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 two questions to this court :
'(1) Whether, on the facts and in the circumstances of the case, the disallowance of 2/3rds of foreign tour expenses of the director, Shri Vinod L. Doshi, on the plea that this expenditure was of the nature of capital expenditure, is justified in law ?
(2) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 16,029 paid to M/s. G. Perry & Sons Ltd., England, on the plea that this expenditure is of the nature of capital expenditure, is justified in law ?'
2. The facts leading to the reference are as follows :
The assessee has business of manufacturing oil engines, agricultural equipments and machine tools. The year of assessment is 1963-64, for which the previous year ended on 31st June, 1962. During the accounting period relevant to the assessment year, the assessee incurred an expenditure, of Rs. 23,308 towards the foreign tour of its technical director one V. L. Doshi. According to the minutes of the meeting of the board of directors held on 22nd August, 1961, the said visit to Europe, the U.K. and the U.S.A. as also the Damascus was for further discussions with the company's existing collaborators and the proposed collaborators. The said tour included the programme of negotiation with Scottish Machine, i.e., the assessee's technical collaborators, for the manufacture of their planning machines at the assessee's machine tool division at Chinchwad; with Schiess Aktiengesellschaft, Dusseldorf, Germany, the assessee's technical collaborators for the manufacture of Vertical Turrent Lathes, and with Strojimport, Czechoslovakia, who were the assessee's collaborators for manufacture of Slotting Machines. The tour also included a visit to the Draper Corporation of U.S.A. to finalise a technical collaboration for the manufacture of their Automatic Looms in their factory at Satara Road. He was also further to discuss collaboration agreement for the manufacture of PFAUTER Gear Hobbing Machines at their machine tool division at Chinchwad. It also further appears that the said technical director was to attend the International Levant Trade Fair, Bari, Italy, and to visit the exhibition at Brussels and a fair at Damascus. In the application made to the Reserve Bank of India for the release of foreign exchange for the said tour, it was stated that the visit was primarily planned to study the modern development made in the manufacture of machine tools, diesel engines and precision tools with a view to incorporate the same in the machine tools and diesel engines manufactured by the assessee at Chinchwad and Satara Road factories; to finalise the purchase of machinery required for the expansion of the said two factories; to finalise the technical collaboration agreement with M/s. Draper Corporation, U.S.A.; to study the various technicalities connected with the manufacture of automatic looms; to discuss collaboration agreement for the manufacture of PFAUTER gear hobbing machines; to explore the possibilities of export market for the products of the assessee and to find our possibilities of entering into technical collaboration with the foreign firms for the manufacture of new items of machine tools in the newly built machine tool division of the assessee. The ITO was of the opinion that according to the said application made to the Reserve Bank, the technical director was also to study modern developments in the manufacture of various products of the company and explore the possibilities of export markets for them. There was, therefore, according to him, a clear emphasis on negotiation for technical collaboration and purchase of machinery in the said tour. He, therefore, attributed 2/3rds of the total expenditure, viz Rs. 15,536, to the said aspects of the tour and held that the said sum of Rs. 15,536 was in the nature of capital expenditure, and, therefore, liable to be disallowed from the expenses claimed for the relevant year.
3. As regards the amount involved in the second question, the ITO noticed that during the relevant period to the assessment year, a sum of Rs. 16,029 was paid by the assessee to M/s. G. Perry & Sons, England, for downright payment for pattern shop collaboration. It was found by him that in the year 1962, the assessee had entered into an agreement with the said M/s. G. Perry & Sons for expending the existing pattern shop at Satara works as the said company had developed specialised processes and knowledge relating to the manufacture of plates. The said amount, which was equivalent to Pound 300, covering the payment to be made at the time of the agreement and the instalments payable under the agreement were not allowable as an expense on the ground that the said payment comprised mostly of the purchase price of the right to use the specialised processes and knowledge of the said company, and, therefore, was clearly an expenditure of a capital nature.
4. The assessee feeling aggrieved preferred an appeal to the AAC urging that the ITO had erred in disallowing the aforesaid two claims. The AAC held that it was admitted that no report was submitted by the said technical director to the assessee as to what exactly he had done during the said tour. There was also no evidence on record to show as to the activities carried out during the said tour. In the circumstances, he held that there was no need to interfere with the order of the ITO. As regards the payment of the sum of Rs. 16,029 made to M/s. G. Perry & Sons, the AAC held that it was rightly held that the substantial purpose of the agreement was for the erection of the pattern shop and plates and the introduction of new methods of manufacturing activities. He further held that the manner of the payment which was fixed under the agreement was in lump sum. This fact shows that the assessee had really purchased the capital asset in the form of 'know-how', they lay out of the shop and also valuable information relating to the purchase of machinery and plant. He, therefore, held that there was no need to interfere with the action taken by the ITO.
