M.K. Srinivasa Iyengar, J.
1. These references are made by the Income-tax Appellate Tribunal, Bangalore Bench in relation to the assessment for the assessment years 1962-63, 1964-65, 1965-66. 1968-69, The assessee is common to all these cases. The questions relate to the payment of certain sums of money to foreign companies by the assessee under certain agreements entered into with them. One question that is being common for all these years is in regard to the payments made under an agreement with M/s. Alfred Herberts Ltd., U. K. (hereinafter referred to as Her' berts). The agreement with that company was on 1-8-1958. The payments made in the several assessment years were 1,000, 2,000, 1,000 and 3,250. In relation to the assessment year 1965-66. questions relate to payments made to a Company M/s. Landis Tool Company, U.S.A. (hereinafter referred to as Landis) of 12,000 dollars and to M/s. Monarch Machine Tools Company of U.S.A. of 10,000 dollars, also. The Tribunal held that the payments made to Herberts and Landis were capital in nature while the payment made to Monarch Machine Tools Co., was revenue in nature. The Appellate Assistant Commissioner had held that the payment made to Monarch Machine Tools Co., was revenue in nature and the Tribunal dismissed the appeal that had been filed by the Department against that order, The reference in regard to Monarch Machine Tools Co., is at the instance of the Commissioner while others are at the instance of the assessee.
2. In regard to an earlier assessment year namely 1960-61, a similar payment that had been made to Herberts Ltd., and been held to be capital in nature by the Tribunal and there was a reference to this Court at the instance of the assessee. This court held that the view taken by the Tribunal was correct. On behalf of the assessee the principles enunciated by the High Court of Bombay in Commr. of I.-T., Bombay v. CIBA Pharma Pvt, Ltd., : 57ITR428(Bom) had been relied upon. This Court, however, distinguished that case and was of the opinion that the payment was made in regard to a new product and the principle enunciated by the High Court of Bombay in Ciba Pharma Private Ltd., was not applicable, as the agreement in relation to that case was only for a period of 5 years and further it was concerned with a pharmaceutical industry and technical knowledge in that field would become outmoded within the course of months and years and therefore the ratio of that decision was not applicable to the facts of this case.
3. When the assessment for the years under consideration was taken up it was contended for the assessee that the full facts had not been placed in regard to the earlier assessment year and actually the assessee was manufacturing lathes and grinders almost from its inception in 1941 and the agreements were not in regard to any new business as such. Further certain material facts had not been properly appreciated. However, the Income-tax Officer did not accept the contention of the assessee and disallowed the expenditure claimed in this behalf as not permissible under Section 37 of the Income-tax Act, 1961. On appeal, however, the Appellate Assistant Commissioner reversed the finding of the Income-tax Officer so far as Monarch Machine Tools Company was concerned for the assessment year 1965-66, and the Tribunal upheld his view in this behalf on a further appeal by the Department. But, the Appellate Assistant Commissioner apparently following the observations made by this Court in Mysore Kirloskar Ltd. v. Commr. of I.-T., Mysore : 67ITR23(KAR) disallowed the claim for allowing these expenditures in relations to both Alfred Herberts Ltd. and Landis Tool Company. In the further appeals by the assessee, it was strenuously contended that this Court had proceeded on a wrong premise that new products were being manufactured and the agreements were in relation thereto and certain other aspects were also put forward as distinguishing the earlier case for the assessment year 1960-61. The Tribunal appears to have felt that these aspects which had not been considered in the earlier year should be enquired into and accordingly remanded the matter to the Appellate Assistant Commissioner to make a report in regard to these aspects raised on behalf of the assessee. The Appellate Assistant Commissioner examined witnesses and on the basis of the material placed before him sent a remand report dated 30-10-1971 in relation to the assessment years 1962-63, 1964-65 and 1965-66 which substantially supported the contentions on behalf of the assessee. So far as the assessment year 1968-69 was concerned, the appeal was kept pending before it awaiting remand report of the Appellate Assistant Commissioner as it was agreed between the parties that the report will hold good even for that assessment year.
