondence commenced between the English company and the promoters of the assessee commencing with the former's letter dated April 7, 1959. There was further discussion on the subject during the visits of the representatives of the English company to India and the Indian promoters to the United Kingdom. As a result of such negotiations it was decided to establish a factory for the manufacture of diamond and tungsten carbide dies in Bombay which dies would be suitable for wire-drawing industries. Technical collaboration was envisaged with the English company. In pursuance of these negotiations, the Government of India was approached by Gannon Dunkerley & Company Ltd. for their approval of the scheme. This was by a letter dated September 11, 1959. There was a slight modification of the proposal which the promoters conveyed to the Government of India by their letter dated April 18, 1960, and ultimately on April 28, 1960, the Government of India approved the proposal. The two items of the proposal which required approval of the Government were particularly the proposed payment of a lump sum of rupees one lakh to the U.K. collaborators as suppliers of the technical know-how and the issue of shares to the extent of about 45% of the paid-up capital of the new company towards supply of plant and machinery. The letters exchanged between the English company and the Indian promoters and between the said promoters and the Government of India resulting in the final approval letter of April 28, 1960, are collectively annexed to the statement of the case as annexure 'A'.

3. As stated earlier, the assessee was incorporated in May, 1960, with two main shareholders. These were Gannon Dunkerley & Co. Ltd., an Indian company which held 55.3% of the shareholding and the die company which as stated earlier was an associate of the English company. The latter was to have 44.4% of the total shareholding. The remaining 0.3% of the shares were held by five nominees of these two collaborating companies.

4. Shipments of machinery arrived from the U.K. between September, 1960, and January, 1961. One Silcock, a technical expert belonging to collaborators, arrived in India in January, 1961, and stayed here till June, 1962. The factory was erected by March 31, 1961, and was commissioned for trial runs on April 1, 1961. The first batch of tungsten carbide dies was put on the market on June 12, 1961. The manufacture of diamond dies, however, did not commence till the end of 1965. As the technical expert from the United Kingdom left India in June, 1962, an engineer of the assessee, one V.U. Popat, was deputed to the U.K. collaborators' factory at Manchester in May, 1962. He was given training for nearly five months and he returned to India in October, 1962, after acquiring practical knowledge in regard to the manufacture of tungsten carbide and diamond dies. Similarly, another engineer of the assessee, one Bhave, was sent to Manchester in November, 1963, and returned in October, 1964, after receiving practical training in the manufacture of diamond dies.

5. As stated earlier, the first batch of tungsten carbide dies was put on the market in June, 1961. The arrangement for technical collaboration, which was envisaged in correspondence earlier and which was to a certain extent being worked out, was reduced to writing only in December, 1961. This was by the technical collaboration agreement dated December 7, 1961. The entire technical collaboration agreement has been annexed to the statement of the case and designated as annexure 'B'.

6. Annexed as annexure 'C' to the statement of the case is a copy of the agreement dated July 27, 1964, between the collaborators and the assessee-company for the supply of machinery.

7. In this reference, we are concerned with two assessment years, namely, 1962-63 and 1963-64, respectively. Under the technical collaboration agreement, the amount of Pound 7,500 was payable to the U. K. collaborators. Out of this amount, Pound 5,000, equivalent to Rs. 66,899, was paid during the assessment year 1962-63. The balance of Rs. 33,499 was paid during the assessment year 1963-64. For the first assessment year the assessee claimed a loss of Rs. 1,46,040 as per its revised return. In the said return it had claimed the amount of Rs. 66,899 as a deduction. It made a similar claim in respect of the assessment year 1963-64 but for the lesser amount of Rs. 33,499. For both the years, the Income-tax Officer declined to accept the assessee's contention that the items represented revenue expenditure. Thus the loss was calculated for both the years excluding the payments to the U.K. collaborators.

8. The assessee carried the matter in-appeal to the Appellate Assistant Commissioner. He upheld the decision of the Income-tax Officer for both the assessment years, holding that the payments represented capital expenditure only.

9. The matter was thereafter carried by the assessee to the Income-tax Appellate Tribunal. The Tribunal has in its appellate order dealt with the rival submissions. It appears to have been contended by the representative for the assessee before the Tribunal that no formulae, plans, sketches and diagrams were handed over by the U.K. collaborators and only practical knowledge was imparted. In paragraph 9 of its order the Tribunal has expressed the view that necessary formulae and plans must have been provided by the collaborators to the assessee-company. However, the Tribunal observed further that nothing turned on this particular aspect of the matter, namely, on the mode of conveying know-how, and it made no difference to the assessee whether the know-how was conveyed by oral instructions or through blue-prints. According to the Tribunal, the claims of the assessee and of the Revenue would be governed by the terms of the technical collaboration agreement dated December 7, 1971. Reading the agreement, the Tribunal held that under the same, Pound 7,500 payable by the assessee for the purchase and acquisition of the technical know-how pertaining to the manufacture of dies from the U.K. collaborators. Further, according to the Tribunal, by payment of a price, the assessee had purchased and acquired the know-how for all time and not for a temporary period with an obligation of return. Hence, according to the Tribunal, the assessee had clearly acquired an asset of an enduring nature and the expenditure incurred for the same was capital in its nature and not revenue. According to the Tribunal, the acquisition of know-how had resulted in an enduring benefit inasmuch as it had helped the assessee in establishing its new business. Thus the Tribunal opined that the Income-tax Officer and the Appellate Assistant Commissioner were correct in disallowing the payment as being of a capital nature.

10. Before the Tribunal the assessee had in the alternative claimed that in the event of the expenditure being held to be of a capital nature, the same should be considered as forming part of the cost of plant and machinery and hence necessary depreciation and development rebate should be allowed thereon. The Tribunal found, in the first place, this was an alternative ground which was inconsistent with the stand taken by the assessee's representative in the course of arguments before the Tribunal or in the earlier proceedings. The Tribunal found further that if the collaboration agreement was properly scrutinised the amount of Pound 7,500 was observed to be paid in lieu of acquisition of the know-how as contemplated in Part I of the preamble and agreed that the agreement did not stipulate any payment for Part II of the agreement which dealt with assistance for putting up the factory. The Tribunal rejected the argument orally made by the assessee that the total expenditure of Pound 7,500 be divided on an ad hoc basis into three compartments, one relating to the purchase and acquisition of the technical know-how pertaining to the manufacture of dies, etc., the other relating to assistance in running the factory from day to day, and the third pertaining to assistance for putting up the factory. For obvious reasons, this approach was not accepted by the Tribunal, which dismissed the appeals of the assessee for both the assessment years.