5. The Tribunal, in appeal, confirmed the finding of the lower authorities on both the points. With regard to the expenses on tour it was held that the same was primarily for the purposes of finalising the purchase of machinery required for the factory of the assessee, for technical collaboration agreement in respect of the new items of machinery to be manufactured by the assessee and for finding out possibilities of entering into technical collaboration with the foreign firms for the manufacture of new items of machine tools. According to the Tribunal, 'this agreement when finalised or fructified into benefit agreement of technical collaboration would have resulted in bringing into existence the very framework of profit-making apparatus and as such the expenditure in that connection was capital in nature.' With regard to the amount of Rs. 16,029 paid by the assessee to G. Perry & Sons Ltd., the Tribunal held that the case was not covered by CIT v. Ciba of India Ltd. : 69ITR692(SC) . because under the present agreement it was proposed to build a pattern shop in India for the assessee for the purpose of establishing an industry for the construction and manufacture of patterns and other articles manufactured by M/s. G. Perry & Sons Ltd. The know-how, etc., was made available to the assessee against a lump sum payment of Pound 300 payable by the assessee in the manner indicated in the agreement. The Tribunal held, therefore, that it was a case of outright sale of know-how supply of information, etc., for a lump sum payment. According to the Tribunal, the case was more appropriately covered by the decision in Mysore Kirloskar Ltd. v. CIT : 67ITR23(KAR) . In this view of the matter, the Tribunal held that the expenditure being of a capital nature, the assessee was not entitled to the allowance of the said amount as an expenditure for the relevant year. Thereafter, at the instance of the assessee, the Tribunal has referred the question to this court as stated at the outset, under s. 256(1) of the Act.
6. On the first question, viz., the expenditure incurred on the foreign tour of the technical director of the assessee, Shri Mehta, on behalf of the assessee, contended that the Tribunal had come to the conclusion that the expense incurred was in the nature of a capital expense because, according to the Tribunal, the tour was undertaken for finalising the purchase of the machinery required for the factory of the assessee and also for technical collaboration agreement in respect of the new items of machinery and further to find out possibilities of entering into technical collaboration with the foreign firms. Shri Mehta submitted that the reason given by the Tribunal for arriving at the said conclusion was not correct inasmuch as, on the facts and circumstances of the case, it cannot be said that the purpose of finalisation of the purchase of the machinery or technical collaboration or even the entering into agreement for technical collaboration added to the assets of the assessee. According to us, it is not necessary to go into the said question because the AAC has in terms recorded that admittedly the technical director had not submitted his report in respect of the said tour. There was also no other evidence on record to show as to what actual activities were carried on by the said technical director when he went on the said tour. This is, therefore, a case where there is no evidence on record to show as to the purpose for which the said expenses were actually incurred. In the circumstances, this was a case where the ITO would have been competent to disallow the whole of the said expenditure as a revenue expenditure. However, the ITO has only disallowed 2/3rds of the said expenses by apportioning the entire expenses into two parts, the 2/3rds being appropriated towards the cost of acquisition of capital asset or assets in the nature of capital asset and the remaining 1/3rd as revenue expenses. The AAC did not think it necessary to disturb the said finding of the ITO for the reasons reproduced hereinabove. In the circumstances, it was not necessary for the Tribunal to go into the question whether in the fact the said expenses could be said to have been incurred for the acquisition of a capital asset or not, since admittedly the assessee had not cared to place on record the evidence with regard to the purpose for which the expenses were actually incurred. Shri Mehta has, however, submitted that the resolution passed by the board of directors as well as the application made to the Reserve Bank of India showed the purpose for which the tour was undertaken, and, therefore, it should be held that the expenses which were incurred were also for the said purpose. We are not impressed by this argument. It is one thing to mention the purpose for which the tour is sought to be undertaken in documents which are prepared prior to the commencement of the tour. It is a different thing to attribute the expenses actually incurred to the said purpose or purposes. For, the purpose for which the tour is undertaken may not actually be achieved and the moneys may be spent for a different purpose. It is necessary, therefore, that the relevant evidence is placed on record to prove the purpose for which the expense is actually incurred. As pointed out by the AAC, there is admittedly no such evidence on record. In the circumstances, we are more than satisfied that the ITO could not be said to be wrong in disallowing 2/3rds of the said expense as revenue expenditure.