4. However, as already stated, the Tribunal held that the payments to Alfred Herbert Limited and Landis Machine Tools Co., were capital in nature and the assessee was not entitled to allowance of those expenditures under Sec. 37 of the Income-tax Act.
5. The question that is common to all the years which relates to the payment to Alfred Herbert Limited is as follows:
'Whether, on the facts and in the circumstances of the case, and on the true interpretation of the agreement dated 1-8-1958 between Mysore Kirloskar Ltd., and Alfred Herberts Ltd., U. K. the Tribunal was right in law in holding that the payment of Rs. 13,400 ( 1,000) made under Clause 12 (i) of the agreement is of capital nature?'
The amounts for the other three years are 2,000, 1,000 and 3,250. The other two questions relating to the assessment year 1965-66 are as follows:--
'Whether, on the facts and in the circumstances of the case, and on the true interpretation of the agreement dated 31-12-1963 between Mysore Kirloskar Ltd., and Landis Tool Co., U. S. A. the Tribunal was right in holding that the payment of Rs. 57,450 (S. 12,000) made under Clause 3 of the agreement is of a capital nature?
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment of Rs. 47,825 ( 10,000) as per Clause 8 of the agreement dated 9-1-1964 between the assessee and the Monarch Machine Tools Co. of U.S.A. was allowable as revenue expenditure?'
It has been contended by Sri G. Saran-gan, the learned counsel for the assessee, that the facts and circumstances in the instant cases are indistinguishable from those in Ciba Pharma Private Ltd., decided by the Supreme Court on appeal by the Department from the judgment of the High Court of Bombay in Commr. of Income-tax, Bombay City I v. Ciba of India Ltd., : 69ITR692(SC) . It is argued by him that the decision of this Court in : 67ITR23(KAR) is based upon a wrong assumption, in that it proceeded on the basis that the agreement with Alfred Herbert Ltd., was in regard to a new product, whereas it is clear that the assessee was manufacturing lathes and grinders even earlier to 1958 and further that the two grounds on which Ciba's case was distinguished are irrelevant and so untenable.
6. The main plank for the Department has been the judgment of this Court reported in : 67ITR23(KAR) . We have been taken through the judgment of the High Court of Bombay as well as the judgment of the Supreme Court reported in : 69ITR692(SC) and also two decisions of the High Court of Calcutta reported in Commr. of Income-tax (Central), Calcutta v. Hindustan General Electrical Corporation Ltd. : 81ITR243(Cal) and in Commr. of Income-tax, West Bengal v. Associated Electrical Industries (India) Pvt. Ltd.. : 101ITR844(Cal) : 1976 Tax LR 203 and another decision of the High Court of Bombay in Accvickers Babcock Ltd. v. Commr. of Income-tax, Bombay : 103ITR321(Bom) . The Appellate Assistant Commissioner in his exhaustive report on remand noticed the several clauses in the three agreements in regard to the several provisions and conditions under which the technical knowledge or know-how was supplied to the assessee and the purpose of such supply and that they were similar. The Tribunal does not find anything contrary thereto. The only difference if at all it can be said to be so, is that in the preamble to the agreement with Monarch Machine Tools Company, the expression 'licence' is used which is not to be found in the other two agreements. Apart from this difference, the main purpose of the supply of know-how and the conditions subject to which it was to be used are identical. Therefore, it would be sufficient if we notice a few of the clauses in the agreement with Alfred Herbert, The preamble to the agreement specifies that Herbert who are manufacturers of machine tools, small tools and workshop equipment have agreed to grant to MK (Mysore Kirloskar) permission to manufacture certain machine tools and workshop equipment for sale in India.