11. It is from this decision of the Income-tax Appellate Tribunal that the following two questions have been referred to the High Court for its opinion. The reference is at the instance of the assessee. The two questions referred to us under section 256(1) of the Income-tax Act, 1961, are as under :

'(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 66,899 and Rs. 33,499 incurred by the assessee-company by way of payment of price to its U.K. collaborators in terms of the agreement dated December 7, 1961, or any part thereof is deductible as revenue expenditure in terms of section 37(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 respectively ?

(2) Whether, on the facts and in the circumstances of the case, the expenditure referred to in question No. 1 or any part thereof can be considered as forming part of the actual cost of the machinery or plant to the assessee for the purposes of grant of depreciation allowance under section 32 and development rebate under section 33 of the Income-tax Act, 1961 ?'

12. Before dealing with the mass of decisions to which our attention has been drawn and trying to apply these decisions to the matter in hand, we think the facts must be gathered in greater detail from the annexures to the statement of the case. This is because the answers to be given to the questions may turn on what is available from these details.

13. As stated earlier, the proposal to form a new company was initiated by the English company which conveyed the suggestion to Gannon Dunkerley & Co. Ltd. by its letter dated April 17, 1959. The said letter suggests joint participation and contemplates training of the operatives of the proposed company and talks of imparting to the new organisation the know-how of the English company which it had acquired over a quarter of a century of die-making. It appears that certain queries were raised by the Indian company and some further details were furnished by the English company in its letter dated August 17, 1959. The said letter gave details of certain estimates of the production figures and cost and also enclosed a rough layout of the machines and 'sequence of operation' list together with details of raw material requirements and other information for both the diamond and tungsten carbide die sections.

14. Armed with these details, the Indian promoters, namely, Gannon Dunkerley and Company Ltd., made a proposal to the Government of India. This was by their letter dated September 11, 1959. The original suggestion, it appears, was that the English company was to be given 45% of the shares (total capital being Rs. 2,70,000 in consideration of their imparting technical know-how to the new company to be formed. At that stage, machinery was proposed to be purchased and 20% payment for the same was to be made on shipment and balance 80% in eight six monthly equal instalments. Part II of the said letter envisaged the English company providing various services for which 45% of the share capital of the face value of Rs. 1,21,500 was to be allotted free of charge. Approval of the Government was sought to the scheme by the said letter. It appears thereafter that the whole basis of collaboration and payment for the services to be rendered by the U.K. Collaborators underwent a change. Certain negotiations took place subsequently between the English collaborators and Gannon Dunkerley & Co. Ltd. and as a result of these negotiations, a fresh proposal came to be made on April 18, 1960 by Gannon Dunkerley & Co. Ltd. to the Government of India. Under the fresh proposal conveyed to the Government of India by a letter dated April 18, 1960, an amount of Rs. 1,00,000 was to be paid to the English technical collaborators as a lump sum payment for giving technical know-how subject to the Indian taxes to the extent applicable. It was proposed that the amount was to be paid in three instalments, namely, one-third within one month of signing of the agreement, one-third when the factory went into commercial production, and one-third 12 months after the start of commercial production. As for plant and machinery, they were to be supplied by the U.K. Collaborators without cash payment in lieu of the value equal to 45% of the shareholding. It was made clear by the said letter that no royalty payment was envisaged. It is this proposal which ultimately received the approval of the Government of India and the Government agreed to the payment of a lump sum of Rs. 1,00,000 in three instalments indicated earlier 'as consideration for supply of technical know-how'.

15. We have already given earlier the time schedule pertaining to the formation of the company, commencement of commercial production, etc. It will have to be noted now that the technical collaboration agreement (annexure 'B') dated December 7, 1961, was entered into about six months after the first batch of tungsten carbide dies was put on the market and more than one and a half years after the assessee-company was incorporated.

16. If the technical collaboration agreement is properly scrutinised, it will be found that it contains a threefold obligation on the 'die company'. The first obligation is to impart to the assessee and allow the assessee to acquire and use the technical know-how. The second is to collaborate technically with the assessee for setting up a factory in India for manufacturing dies, plugs and tools. The third obligation undertaken by the die-company is not to sell dies, plugs and tools similar to those manufactured by the assessee in their Indian factory without prior written agreement in any of the following areas, namely, India, Pakistan, Ceylon, Burma and Indonesia. Allied to this third obligation is the obligation not to sell these items to any party outside the territories mentioned above with the knowledge that that party intends to export dies, plugs and tool for use or sale in the aforementioned territories.

17. Now, the technical collaborator agreement specifically provides that the payment of Pound 7,500 payable by three instalments as mentioned in clause (1) was for the know-how to be supplied by the die company and for the covenant contained in clause (5). The Tribunal found that for the obligation to give technical assistance and collaboration for putting up the factory, no payment was envisaged under the technical collaboration agreement. This finding of the Tribunal has not been challenged either by the assessee or the Revenue and we must, therefore, proceed on the footing that the payment of the amount of Pound 7,500 in the instalments provided was for the imparting and purchase of know-how and for the obligation contained in clause (5).

18. At this juncture, it may be pointed out that after the order of the Tribunal a miscellaneous application was made by the assessee accompanied by an affidavit of a director of the assessee. In the said affidavit, the said director has referred to clause (2) of the said technical collaboration agreement and has stated that although the said clause (2) (of Part I) talked of handing over to the representative of the assessee-company the necessary formulae, plans, sketches and diagrams in Salford, in point of fact, none of these was handed over in Salford or anywhere else. According to the said affidavit, a clear and categorical statement to this effect had also been made earlier before the Tribunal during the hearing of the appeal. The Tribunal in its order on the said application, which order is dated March 25, 1970, commented on the pertinent fact that the technical collaboration agreement had been entered into six months after the production Commenced. Hence it opined that what was recorded in the agreement must be taken to be correct. In the opinion of the Tribunal, however, nothing depends on this aspect of the matter. The application was accordingly rejected.