7. As regards the second question, Shri Joshi, the learned counsel appearing for the department, fairly conceded that in view of the decision of the Supreme Court in CIT v. Ciba of India Ltd. : 69ITR692(SC) , there is no scope for the department to argue that the know-how and the technical knowledge that may be obtained under the agreement as in the present case would constitute an asset of a capital nature, and inasmuch as the Tribunal has taken a contrary view, the Tribunal's finding will have to be reversed. In order to appreciate this, it will first be necessary to reproduce the relevant clauses of the agreement between the assessee and the said M/s. G. Perry & Sons Ltd. The vendor referred to in the following clauses is the said M/s. G. Perry & Sons Ltd. and the purchaser is the assessee. The same are as follows :
'(1) The vendor has hitherto exported to India patterns and other articles manufactured by it in the course of its trade of pattern makers but is apprehensive that that part of its trade may shortly cease owing to the policy of the Government of India to restrict imports to goods which cannot be produced within India.
'(2) The purchaser proposes to build in India a pattern shop (hereinafter referred to as 'the pattern shop') for the purpose of establishing an industry there for the construction and manufacture of (a) wood and metal patterns for all branches of engineering (hereinafter called 'patterns') and (b) pressure cast plates (hereinafter called 'plates').
(3) The vendor has for many years developed and now owns specialised processed and knowledge relating to the construction and manufacture of patterns and plates and to the types and use of machinery, plants, tools appliances and devices used in such construction and manufacture and has agreed to convey such processed and knowledge to the purchaser.
NOW THIS DEED WITNESSETH as follows : In consideration of the payment to the Vendor by the purchaser of the capital sum of three hundred pounds sterling (the receipt whereof the vendor hereby acknow-ledges) and of the delivery to the vendor by the purchaser of three bills of exchange drawn by the purchaser in favour of the vendor on National Provincial Bank Ltd., Leicester, each for a sum of nine hundred pounds, the first being payable on the 1st day of Feb., 1962 the second 2nd day of January, 1963, and the third on the 2nd day of January, 1964 the vendor undertakes to convey to the purchaser the said processes and knowledge and in particular will :
(A) make available to the purchaser all information and 'know-how' in the possession and knowledge of the vendor relating to the construction and manufacture of patterns and plates
(B) provide and make available to the purchaser a plan showing a suitable layout for the pattern shop
(C) advise the purchaser on all types of machinery and tools necessary for the establishment of the pattern shop and supply the purchaser with full information relating to the sources manufactures and suppliers of such machinery and tools
(D) advertise in the United Kingdom for a suitable pattern-maker to be employed by the purchaser in India and interview suitable applicants (if any) and submit its recommendations on such applicants to the purchaser
(E) for the period of four years from the date hereof supply the purchaser with all such drawings as may be in the vendor's opinion be necessary to show the layouts of moulding methods which they recommended should be used in the construction and manufacture of typical patterns and plates and advice the purchaser on all matters reasonably necessary and incidental for the construction of patterns and plates provided always that the vendor shall not be required to supply the purchaser with more than one drawing relating to each type of pattern or to prepare any estimate of cost of any pattern
(F) at times to be mutually agreed between the vendor and the purchaser given access to the vendor's works at Hall Lane in the City of Leicester to three employees of the purchaser for the respective periods hereinafter mentioned, namely, one technician for a period of three months and two pattern-makers for the period of nine months and :
(i) during such period of three months the vendor will take all such steps as may in the opinion of the vendor be reasonably necessary to instruct the said technician as a supervisor over the construction and manufacture of patterns and plates including instructions in -
(a) the laying out of patterns for moulding
(b) the design of prints, and
(c) the use of all types of foundry fixtures.
(ii) during such period of nine months the vendor will take such steps as may be in the opinion of the vendor be reasonably necessary to instruct the said two pattern-makers in the construction and manufacture of patterns and plates including instructions in -
(i) the use and maintenance of all types of pattern-making machinery and hand tools
(b) the construction and manufacture of good pattern castings in aluminium, and (c) pattern-making allowances.