7. Clause 1 states that Herbert hereby grant to MK permission to manufacture in India in accordance with Herbert's designs -- Capstan and Turret Lathes having spindle bores of one and one-half inches to four and one-quarter inches inclusive and spare and component parts for such lathes referred to collectively as products and the assessee had agreed to manufacture the products during continuance of the agreement and not to manufacture or sell machine tools or equipment of substantially similar designs or parts therefor covered by the products either for their n use or for supply to any one else. The assessee was permitted to complete the manufacture of not more than six Capstan Lathes at present in course of construction for use in the works of their companies only. The assessee agreed to undertake manufacture of these products only for their factory or factories situated in India and would not directly or indirectly manufacture in any other State of Territory. The agreement also provided that any further type of products might be agreed to be manufactured on such permission,
8. Clause 2 provided that notwithstanding anything herein contained Herbert shall be entitled to determine the agreement by notice in writing in the event of the assessee selling the products direct to customers in India or through any Distributors or Agents of whom Herbert did not approve,
9. Clause 3 (i) provided that in consideration of the payments mentioned in Clause 12 (i) Herbert would provide the assessee with manufacturing technique of the products from time to time and also furnish two complete sets of detailed and general arrangements drawings, material specifications and parts lists relating to the appropriate machines. Sub-clause (ii) made provision for supply of patterns, jigs fixtures and special tools as may be agreed upon at prices to be fixed.
10. Clause 5 provided that in the event of the agreement being terminated before the end of 15 years (fixed in the agreement) the assessee shall deliver to Herbert or otherwise as Herbert should direct without charge all drawing patterns, jigs fixtures and special tools which were supplied to the assessee by Herbert or produced or obtained by the assessee for manufacturing the products. The assessee agreed not to use any of the drawings, patterns, jigs fixtures and special tools for any other purpose except for work to Herbert de-signs.
11. Clause 7 inter alia made provision for termination of the agreement if the quality of the products manufactured did not come up to the standards of Herbert.
12. Under Clause 8 it was provided that all machines manufactured pursuant to the agreement had to be sold under the Trade Mark 'Herbert Kirloskar' which name had to be cast on all machines in a conspicuous space and had to be used in all quotations, specifications, orders, advertisements and description of the products. Under that clause it was specifically agreed that the assessee shall cease to use all the said Trade Marks or any of them in relation to any machine on the termination of the agreement.
13. Clause 11 made provision for communication of information on improvements in the manufacture design or use of the products which may come to the knowledge of the parties and licence for the user thereof free of any royalty.
14. Clause 15 provided that Herbert would not authorise or assist any other concern in India to manufacture the products and spares and component parts therefor so long as the manufacturing capacity of the assessee will ensure a reasonable supply to satisfy the demand for the same in India and it further provided that if the assessee was unable to meet such demands nothing would prevent Herbert from exporting into India any of the products manufactured by or to the order of Herbert outside India to the extent that from time to time may be permitted by the Government of India or which it could lawfully export without any such specific permission and whether or not the assessee was able to meet the demand.
15. Clause 18 provided that the assessee should observe strict secrecy as to all confidential and secret documents, information and 'know-how' supplied to it by Herbert and would not directly or indirectly use the know-how, experience and information acquired by it pursuant to the agreement so far as to assist any other person, firm or company to manufacture products similar to the products of any of them or otherwise to the detriment of Herbert.
16. Clause 21 of the agreement provided that, in the event of the agreement being terminated by efflux of the period fixed therein or by notice thereafter as provided is Clause 17, or in the event of its being terminated by efflux of time as to any other machine or machines (other than the Herbert No. 4 Capstan Lathe and Herbert No. 7B Combination Turret Lathe) nothing contained in the agreement shall thereafter in any manner whatsoever prevent the assessee from manufacturing and/or selling the products and it shall have full power, liberty and authority to manufacture and/or sell the same but without limiting the like rights of HERBERT or any other person authorised by it. It also provided that the assessee would be free to make such arrangements for the sale of the products as they may in their absolute discretion think fit, but in the event of the agreement being terminated before the expiration of the period of 15 years, the assessee would be entitled to complete and deliver the products in course of manufacture at the date of such termination and would be bound to make the payments to Herbert in respect thereof in accordance with Clause 12 (ii). It further provided that save as aforesaid the assessee should not during the remainder of the fixed term of fifteen years specified under Clause 17 directly be engaged concerned or interested in the manufacture or sale of the products.