19. At this juncture a reference may be made to the order of the Income-tax Officer for the assessment year 1962-63. In this order the Income-tax Officer has recorded as under :

'.... In my letter dated September 6, 1963, it was pointed out to the assessee that this is in the nature of capital expenditure inasmuch as the technical know-how was payable for the installation of the factory, purchase of machinery and installation and construction of various buildings and factories The assessee was also requested to allocate the know-how paid on the part relating to the construction or the erection of the assets on which depreciation is admissible as per the Income-tax Rules. By the company's letter dated September 19, 1963, the assessee has only pointed out that no amount has been charged in the profit and loss account during the year, but the amount payable during the year was Rs. 66,899 and this has been debited to the deferred revenue expenditure account and shown in the balance-sheet. The assessee also stated that it is not possible to allocate the expenditure under various heads.'

20. As far as allowance of depreciation and development rebate is concerned, and with which aspect we are concerned in question No. 2, our attention has been drawn to a few decisions in which, according to learned counsel for the assessee, it had been held that both depreciation and development rebate would be allowable to the assessee in the event of the payments being held to be of a capital nature. A brief reference may be made to these decisions, since in our view no such claim is tenable under the facts of this particular case, and question No. 2 would be required to be answered against the assessee in the event of it being held that the answer to question No. 1 required to be given would be one in favour of the Revenue. In our opinion, it is not the settled legal position and it cannot be that depreciation allowance or development rebate must be admissible on all items of capital expenditure.

21. The first of these decisions which may be referred to is the decision of the Supreme Court in Challapalli Sagars Ltd. v. CIT : [1975]98ITR167(SC) . In the said decision the Supreme Court referred to various standard works such as Accountancy by Pickles, Practical Auditing by Spicer & Peglar and Higher Book-keeping and Accounts by Cropper Morris and Fiscon. It was mentioned in the court that in statement of auditing practices issued by the Institute of Chartered Accountants of India it has been explained that the 'cost' of fixed assets should include all expenditure necessary to bring the assets into existence and to put them in working condition. The principle was accepted by the Supreme Court (see p. 175 of the report) and applying the principle it was held that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the 'actual cost' of the assets to the assessee within the meaning of the expression in section 10(5) of the Indian Income-tax Act, 1922, and the assessee was held to be entitled to depreciation allowance and development rebate with reference to such interest also.

22. In the present case, it has been held by the Tribunal that no payment is envisaged under the technical collaboration agreement for the second obligation undertaken by the die company which is the one under Part II of the agreement. Upon a reading of the technical collaboration agreement, no part of the portion of Pound 7,500 can be attributable to the technical assistance to be given the die company for setting up of the plant of the assessee. If at all any portion of the payment of Pound 7,500 could have been regarded as having been attributable to this obligation, then the principle enunciated in Challapalli Sugars Ltd.'s case : [1975]98ITR167(SC) may have to be applied. However, in view of the conclusion of the Tribunal, which appears to have been accepted by both sides, the said Supreme Court decision would seem to have no application and cannot advance the assessee's case any further.

23. In CIT v Elecon Engineering Co. Ltd. : [1974]96ITR672(Guj) , the Gujarat High Court had the occasion to consider the acquisition of know-how by an Indian company. Under the collaboration agreement which was being considered, before the Gujarat High Court drawings and patterns had been received t by the assessee and it claimed that these drawings and patterns could be regarded as 'plant' on which depreciation was allowable under section 32 of the Income-tax Act, 1961. The Gujarat High Court observed that this was a debatable question, not easy of answer, and though the High Court took the view in favour of the assessee which appeared to the High Court to be more plausible, the other view was characterised as not altogether impossible. The Gujarat High Court was considering two collaboration agreements under which an amount of Pound 24,000 was paid by the assessee to the foreign collaborators from whom the assessee received patterns, drawings, manufacturing and engineering data and information for the manufacture of Worm Reduction Gear Units and Conveyor Idlers. The Gujarat High Court first dealt with the definition of 'plant'. It was urged on behalf of the Revenue by the Advocate-General who appeared for the Commissioner that 'plant' within the meaning of section 32 of the Income-tax Act, 1961, must be construed broadly as a 'capital asset' of tangible nature and that such capital asset must be subject to diminution in value year after year by reason of wear and tear by its application to earn profits in the course of business. The court thereafter considered the nature of 'know-how' and this was with reference to the decision of House of Lords in Jeffrey (H. M. Inspector of Taxes) v. Rolls Royce Ltd. [1962] 40 TC 443 .

24. According to the High Court (at page 707 of 96 ITR) :

'It is true that Lord Radcliffe - and he alone - said in those cases that know-how is an intangible asset and that it should not be confused with its material record in the shape of drawings, lists, data, etc. Now, in the first place, it appears to us, with the greatest respect, that this emphasis on the intangible nature of know-how and the distinction between know-how and its material record, though theoretically or academically accurate and proper, is not in accord with actuality. Know-how is a peculiar kind of asset. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form, as it grows, in the shape of formulae, drawings, patterns, blueprints, specifications and so on. The material form it takes not only facilitates preservation, collation and ready reference, but also makes it perceptible and visible and easily capable of being transmitted to others. When it assumes such a concrete shape, it ceases to be an intangible entity and becomes in a sense a corporeal asset which can be bought or sold, lent or borrowed, exchanged or stolen or imparted gratuitously to others. Secondly, we cannot lose sight of the fact that those observations were made by Lord Radcliffe with the view to emphasising that merely because the physical record of know-how such as lists, drawings and manufacturing and engineering data is imparted to another person, know-how is not lost to the owner thereof who still continues to retain it for his own use and, therefore, income arising from an agreement under which such record is parted with cannot properly be termed as capital receipt. The observations, which may be apposite in that context, cannot be pressed into service in a case where the question is of a wholly different nature and has to be viewed from a different angle, namely, the angle of the person who acquires the know-how by transfer, for, to the recipient, for all practical purposes, know-how finds its manifestation mainly in its material record handed over to him. So far as he is concerned, know-how largely exists in its physical record and the finer emphasis on the intangible nature of know-how and the nice distinction between know-how and its material record would be to some extent unreal and illusory in his case. Know-how which he acquires does not exist except to a large extent in its material record which he receives. Unlike the owner of the know-how, it has no formless existence for the recipient who gains access to it primarily through its material record For him, know-how and its medium form a single entity and in his case to make a distinction between the two would be to ignore the reality. It appears to us, therefore, that so far as the assessee is concerned, designs and patterns can be equated with the know-how itself and as such it cannot be said that such know-how is an intangible asset and, therefore, not plant.'

