1. By this reference made under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the Tribunal has referred the following question for the opinion of this court;
'Whether, on the facts and in the circumstance of the case, in computing the income of the assessee a moiety of the sum of RS. 35,984 was rightly held to be deductible ?'
2. The question relates to the assessment year 1966-67, the previous year of which ended on the June 30, 1965. The assessee is a company established in 1963, and in the beginning it carried on merchanting business in automotive lubrication equipment and supplies. On the July 1, 1964, the assessee entered in to a collaboration agreement with a U.S.A. company called Stewart Warner Corporation (hereinafter referred to as 'Stewart') which is well established in the business of designing, manufacturing and selling automotive lubrication equipment and supplies. The object of the agreement was to enable the assessee to manufacture the said equipment and supplies in India. In the agreement Stewart is referred to as the licensee or and the assessee as the licensee. Under cl. 1 of the agreement Stewart granted to the assessee an exclusive licence for all pertinent patents and technical information to manufacture, use and sell in India all automotive lubrication equipment manufactured, designed or developed by Stewart as specified in their catalogues in forms 38-55 and 38-87 and in any new catalogues which may supersede or supplement the said catalogues. The assessee has also the right to have the products made or fabricated in India by third parties, and could also purchase the products from Stewart for sale in India. Clause 2 authorised the export of the products to certain nearby markets under certain conditions. The assessee was also given under cl. 3(a) of the agreement the right to use the trade mark and trade names of Stewart on certain conditions. Clause 3(d) of the agreement prohibited the registration of the trade marks and trade names included under the agreement in any form or in any combination whatsoever in India or in any other country, and it was provided that the owner-ship of the trade marks vested in Stewart. The agreement was to remain in force for a period of ten calendar years, with no provision for general thereof. Clause 3(a) of the agreement stated as follows :
'3(a) The licensee upon termination of this agreement to discontinues and cease the use of each of the S-W trade marks and trade names in any form or manner whatsoever, and further agrees, upon request, to execute and deliver at the licensee's cost whatever document or documents may be necessary to recovery to the licensee or, its successors and assigns, any and all right acquired or held by the licensee into or under the said trade marks or trade names by virtue of its use thereof.'
3. Clause 5 of the agreement provided that Stewart had the right, during the continuance of the agreement to solicit and make sales in the U.S.A. or in India or elsewhere of the products covered by the agreement, to certain types of customers without incurring any liability whatsoever to the assessee except that of payment and commission at the discretion of Stewart. Under cl. 6 Stewart was required to advise the assessee during the period of the agreement of all important improvement in respect of the products covered by the agreement, and cl. 7 required that the assessee would not enter into any similar licence or technical assistance agreement with any other person engaged in the manufacture of similar products.
4. The agreement also provided for services to be render by Stewart to the assessee. Under cl. 9 Stewart was to make available to the assessee the technical information and know-how concerning techniques, facilities and processes used by Stewart for the purpose of manufacturing the products in India. Clause 10 dealt with the assistance for selection, procurement and installation of machinery and plant. Stewart was also required to supply to the assessee with copies of drawings of the products as well as of the machinery equipment and tools to manufacture the products. Clause 12 further provided for the assistance to be given for manufacture by deputing Stewart's engineers to India or by training the assessee's staff in the U.S.A. the expenditure for the same being met by the assessee.
5. Clause 14 of the agreement then provided for an initial payment to Stewart by the assessee, and cl. 15(a) provided for the recurring royalty payment. The said cls. 14 and 15(a), so far as they are material, are as follows :
'14. Immediately after the execution of this agreement by both the the parties the licensee shall pay to the licensee or in United States dollars an initial fee of seven thousand five hundred dollars ($7,500), which will not be subject to Indian taxes, for the services herein provided.
15(a) As royalty for the exclusive licence granted by the licensee or under this agreement and for the use of its Indian patents and applications there for, trade marks and trade names, the licensee agrees to pay to the licensee or in United States dollars within sixty (60) days following each quarter annual period ending on the March 1, June, September and December of each year, a royalty of five per cent. (5%) on licensee's net factory sales of S-W products and of any other substitute lubrication equipment and supplies, including, parts and components thereof, an auxiliary equipment reduced by the costs C.I.F. Indian ports of imported components purchased from licenser at licenser's list prices less standard export discounts.'