17. Read as a whole, it is seen that under the agreement the assessee acquired merely the right to draw for the purpose of carrying on its business as a manufacturer of certain articles upon the technical knowledge of the foreign company for a limited period. The foreign company did not part with any of its assets absolutely for ever or for any limited period of time. It continued to have a right of user of its knowledge, even after the agreement had run its course: its right in this behalf was not lost. The assessee did not acquire any right to the user of the name 'HERBERT' in regard to the products even if the agreement had run its course. Actually it could not use that name and had to discontinue such user or associating that name with the products to be manufactured thereafter. In the words of the Supreme Court in Ciba's case. : 69ITR692(SC) 'by making that technical knowledge available the foreign company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business,'
18. From the terms of the agreement it is clear that (1) No (sic)cret process or technical knowledge was sold by the foreign company to the assessee, (2) the period of user was for 15 years; (3) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (4) the permission was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons though outside India; (5) the assessee was expressly prohibited from divulging the confidential information to third parties; (6) there was no transfer of fruits of research once for all; and (7) the foreign company which was continuously carrying on research had agreed to make it available to the assessee. These are the very factors which were taken into consideration by the Supreme Court in coming to the conclusion that the expenditure was of revenue nature and allowable under Section 10 (1) (xv) of the Indian Income-tax Act 1922, which is pari materia with Sec. 37 of the Income-tax Act 1961. Therefore, it is clear that the facts and circumstances in the instant case are indistinguishable from those in Ciba's case : 69ITR692(SC) , The Supreme Court in the course of its judgment referred to the decision of the House of Lords in Jeffrey v. Rolls Royce Ltd. (1965) 56 ITR 580 and Musker v. English Electric Co. (1964) 41 Tax Cas 556 and distinguished the decision in Evans Medical Supplies Ltd. v. Mori-arty (1959) 35 ITR 707. The principles enunciated by the Supreme Court in Ciba's case were applied by the High Court of Calcutta in Commr. of Income-tax (Central) Calcutta v. Hindustan General Electrical Corporation Ltd. : 81ITR243(Cal) . The learned Judges referred to the speech of Viscount rad-office in Musker v. English Electric Co. Ltd. and extracted the following observations:
'In my opinion, there are two considerations which govern cases of this kind and which go a long way towards destroying the force of the analogies by which the appellant's argument seeks to prove that the transactions under review were sales of fixed assets, and that receipts arising from them ought to be treated as receipts on capital account, One is that in reality no sale takes place. The appellant had after the transaction what it had before it. There is no property right in 'know-how' that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. Special knowledge or skill can indeed ripen into a form of property in the fields of commerce and industry, as in copyright, trademarks and designs and patents, and where such property is parted with for money what is received can be, but will not necessarily be. a receipt on capital account, But imparting 'know-how' for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil,'
This Court in its judgment in Mysore Kirloskar Ltd. v, Commr. of I.-T. Mysore : 67ITR23(KAR) referred to certain observations in Rolls Royce case (1965) 56 ITR 580 in the speech of Lord Radcliffe and in particular to the following:
'These considerations lead me to say that, although 'know-how' is properly de-scribed as fixed capital by way of analogy, it is the kind of intangible entity that can very easily change its category according to the use to which its owner himself decides to put it. I am not sure that it is too much to say that it is his use of it that determines the category. It is not like a single physical entity which must be employed for production or else broken up; it is more like a fluid in store which can be pumped down several channels.'