25. Upon this footing, probably, the High Court upheld the decision of the Tribunal which was to the effect that the drawings and patterns were plant within the meaning of section 32 and the assessee was, therefore, entitled to depreciation in respect of those assets on the pro rata cost of their acquisition.

26. The Bombay High Court followed the aforesaid decision of the Gujarat High Court CIT v. Elecon Engineering Co. Ltd. : [1974]96ITR672(Guj) in CIT v. Emco Electro Pvt. Ltd. : [1979]118ITR864(Bom) . It was held in the above case that where technical know-how which was condensed into printed material which conformed to the description of a book in its normal and natural sense was sold to the assessee under an agreement, it constituted a part of the assessee's plant within the meaning of the term as defined in section 43(3) of the Income-tax Act, 1961, and an assessee would be entitled to an allowance of depreciation and development rebate thereon.

27. As far as the present case is concerned, Mr. Joshi relied more strongly on the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. CIT : [1963]49ITR160(SC) . In the said decision the Supreme Court was considering expenditure incurred by the assessee in shifting its factory from Sitalpur, which place suffered from the ravages of floods and where quality sugarcane was not available in sufficient quantities. With a view, therefore, to improving its business of dismantling the building and machinery and transporting and erecting them at Garaul, the assessee incurred an expenditure. It was held that this expenditure amounting to Rs. 3,19,766 was capital expenditure. In the opinion of the Supreme Court, an enduring advantage had been acquired by the assessee without an addition to or increase in the value of the capital asset. According to the Supreme Court, depreciation could not be claimed merely because expenditure has been held to be capital in its nature. It would be claimed only if the assessee was able to show that a tangible asset has been acquired by the expenditure which could be said to have depreciated.

28. In our opinion, a claim of the nature made by the present assessee cannot be regarded as comparable to the claim which had been upheld by the Gujarat High Court and by this court in the two decisions above referred to. Having accepted the Tribunal's reading of the technical collaboration agreement, it is also not open for the assessee to claim that any part of the payment of Pound 7,500 was required to be made to obtain technical assistance from the collaborators for setting up the plant or machinery. If that be so, even if the payment would have to be regarded, and that is the question to be really decided, as capital expenditure the claim for development rebate or depreciation allowance would not be allowable thereon. Indeed, the assessee has consistently claimed that no patterns or processes or plants or formulae were handed over to it by the collaborators either at Salford or anywhere else. According to the assessee, this seems to be borne out. What was given was information, training and guidance which the English collaborators had accumulated as a result of their 25 years experience and which was conveyed to the employees of the assessee by training the said Popat initially and Bhave subsequently and by the guidance given by the collaborators' representative in India, to which aspect we have already alluded earlier.

29. To put it briefly, if we hold that the expenditure incurred was capital expenditure, then our answer to question No. 2 which we are called upon to give would be against the assessee. The real point, however, is whether the expenditure is properly to be regarded as revenue or capital.

30. It is well settled that since no specific tangible asset can be pointed out as having been purchased or acquired by the assessee, the expenditure would have to be regarded as capital, if the assessee has claimed an advantage of an enduring nature. In Mr. Joshi's submission, the acquisition of know-how under the technical collaboration agreement with which we are concerned is one which provides for purchase of know-how outright by the assessee, and if that be so then the assessee did in fact acquire an asset of an enduring nature which required the expenditure to be designated as capital in its nature. On the other hand, Mr. Mehta for the applicant submitted that it had been repeatedly observed by this court that 'know-how' which was predominantly conveying of information, imparting knowledge and was unconnected with transmission of secret process patterns, technical designs and similar items was not and could not be regarded in these days of fast-changing technology as conveying or conferring any enduring asset and it made no difference whether the know-how was leased for a short term coupled with an obligation to return it with the expiry of the term or obtained outright. In other words, according to Mr. Mehta, the acquisition of know-how, in the circumstances similar to one which we have in the instant case, did not confer on the assessee any enduring advantage and hence the payment for the same ought not to be regarded as capital in nature.

31. This makes necessary a reference to decided cases on the question of acquisition of know-how and payment for the same.

32. We may start with the case decided by the Supreme Court, since it is universally referred to in almost all subsequent decisions, both of this court and of the other courts, to which a detailed reference will now have to be made.

33. This decision of the Supreme Court which may be regarded as the starting point of our decision on this aspect of the reference is CIT v. Ciba of India Ltd. : [1968]69ITR692(SC) . By this decision, the Supreme Court affirmed the earlier decision of the Bombay High Court in CIT v. Ciba Pharma P. Ltd. : [1965]57ITR428(Bom) of its decision, the Supreme Court has noted various features of the agreement which was being considered by it. These are, in the words of the Supreme Court :

'The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss Company to the assessee : (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement.'

34. On a consideration of these features, the Supreme Court held that the payment made by the assessee to Ciba Ltd. Basle, the Swiss company, was an admissible deduction. In other words, the expenditure was held to be a revenue expenditure and not a capital one.

35. In the case before us, we find no question of any licence being obtained by the assessee-company for a limited period or an express prohibition contained therein preventing the assessee from divulging confidential information to third parties. We also find a lump-sum payment unrelated to the turnover or production of sales. It will have to be conceded that the technical collaboration agreement between the die company and the assessee is materially different from the one between Ciba of India Ltd. and Ciba Ltd., which the Supreme Court was considering. There would have been certainly difficulties in applying the aforesaid Supreme Court decision straightaway to the present case because of this material difference. We have, however, a number of decisions of our own court which have considered the aforesaid Supreme Court decision and which, in our opinion, have advanced the principles therein enunciated towards the position canvassed for acceptance by Mr. Mehta on behalf of the assessee before us. We may now note these decisions.