6. Clause 19 of the agreement then provided that the assessee would recognize and acknowledge the validity of the patents licensed under the agreements, and excepts as otherwise provided none of the invention or patents were to be applied or used by the assessee without the prior consent of Stewart. The agreement furthers provided an option to Stewart. The agreement further provided an option to Stewart to purchase 51% of the equity interests in the assessee's business upon termination of the agreement so for as the business related to the manufacture and sale of Stewart's products.
7. On the basis of this agreement, in the assessment for the relevant years, the assessee claimed the payment of 7,500 dollars(Rs. 35,984) as a deduction on the ground that the said payment was made as follow : Rs.
1. For services connected with plant and machinery 17,992 2. Patents and trade marks 8,996 3. Licence to manufacture and technical assistance 8,996
8. The assessee claimed that the aforesaid two sums of Rs. 8,996 (each) were expenses on revenue account, though in its books the sums spent on patents and trade marks had been capitalised. The ITO after considering the matter took the view that in the first place the basis on which the sums were allotted as above for different purpose was not explained by the assessee. He further held that the entire said expenditure was incurred to obtain benefits of an enduring nature to the assessee, inasmuch as it was an outlay for purchase of technical know-how in the shape of manufacturing designs and patents. He also held that no part of the sum could be attributed specifically to the acquisition of plant and machinery and, therefore, the sum of Rs. 17,992 apportioned of the purpose would not be eligible for deprecation as forming part of the cost of the plant and machinery.
9. Against this finding of the ITO, the assessee in its appeal contended before the AAC that the agreement was merely for utilisation of the technical know-how for a limited period of then years, after which the technical data furnished and designs and drawing supplied were to be returned to the licenser, Stewart. Further, during the period of the agreement, the assessee was required to observe complete secrecy of the processes of manufacture, and in this connection reliance was placed on behalf of the assessee on a decision of this court in CIT v. Ciba Pharma Private Ltd. : 57ITR428(Bom) . It was also contended on behalf of the assessee that the observation made by the ITO that the expenditure of Rs. 17,992 could not be deducted as part of the depreciation cost of the plant and machinery was unwarranted as there was no claim for depreciation made before the officer for the year in question. The AAC held that the decision of this court in Ciba's case : 57ITR428(Bom) was not helpful to the assessee inasmuch as, in the present case, the agreement fell into two parts, one for the equation of the technical know-how, and the different payments were prescribed for the said two different purposes for which the agreement was entered into. According to the AAC, while the payment made for the use of the trade marks and patents on a royalty basis would be a revenue payment, the payment for acquisition of the technical know-how by way of lump sum fee would be a capital payment. He also held that the exclusive right to manufacture and sell Stewart's products did not confine itself to India but the said right was available also to nearby markets and that the rights granted for the manufacture and sale in India and for export to nearby markets were invaluable rights and the payment made under cl. 14 of the agreement was referable to those rights. According to the AAC, the royalty payment under cl. 15(a) reproduced above was for the rights granted to the assessee in cl. 3 and the clauses following, and since separate payments had been prescribed for two sets of advantages, the lump sum initial payment did not qualify for deduction. He also held that the assessee itself had treated 50%of the lump sum payment as referable to plant and machinery and even out of the remaining 50% a moiety had been capitalized in the assessee's books. For all these reasons, he concluded that no portion of the sum was eligible for deduction as revenue expenditure.