After referring to these observations, this Court proceeded to state:
'The above decision clearly establishes that 'know-how' primarily is a capital asset and the price received on its sale a capital receipt .....Applying the ratio of the above decision to the facts of the present case, it becomes evident that 'know-how' supplied by Herbert in the hands of the assesses is a capital asset, but the price realised for the sale of that 'know-how' by Herbert is a revenue income. From that conclusion, it follows that the 'know-how' acquired by the assessee during the assessment year is an acquisition of a capital asset and, consequently, the price paid for that acquisition is a capital expenditure,'
With great respect, in our opinion, the conclusion does not follow the observations of Lord Radcliffe's judgment referred to in the judgment earlier. The High Court of Calcutta in : 81ITR243(Cal) referred to the decision in : 67ITR23(KAR) but distinguished it. The High Court of Bombay in the case reported in : 103ITR321(Bom) (Acc-Vickers Babcock Ltd. v. Commr. of Income-tax, Bombay City) also referred to the decision of this Court in : 67ITR23(KAR) and distinguished it, preferring to follow the principles laid down by the Supreme Court in Ciba's case : 69ITR692(SC) .
19. Clause 12 provides for the payments and is as follows:--
'12 (i) On the execution of this agreement to pay 'HERBERT' in respect of the 'know-how' to be supplied here-under the sum of 1,000/- (One thousand pounds sterling) in respect of the Herbert No. 4 Capstan Lathes and 1,000 (One thousand pounds sterling) in respect of the Herbert No. 7B Combination Turret Lathes and upon agreeing to manufacture any further machine a further 1,000 (One thousand pounds sterling) in respect of each and every other type of machine manufactured hereun-der.
(ii) On MK's invoice price of all products manufactured and sold hereunder (including any goods completed after the date of termination as provided in Clause 37 hereof) MK will make a payment to HERBERT of 7 1/2% (seven and one half per cent) subject to any deduction for tax payable under Indian Law.
(iii) x x x x' The Department has recognised the payments under sub-clause (ii) as allowable revenue expenditure. It is plain that the nature and purpose of the payments under both the sub-clauses are the same; only the payments are in two stages. Merely on this account the character of the payments is not changed. They cannot be treated differently.
20. It is pertinent to point out that the relevant agreement considered by the High Court of Bombay provided for a lump sum payment though payable in instalments and the agreement itself was renewable for a period of five years at a time, if no notice terminating the agreement six months before the expiry of the period was given. Therefore, tha period of the agreement by itself is not conclusive or determinative of the nature of payment whether it is of revenue or capital nature. This Court in : 67ITR23(KAR) distinguished Ciba's case : 69ITR692(SC) on the two grounds viz.. that the period of agreement in Ciba's case was only for a period of five years, and that the knowledge acquired by research would be outmoded in months or years in pharmaceutical industry and could not therefore be said to be an asset of capital nature, Both these criteria, in our opinion, are not determinative. One of the assumptions implicit in and underlying the reasoning on which Ciba's case was distinguished is, that the pace of research in and development of the pharmaceutical industry is far more accentuated than what can be said to obtain in the machine tools industry. This assumption is not supportable. The pace of all round technology advancement being what it is, there is no warrant for an assumption that research in machine tool industry in which metallurgical science has a significant part to play is slower than in other fields of technology and science. There is no material to hold that the postulate that developments in pharmaceutical industries are susceptible to obsolescence does not hold good in other fields of technology including the field of modern machine tools design which is no less sophisticated. We are clearly of the opinion that the judgment of this Court reported in : 67ITR23(KAR) proceeded on wrong assumptions and is not in accordance with the principles enunciated by the Supreme Court in Ciba's case : 69ITR692(SC) and must be considered as not laying down the correct law. We accordingly overrule it.
21. In the result, we hold that in so far as the payment to M/s. Monarch Machine Tools Co. Ltd. is concerned, the Tribunal was right in holding that it was allowable revenue expenditure. In regard to the payments made to M/s. Alfred Herbert Co. Ltd. and M/s. Land-is Tool Co., the Tribunal was in error in holding that they were of a capital nature. We hold that the payments mader to these companies in the relevant years under consideration were of a revenue nature and allowable under Section 37 of the Income-tax Act, 1961, The questions are answered accordingly. Parties shall, however, bear their own costs.
22. Answer accordingly.