35. In ACC-Vickers Babcock Ltd. v. CIT : [1976]103ITR321(Bom) , this court had the occasion to consider a collaboration agreement between the assessee before it and Fuller Company of U.S.A. The decision of the Supreme Court in Ciba's case : [1968]69ITR692(SC) was cited before the Division Bench which opined that the duration of the agreement cannot be decisive of the matter. (See p. 333 of 103 ITR) The Division Bench found that there was in the collaboration agreement before it a term which cast an obligation upon the assessee to return all the information and technical know-how to Fuller at the termination of the agreement. According to the Bench, such a term negatived the case of the Revenue which was that the foreign collaborator had the assessee (sic). Hence it was held that the expenditure would be required to be regarded as an integral part of the assessee's profit making process and hence revenue in nature. Again, whilst considering the decisions of the Mysore High Court in Mysore Kirloskar Ltd. v. CIT : [1968]67ITR23(KAR) and the Andhra Pradesh High Court Hylam Ltd. v. CIT : [1973]87ITR310(AP) in favour of the Revenue cited before it (which decisions were overruled by these two High Courts subsequently in Full Bench decisions) it was observed (at page 336 of 103 ITR) :

'.... the aspect that the technical 'know-how' is supplied for manufacturing a new product, though relevant, would not be decisive of the matter.'

36. The Supreme Court decision in Ciba's case : [1968]69ITR692(SC) was followed once again by this court in Antifriction Bearings Corporation Ltd. v. CIT [1978] 114 ITR 335. The Division Bench of the Bombay High Court emphasised certain terms of the collaboration agreement which provided for a restricted use by the assessee in a restricted manner for a ten year term. In the opinion of the High Court, the case fell squarely within Ciba's decision : [1968]69ITR692(SC) . In our opinion, because of important factual difference, the aforesaid decision would not seem to be of much assistance to us.

37. We now come to a very important decision which is the principal foundation on which the assessee's case before us is based. That is the decision of this High Court in CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. : [1980]123ITR538(Bom) . In our opinion, a detailed reference to the facts on which the said decision has been given would be necessary.

38. In TELCO's case : [1980]123ITR538(Bom) , the court was considering two collaboration agreements, one with Messrs Daimler Benz and the other with Messrs Henricot, and the nature of payments to be made by the assessee to the collaborators thereunder. It is pertinent to note that the assessee company was upto that time manufacturing locomotives only. The agreement with Messrs. Daimler Benz was arrived at in order to enable the assessee to establish a factory for the manufacture in India of Daimler Benz trucks and other automotive products. The agreement with Messrs Henricot was to enable TELCO to secure competent technical assistance in Europe to bring the Telco Steel foundry when completed into full and efficient operation as early as possible and to design and manufacture therein on an economical and efficient basis the maximum possible tonnage of sound steel casings of all sizes, shapes and specifications, including particularly heavy and complicated casings for the steam locomotives building industry. The latter agreement was thus in connection with the product already being manufactured, whereas the first agreement with Messrs Daimler Benz was for a totally new product, as a new factory was to be established. It is the first agreement, therefore, with which we are particularly concerned

39. It would appear from a perusal of the said decision that the services which were to be rendered by Messrs Daimler Benz under the collaboration agreement and the payments to be made to the foreign collaborators were summarised in an affidavit filed by the Director-in-charge before the Income-tax Officer. The duration of the agreement with Messrs Daimler Benz was 15 years and the said agreement enabled Telco to continue to use the technical information and the experience acquired by it under the agreement even after the agreement had come to an end on the expiry of the fixed period. It was submitted on behalf of the Revenue that since the benefit of the technical know-how made available by Messrs Daimler Benz could be utilised by the assessee even after the period of agreement was over, and since the know-how and technical knowledge could be drawn upon for a long period of 15 years, Telco must be deemed to have acquired a capital asset. Accordingly, it was claimed by the Revenue that the expenditure incurred in the form of payment to Messrs Daimler Benz must be regarded as being capital in nature.

40. It may be mentioned that in the affidavit of the director it had been stated that no patent or patent rights or licences had been transferred or assigned to Telco by either Messrs Henricot or Messrs Daimler Benz. It was further stated in the affidavit that Messrs Daimler Benz had not given any technical advice, information or assistance to Telco concerning the layout of the factory and buildings, extensions, etc., for the automotive division. It was further stated that the plant and machinery required for the automotive division had been supplied to Telco by Messrs Daimler Benz, but these assets had been separately paid for as also jigs, tools and fixtures as well as parts and components required by Telco for the manufacture of automotive products. We may pause here and point out that even under the two technical collaboration agreements between the die company and the assessee it has been found that no payment is envisaged for the obligation undertaken in Part II of the same. We have also noted that separate consideration was provided under a separate agreement for reconditioned machinery to be supplied by the die company to the assessee. The technical collaboration agreement in Telco's case : [1980]123ITR538(Bom) provided that after the stipulated term of 15 years was over, Telco would not use the trade name of Messrs Daimler Benz. The Division Bench observed (at page 549) :

'..... If the transaction embodied in the agreement is looked at commercially, it looks to us as nothing more than obtaining the services of a consultancy so far as the supply of know-how is concerned, and in the nature of a licence to use the trade name so far as permission to use the trade name of M/s. Daimler Benz was concerned. The payment was not, therefore, for acquisition of any capital asset. Though the production of trucks was to be continued by Telco even after the expiry of agreement, the use of the trade mark of M/s. Daimler Benz could not be used by Telco as the licence to use the name had come to an end. So far as the payments made under the agreement were concerned, they were to be made partly in the nature of royalty and partly in the nature of share in the profit but they were only intended to secure the use of the trade name and acquire necessary know-how. Technical know-how can in no sense of the term be called a tangible asset. Mr. Moolgaonkar has clearly stated that in this case no patent rights were granted. It is not as if know-how in technical production remains stagnant and remains the same. In the present day conditions of technological and scientific development, all technical know-how changes from time to time and with it the production methods also change. In our view, acquiring technical know-how and technical advice, for the time being, cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset.'

41. The Division Bench went on further to hold that it was not possible for them to accept the argument that merely because the company, namely, Telco, which had entered into a contract with regard to know-how was entitled to use that know-how even after the agreement had expired, the benefit must be said to be of an enduring character. According to the Division Bench, an agreement of foreign collaboration, where foreign know-how is availed of in lieu of payment, was, in substance, a transaction for acquiring the necessary technical information with regard to the technique of production. The Division Bench went on further to say that (at page 550 of 123 ITR) :

'The fact that the same information is continuously used whether in the same form or in improved form will, therefore, not be relevant in deciding whether technical know-how obtained under such an agreement is a capital asset. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. There is no property right in a know-how which can be transferred just as it is, in a limited sense, in a patent. In any case, a party making the know-how available can hardly make any attempt to retrieve all the information supplied after the other party to the agreement has fully equipped itself and made itself familiar with the technical information and know-how supplied. The fact that the production can still be continued after the expiry of the agreement is, therefore, in our view, wholly immaterial for deciding whether such know-how can be treated as a capital asset.'