9. In the appeal before the Tribunal, it was contended on behalf of the assessee that a moiety of the expenditure of Rs. 35,984 should be allocated towards the cost of installing plant and machinery and the balance should be allowed as revenue expenditure as claimed before the ITO. It was submitted that under the agreement Stewart supplied know-how to the assessee to manufacture and also undertook to keep the assessee informed, during the period of the agreement, of the fruits of any further research carried out by them. There were also other services to be rendered like training of employees, deputation of their staff on India and rendering all other assistance for manufacture of the products and of bringing them up to the required standard. It was also pointed out that the agreement was not for an indefinite period but was restricted for ten years with no provision for its renewal. It was also the assessee's case that it would have been justified in claiming the entire expenditure as revenue deduction but since some services were rendered in connection with selection, procurement and installation of the machinery, tools and equipment even if only a proportion of the expenditure is allowed as revenue the assessee would be satisfied. As against this, the case of the department was that the initial payment under cl. 14 of the agreement was not related to the purchase of machinery or for user of trade marks. A running royalty was paid for the granting of licence and user of and user of patents and trade marks and the initial payment was for the acquisition of know-how which was a capital asset.
10. The Tribunal, considering the rival submissions, rejected the argument advanced on behalf of the department that the assessee had made an out-right purchase of know-how in the present case. The Tribunal therefore, held that the present case was covered by Ciba's case : 57ITR428(Bom) in as much as the assessee had only access to the technical knowledge and experience which Stewart commanded and the assessee was a mere licensee, for a limited period, of the technical knowledge of the U.S.A. company with the right to use the patents and trade marks of that company. The Tribunal also held that as in Ciba's case : 57ITR428(Bom) , the assessee acquired under the agreement only the right to draw, for the purpose of its manufacturing business, upon the technical knowledge of the foreign company, and that too for a limited period. Hence, the mode of payment, viz., partly as lump sum and partly as lump sum and partly as recurring royalty, had no significance, since no capital assets as such were acquired. The Tribunal, how ever, held that a portion of the payment under cl. 14 was referable to the services under cl. 10 of the agreement, viz., the assistance in the selection, procurement and installation of machinery tools and equipment. The portion was, therefore, disallowable being capital expenditure, and it was reasonable to allocate 50% of the payment as pertaining to the services envisaged in cl. 10 of the agreement as claimed by the assessee. Hence, the balance of the payment was held to be revenue expenditure, setting aside the finding go the ACC that the rights and claims under cls. 1 and 2 created a capital asset. In this view of the matter, the Tribunal held against the department, and thereafter on the application of the revenue referred the aforesaid question as a question of law for the opinion of this court under s. 256(1) of the Act as stated earlier.
11. We have reproduced hereinabove elaborately the relevant clauses of the agreement between the foreign company, Stewart, and the assessee in the matter of various services to be rendered by them as well as for the impairing of their technical know-how and information for the purposes of the production and sale of the automotive lubrication equipment and supplies. These various clauses, according to us, 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. The services and information given by them neither created any capital asset 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 utilize the service of the foreign company of the purpose stated in the agreement, including the services of their personnel for trading the assessee's staff for the purpose. The advantage was further limited to a period of ten years without the option for renewal of the agreement. The agreement was essentially for acquiring technical know-how and assistance for the manufacture and sale of the products in question. Further the licence to use the patents and trade marks during the duration of the agreement was only consequential and did not also create and capital asset in favour of the assessee. No rights of any permanent nature were assigned to the assessee under the said agreement was do not see any distinction on facts between the agreement considered by this court in Ciba's case : 57ITR428(Bom) and the facts of the present case. It may be pertinent to point out in this connection that Ciba case : 57ITR428(Bom) decided by this court was later on affirmed by the Supreme court in its decision in CIT v. Ciba of India Ltd. : 69ITR692(SC) . This court has taken a similar view of such agreements consistently so far, the latest decision on the point being CIT v. Tata Engineering & Locomotive Co. P. Ltd. : 123ITR538(Bom) . In this case also more or less similar facts fell for consideration, and there the view taken was that the expenses incurred for similar information and services were properly allocable as expenses on revenue account inasmuch as under such agreements no capital asset was acquired or could be deemed to have been acquired by the beneficiary company, such as the assessee in the present case. For the same reasons, we are of the view that the view taken by the Tribunal is correct and requires no modification by this court.
12. In the result, we answer the question referred to us in the affirmative and in favour of the assessee.
13. The revenue to pay the costs of the assessee.