The purchaser shall on the signing of this deed pay to the vendor the further sum of six hundred pounds sterling to be paid in the United Kingdom free from any deduction whatsoever such sum to be held by the vendor on behalf of and as agents for the purchaser and so that the vendor shall pay out of such sum to each of the purchasers said three employees by way of subsistence allowance a weekly sum during such period or periods as they shall respectively have access to the vendors said works Provided always and it is hereby agreed that nothing herein contained shall impose any responsibility on the vendor for the provision of subsistence for the purchasers said employees in excess of the said sum of six hundred pounds.
DURING the period of four years from the date hereof the purchaser shall treat as confidential all information and drawings which may be supplied by or on behalf of the vendor under or pursuant to this deed and shall ensure that all such information and drawings are used solely to assist in its construcation, manufacture and sales of patterns and plates.
THE purchaser shall be entitled to construct and manufacture patterns and plates not only for the use of the purchaser but for the sale thereof to any other person, firm or company.
THE purchaser may not without the previous consent in writing of the vendor assign this deed or the benefit thereof or any right thereunder'.
8. It is, therefore, apparent from the aforesaid clauses of the agreement that what the said M/s. G. Perry & Sons Ltd. agreed to give to the assessee was only the knowledge and information on technical know-how. They also further agreed to give from time to time such information as was necessary for the setting up of the said pattern shop. They further agreed to make arrangements for the training of the necessary personnel during the period of four years and it is in consideration of this supplying of the technical knowledge, rendering service and imparting training that the purchaser agreed to pay the said sum of money. The present case, therefore, is covered squarely by the ratio of the decision of the Supreme Court in Ciba's case : 69ITR692(SC) . The latest decision of this court on the point is CIT v. Tata Engineering & Locomotive Co. Ltd. : 123ITR538(Bom) , which has also taken note of the case of Ciba of India Ltd. It has been held by this court in this case that technical know-how cannot be called a tangible asset. Technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available, is such that it cannot be called a capital asset. Merely because an assessee, who has entered into a contract with regard to know-how, is entitled to use the know-how even after the agreement has expired, it does not mean that he has acquired a benefit of an enduring nature. Agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction of acquiring the necessary technical information with regard to the technique of production. Instead of employing persons having knowledge of technique and utilising their knowledge, technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected right under a registered patent. It may be stated that in that case, the assessee, Telco, entered into two agreements, one with Daimler Benz and another with Henricot. Under the first agreement, Daimler Benz were to provide drawing s and designs and full technical information required for the manufacture of automotive products. They were to provide training facilities for Indian personnel in their German plants. Telco could use the name and trade mark of Daimler Benz. The period of agreement was fifteen years but one of the parties could terminate the agreement by six months' notice in case of a serious breach of its terms and conditions. After the agreement came to an end, Telco was entitled to continue its manufacture but they could not use the trade was entitled to continue its manufacture but they could not us the trade name of Tata-Mercedez-Benz. Under the second agreement, Henricot agreed to give technical advice, information and assistance to Telco steel factory and provide facilities for training Indian personnel in their Belgian plant. The agreements provided for payment of royalty and a percentage of profits for the provision of know-how. Telco had to bear the expenditure of training it s personnel in the foreign factories. Telco claimed the amounts paid under the collaboration agreements and expenses incurred in training its personnel for the assessment year 1959-60 as deductible expenditure. It was held, firstly, that, on the facts, in essence, the agreements were for acquitting technical knowledge regarding methods of production and in the case of Daimler Benz for use of the trade name. The assessee had not acquired any asset or advantage of an enduring nature for the benefit of its business. The amounts paid for provision of know-how and licence to use the trade name were revenue expenditure. Secondly, it was held that the expenditure on training of personnel was incurred with a view to achieving maximum and efficient production, The expenditure incurred on such training was closely related to the profit-earning process and was allowable as revenue expenditure.
9. It will thus be apparent that the facts in the present case are squarely covered by those in the aforesaid Telco's case : 123ITR538(Bom) . In this view of the matter, there is no scope for the argument that the present expense would be a capital expense, and, therefore, will be disallowed. In the circumstances, the assessee is entitled to succeed on this point and the Tribunal's finding will have to be set aside.
10. The result, therefore, is that we answer the two questions referred to us as follows :
11. Answer to the first question is that the ITO was justified in disallowing the 2/3rds of the foreign tour expense of the technical director, Shri Vinod L. Doshi as the expenditure was in the nature of a capital expenditure.
12. The answer to the second question is that the ITO was not justified in treating the expense of Rs. 16,029 paid to M/s. G. Perry & Sons Ltd. England, as capital expenditure and in disallowing the same as such.
13. In view of the fact that both the assessee and the department succeed partly, there will be no order as to costs.