42. It may be mentioned that the decision of the Madras High Court in Fenner Woodroffe & Co. Ltd. v. CIT : [1976]102ITR665(Mad) , was cited by learned counsel on behalf of the Revenue before the said Bench, but the same was expressly dissented from.

43. At this juncture, we may mention that in Praga Tools Ltd. v. CIT : [1980]123ITR773(AP) , a Full Bench of the Andhra Pradesh High Court overruling the Division Bench decision of the same High Court in Hylam Ltd. v. CIT : [1973]87ITR310(AP) , made substantially a similar observation regarding the ephemeral character of the technical know-how de hors specific processes, patterns and designs, etc., conveyed along therewith. The Full Bench also rejected the distinction sought to be made between the licensing of the know-how and the acquisition thereof or an argument based on the liability to return the know-how. According to the Andhra Pradesh High Court, in the case before it the imparting of special knowledge and technical know-how by the foreign collaborators to the assessee-company would be just like a teacher imparting his skill or knowledge to his student. According to that High Court, each factor by itself was not decisive, but the totality or the cumulative effect of all the facts and circumstances would be the prime guiding factor to decide the aim and object of the expenditure, be it capital or revenue. Where the expenditure had a direct nexus, connection or relation to the carrying on or conduction of the business of the assessee, it would have to be held or regarded as an integral part of the profit-making process. In such a case it must be held to be revenue expenditure.

44. To continue with our reference to Bombay cases, we find that the observations above noted in Telco's case : [1980]123ITR538(Bom) have been repeated and reiterated in every Bombay case so that one may conclude that what was observed regarding the nature of know-how and the advantage acquired by obtaining the same has become settled law and cannot be passed over as mere casual observations.

45. Telco's case : [1980]123ITR538(Bom) was followed in CIT v. Service Station Equipment Pvt. Ltd. : [1981]132ITR130(Bom) . The agreement considered by the High Court in that case was for ten years with no provision for renewal. Under clause 3(a), the licensee, that is, the assessee before the court, agreed to discontinue and cease the use of various trade marks and trade names in any form or manner whatsoever and there was a further agreement to deliver the document or documents as may be necessary to reconvey to the licensor all rights acquired or held by the licensee into or under the said trade marks or trade names. It was observed by the High Court that the various clauses leave no doubt that the agreement was essentially an agreement for access to the technical knowledge and experience commanded by the foreign company and for the consequential right to use the same under the patents and trade marks of that company. It was further observed that the services and information given by the foreign collaborator neither created any capital assets nor was there a creation or transfer of any asset by virtue of the rights acquired by the assessee to draw upon the said technical knowledge and know-how and to utilise the services of the foreign company for the purposes stated in the agreement including the services of their personnel for training the assessee's staff for the purpose.

46. The next decision to which reference may be made is the case of Cooper Engineering Ltd. v. CIT : [1982]135ITR597(Bom) , where once again Telco's case : [1980]123ITR538(Bom) was referred to and followed. The agreement which the court was considering in Cooper Engineering's case : [1982]135ITR597(Bom) was the one whereby M/s. Perry & Sons Ltd., agreed to give to the assessee knowledge and information on technical know-how. They also agreed to give from time to time such information as was necessary for the setting up of the pattern shop. The foreign collaborators further agreed to make arrangements for the training of the necessary personnel during the period of four years and it was in consideration of this supplying of the technical knowledge, rendering service and imparting training that the assessee agreed to pay a sum of Rs. 16,029 which was a lump-sum or down payment for pattern shop collaboration. The said amount which was equivalent to Pound 300 was allowed as revenue expenditure. The court observed that the amounts paid for provision of know-how and licence to use the trade name were revenue expenditure. The court also opined that the expenditure on training of personnel was incurred with a view to achieving maximum and efficient production and the expenditure incurred on such training was closely related to the profit-earning process and was thus allowable as revenue expenditure. On behalf of the Revenue it was urged that the agreement was different from the one considered by the Supreme Court in Ciba's case : [1968]69ITR692(SC) . The Division Bench of the Bombay High Court found that the agreement was similar to the one considered by the High Court in Telco's case : [1980]123ITR538(Bom) and came to the decision already indicated, namely, that the amounts expended had to be allowed as revenue expenditure.

47. A similar question came to be considered once again by the Bombay High Court in Kirloskar Pneumatic Co. Ltd. v. CIT : [1982]136ITR746(Bom) , where Telco's case : [1980]123ITR538(Bom) is specifically referred to and the transient and temporary character of know-how again adverted to. It was submitted before the Division Bench in the aforesaid decision that there were essential differences between the agreement being considered by the Division Bench and the agreement before the Supreme Court in Ciba 's case : [1968]69ITR692(SC) . In Kirloskar Pneumatic Co.'s case : [1982]136ITR746(Bom) under the collaboration agreement, a right had been given to the assessee to export the products manufactured by the help of know-how supplied by the foreign collaborator Grasso. The court found this circumstance to have no relevance. Similarly, the court found it irrelevant the circumstance that payment in the case of Kirloskar Pneumatic Co. was against the supply of drawings and unlike in Ciba's case : [1968]69ITR692(SC) not tied to sales. In the opinion of the court, difference in modes of payment for the know-how cannot make any difference at all. In the collaboration agreement with Grasso, there was a further clause imposing a restriction on the foreign collaborator from manufacturing or selling products similar to those covered under the collaboration agreement. In the opinion of the High Court, this could not lead to the conclusion that the payment in question was of a capital nature or what the assessee acquired was an enduring benefit. The court thereafter went on to observe (at page 757 of 136 ITR) :

'We may point out that it is hardly useful to embark upon a detailed comparison of the clauses in the different agreements with a view to find out minor differences therein as Mr. Kotwal would have us do. What we have to consider is the agreement generally and broadly. As we have already pointed out, the agreement in question is to be looked at from the point of view that it is for the acquisition of the technical know-how for a limited period. This know-how is bounce to become obsolete with the technological developments and changes in techniques.'

48. Our attention has also been drawn to two unreported decisions (since reported, see below) of this court in which similar observations are to be found. The first of these decisions was that given in (Income-tax Reference No. 234 of 1973 CIT v. Wyman Gordon (India) Ltd. : [1983]144ITR911(Bom) decided on June 28, 1982. The court was considering the technical services fee of Rs. 17,098 paid by the assessee to M/s. Wyman Gordon Co. of the U.S.A. The Bench after noting the features of the agreement as indicated by the Tribunal observed that the controversy raised before it was practically covered by the decision in Telco's case : [1980]123ITR538(Bom) . The passage from the said decision earlier quoted by us was quoted by the Bench while applying the principles enunciated therein and the question was answered in favour of the assessee.

49. Similar observations are to be found in the decision given by this court in (Income-tax Reference No. 101 of 1977) Premier Automobiles Ltd. v. CIT : [1984]150ITR28(Bom) decided on July 27, 1983. The court was, inter alia, considering an agreement entered into by the assessee on October 5, 1962, with the foreign company designated in the judgment as Meadows Company. Clause 10 of the said agreement has been set out in the decision. Under this agreement, Meadows was required to furnish to the assessee a complete set of up to date drawings, blue prints, process sheets, specifications and technical data in connection with the Meadows Engine. Meadows also undertook to supply to Premier (assessee) copies of any modified drawings adopted by Meadows subsequently and certain export rights were also conferred on the assessee by clause 13. For this the assessee agreed to pay and paid subsequently a sum of Pound 50,000 which was in clause 10 described as 'capital sum'. The payment was made during the assessment year 1964-65 and the assessee claimed an amount of Rs. 6,68,990 paid to Meadows Company (equivalent to Pound 50,000) as revenue expenditure. The assessee lost before the Income-tax Officer and the Appellate Assistant Commissioner and also before the Tribunal. The Tribunal emphasised that the assessee had paid the amount at the time of the initiation of a new line of activity and that the payment must be regarded as being of a capital nature. Again, the court cited Telco's case : [1980]123ITR538(Bom) and applied the principle laid down in the said case, namely, that payment made for obtaining the know-how with regard to techniques of production would be of revenue nature and not of capital nature. Thus, on this point the question referred to the Bench was answered in favour of the assessee, the expenditure being held to be of revenue nature and hence allowable as a deduction.

50. The aforesaid discussion reviews the cases reported as well as unreported of the Bombay High Court dealing with such technical collaboration agreements and we find that whereas in Ciba's case : [1968]69ITR692(SC) the Supreme Court emphasised the limited duration or term of the agreement and the liability to return the know-how at the end thereof, the Bombay High Court in Telco's case : [1980]123ITR538(Bom) and subsequently has put emphasis on the transient character of the asset acquired, namely, technical information and know-how, and has decisively indicated that where the know-how is unaccompanied by assignment of patented or secret processes or the right to use the trade name or trade mark or registered designs, the same would be more or less equivalent to technical advice given or information supplied. In other words, in such a case the fact that the agreement did not contain a provision for return of know-how after the expiry of the agreement would be irrelevant. It may be emphasised once again that in Telco 's case : [1980]123ITR538(Bom) Telco retained the right to use the know-how which it had obtained from Messrs. Daimler Benz and the agreement only provided that on the expiry of the term Telco would no longer use the trade name on the trucks manufactured by it. This was apart from the very pertinent observation that the know-how or information acquired would remain in the minds of the recipients unlike drawings and patterns which were tangible and cannot be returned.

51. It is interesting to note how A. C. Sampath Iyengar has examined the case law. Indeed, it would appear to us from the commentary to be found under section 37 (p. 1679, 7th Edn., of Sampath Iyengar, Law of Income Tax) that certain instructions have been given by departmental circulars after Ciba's case : [1968]69ITR692(SC) was decided by the Supreme Court. It has been observed by the learned author at p. 1684 :

'The large number of judicial decisions covering this question, with very few exceptions, unanimously take the view that a payment made whether in lumpsum or by way of periodical payments (generally royalties linked to the turnover) in lieu of benefits received by the person making the payment for the right to use trade marks or processes belonging to a collaborator or to manufacture and market, exclusively or otherwise, products covered by such designs, processes or the like, is allowable as a deduction of a revenue nature, particularly because these agreements mostly do not give any capital value or price of the 'asset' in question.'

52. Telco's case : [1980]123ITR538(Bom) has been noted by the author as having doubted how far in the rapidly changing wealth of technology 'know-how' can at all be considered to be a capital asset, except where patent rights or the like are acquired. The Bombay High Court's decision in Telco's case : [1980]123ITR538(Bom) and that of the Andhra Pradesh High Court in Praga Tools Ltd. : [1980]123ITR773(AP) have been cited under this proposition. The author, however, has expressed his personal view against this position, but we are bound by the observations in Telco's case : [1980]123ITR538(Bom) which observations have been subsequently repeated and reiterated and applied in the several Bombay decisions earlier noted. In our opinion, even independently we find compelling logic in these observations in these days where technology in certain lines sometimes becomes obsolete not merely in years but in months.

53. Since the point seems to be concluded, as far as this court is concerned, by the earlier decisions which we have indicated and which we are bound to follow and with which we agree independently, we may refer to only two decisions of the other High Courts in which similar points arose for consideration. The first decision is that of the Gujarat High Court in CIT v. S. L. M. Maneklal Industries Ltd. : [1977]107ITR133(Guj) . In this case the court examined English cases as also its earlier decision in Elecon Engineering Co.'s case : [1974]96ITR672(Guj) from which we have extracted the passage dealing with the concept of 'know-how'. In Maneklal Industries' case : [1977]107ITR133(Guj) on behalf of the Revenue the court's attention was drawn to the fact that there was no clause in the licensing agreement providing that on the expiry of the period covering the collaboration, the drawings, manufacturing instructions, etc. were to be returned to the foreign company, namely, the S.L.M. The court, however, emphasised as it had already pointed out in Elecon Engineering Co.'s case : [1974]96ITR672(Guj) that the aspect of obsolescence must not be lost sight of while considering the question of acquisition of technical know-how and information. The court ultimately held on consideration of the totality of the circumstances attending upon the transactions before it that the expenditure was allowable as revenue expenditure. We have not examined the agreements and clauses before the Gujarat High Court in detail inasmuch as we have a closer picture before us by reason of the decision in Telco's case : [1980]123ITR538(Bom) .

54. A Full Bench of the Madras High Court had the occasion to consider a similar case in Jonas Woodhead & Sons (India) Ltd. v. CIT : [1979]117ITR55(Mad) . The assessee in that case had entered into an agreement with an English company for the manufacture of all types of springs and suspensions for road and rail vehicles as were being manufactured by the English company with the help of the technical Knowledge and experience possessed by the English company in connection therewith. The agreement inter alia provided for the supply by the English company to the assessee-company of all technical information and know-how in its possession relating to the setting up of plants suitable for the manufacture of the licensed products and relating to the actual manufacture thereof including plants, drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other data and information necessary or desirable to enable the assessee-company to manufacture the licensed products and to set up proper and efficient plants therefor. The agreement provided for payment of royalty by the assessee company to the English company at rates depending upon the turnover relating to the licensed products. The Income-tax Officer treated one-fourth of the payments of royalty made by the assessee-company to the foreign company as representing consideration for services provided by the English company of an enduring nature and hence disallowed the same as being capital in nature. This disallowance was confirmed by the Appellate Assistant Commissioner and the Tribunal. The disallowance was ultimately confirmed also by the High Court. The High Court emphasised that the agreement provided for assistance and information to be furnished by the English company for the purpose of. setting up a factory as also for the manufacture of the licensed products. The factory was regarded by the High Court as an asset of the assessee and the payment of royalty under the agreement which pertained to the information furnished and services rendered by the English company for setting up of the factory was held to be capital in nature. The observations pertaining to the nature of capital expenditure are to be found at page 61 of the report. What is material, however, is the fact implicit in the judgment, namely, that three-fourths of the total payments were accepted by the Income-tax Officer right from the inception as being revenue in character as made for know-how supplied and information given along with the specifications, manufacturing methods, blue-prints of production and testing equipment and other data to enable the assessee to manufacture the licensed products.

55. Mr. Joshi has taken us through the English decisions in which the principal question being considered pertained to the payment received by the supplier of know-how and whether the same would constitute a capital receipt or not. What we are concerned with is the reverse case and in view of the Supreme Court decision in Ciba's case : [1968]69ITR692(SC) and our High Court decision in Telco's case : [1980]123ITR538(Bom) , we find it unnecessary to discuss these decisions in depth.

56. It is unnecessary, in our opinion, to consider whether any formulae, plans, sketches and documents were handed over by the foreign collaborators to the representative. It would seem to us to make no difference either way. It would have made a difference had it been established that what the assessee acquired was not information or guidance acquired as a result of twenty-five years' experience by the foreign collaborators but the right to use a patented or secret process or a right to use the trade name or a registered design. On the record it is not established that the assessee has received any of these tangible advantages. The agreement also does not clearly indicate that the collaborators were to furnish any secret or patented process to the assessee or to allow the assessee to use the collaborators' trade name or a trade mark.

57. We were at one time considering whether the payment under the agreement by the three specified instalments or any part thereof could be held attributable to the services to be rendered by the foreign collaborators under Part Il of the agreement. However, we find clear provision in the agreement that for the obligations undertaken by the foreign collaborators under Part II no payment is to be made by the Indian company and indeed both parties have accepted this reading of the agreement by the Tribunal.

58. It has been repeatedly held in several decisions, both of the Supreme Court and of this court, that the mode of payment is totally irrelevant in determining the nature of the expenditure. It would not follow that expenditure has to be designated as revenue if it is related to the turnover of sales and would have to be designated as capital because it is to be paid in one lumpsum or in instalments aggregating to a specified figure.

59. It is undoubtedly true that in the instant case a new company was being formed to manufacture the product which was hitherto being manufactured by the foreign collaborators and imported by the Indian partners, that is, Gannon Dunkerley & Company Ltd. It is, however, to be remembered that in Telco's case : [1980]123ITR538(Bom) the agreement with Messrs Daimler Benz was for manufacturing trucks which were not at all being manufactured by Telco at the time of the collaboration agreement. Telco was up to the time of this collaboration only making locomotives and for its new proposed activity, namely, for the manufacture of trucks, it set up a new factory after obtaining know-how from its German collaborators, which collaboration was being considered by the High Court. In principle, it would seem to make no difference between a case where an existing company undertakes a totally new line of activity for which it has to establish a new factory, and a case where for manufacturing a new product a new company is constituted or formed. What we have to consider is whether the payment has been made for acquiring an asset of an enduring nature. If know-how has been acquired unrelated to secret or patented processes or the right to use the trade name or trade mark then the acquirer of that know-how - since that phrase was repeatedly used or emphasised would seem to acquire no asset of an enduring nature. If the know-how acquired relates to the setting up of the plant or machinery, then perhaps it may have to be held to be capital in nature, although we are not called upon to decide that question in the present reference. If the know-how acquired relates to the process of manufacturing, then the payment made for the same would have to be considered as revenue expenditure, since the acquirer does not obtain by the expenditure any asset of an enduring nature. It is only the acquisition of information, guidance or, to put it in more familiar terminology, 'payment for consultancy'. That the consultant gives certain diagrams, specifications, list of machinery and estimate of expenses, and explanations as to how the production process is to be carried on and what safeguards are necessary to be ensured for securing a quality product which would be accepted by the market would seem to make no difference.

60. On the broad principles enunciated earlier and following our earlier decision in Telco's case : [1980]123ITR538(Bom) with which principles we fully agree, we are of the opinion that the payments made by the assessee in the instant case were fully allowable as revenue expenditure and that the Tribunal was in error in holding that the same were capital expenditure and hence not allowable.

61. In view of all these decisions, it would appear to us to be unnecessary to answer question No. 2, although we have indicated our views thereon earlier. Accordingly the questions referred to us are answered as under :

Question No. 1 : Both the amounts were deductible in the respective assessment years as revenue expenditure.

Question No. 2 : In the light of the answer given to question No. 1, it is unnecessary to answer this question.

62. The Revenue must pay the costs of this reference to the assessee. Order accordingly.


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