M.S. Shah, J.
1. At the instance of the Revenue, the following questions of law have been referred to this Court by Tribunal, Ahmedabad Bench B, arising from its order dt. 20th Aug., 1982, in ITA No. 1147/Ahd/80, in respect of the asst. yr. 1977-78 :
' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the exchange difference of Rs. 1,32,993 was allowable as revenue expenditure
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the claim of the assessee for Rs. 16,237 for the royalty paid on trade mark was allowable as revenue expenditure
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the claim of the assessee for interest under s. 220(2) of the Act as revenue expenditure ?'
2. As far as question No. 1 is concerned, the relevant facts found by the Tribunal are that the assessee purchased three items of machinery in the years 1965 and 1966 for a total amount of Rs. 7,26,394 D. M. The liability of the purchase price was discharged by obtaining a foreign exchange loan from the ICICI. The payment was to be made in foreign currency only and the repayment schedule was spread over a period of 11 years, two instalments being paid in each year. In the books of accounts the loan was maintained in rupees at the exchange rate on the date when the machinery was purchased. On 1st Jan., 1976, the balance amount of loan payable to ICICI on account of these machineries was Rs. 2,17,252 equivalent to DM 93,643. On 30th June, 1976, an instalment of DM 45,866 was paid for which the payment in rupees amounted to 1,68,007 as against which the balance provided for in the books at the original exchange rate was Rs. 1,06,409. This involved a payment of Rs. 61,598 extra towards the instalment. Likewise, on the second instalment paid on 31st Dec., 1976, the assessee had to pay a sum of Rs. 72,563 extra on account of foreign exchange fluctuations. In respect of the payments earlier made there being a sum of Rs. 1,167 owing to the assessee on account of the same fluctuation the total amount payable by the assessee in respect of the two instalments due in the year came to Rs. 1,32,992. It was this amount which was claimed by the assessee as revenue expenditure.
3. At the hearing of the present reference, the learned counsel for the respondent assessee was fair enough the concede that this Court in the case of New India Industries Ltd. vs . CIT : 203ITR933(Guj) and the Bombay High Court in the case of CIT vs . Hindustan Aluminium Corpn. Ltd. : 207ITR670(Bom) have already held that in view of the provisions of s. 43A of the IT Act, 1961 (hereinafter referred to as 'the Act'), any payments made towards increase in liability of the assessee while repaying the loan obtained for the purchase of capital assets due to fluctuation in foreign exchange rates, is in the nature of capital expenditure. In view of the above, we have no hesitation in holding that the Tribunal was not right in coming to the conclusion that the exchange difference of Rs. 1,32,993 was allowable as revenue expenditure. Accordingly, our answer to question No. 1 is in the negative, i.e., in favour of the Revenue and against the assessee.
4. As far as question No. 2 is concerned, the same is regarding royalty paid by the assessee for the user of trade Mark 'Tebilized'. The facts regarding the said question as found by the Tribunal are that the assessee had entered into an agreement dt. 30th Sept., 1978, with M/s Mettur Beardsell Ltd. for user of the trade mark 'Tebilized'. The assessee's claim for a sum of Rs. 16,237 being royalty for the use of the trade mark 'Tebilized' as revenue expenditure was disallowed by the ITO on the ground that the above trade mark belonged to Tootal, an English company who had an agreement with its Indian agency called Mattur Beardsell Ltd. The ITO proceeded on the basis that Mettur Beardsell Ltd. itself was not the owner of the above trade mark and that the Govt. had withdrawn permission for the Tootal Co. to operate from 1972 and that, Mettur Beardsell Limited cannot be said to be rendering any services to the assessee-company. On appeal, the CIT(A) allowed the claim of the assessee. While dismissing the appeal preferred by the Department, the Tribunal found that the assessee had entered into two different agreements with Mettur Beardsell one for the supply of technical knowhow and service agreement and the other for the use of trade mark 'Tebilized'. Both these agreements were dt. 30th Sept., 1972. The Tribunal further found that the supply of knowhow agreement dt. 30th Sept., 1972, was supplementary to the main agreement dt. 29th Dec., 1970, entered into between the assessee-company, Mettur Beardsell Ltd. and Arvind Mills Ltd. The Tribunal further observed that the assessee was using the trade mark 'Tebilized' representing a particular process and had also to stamp the trade mark on the cloth produced, and that the payment of royalty for the use of said trade mark by the assessee-company was at the rate of a particular amount per square metre and that the same clearly indicated that the expenditure was connected with the production. The Tribunal held that the payment of royalty was clearly under the agreement between the assessee and Mettur Beardsell Ltd., since not merely the ownership of a trade mark but even the right to use the said trade mark could be parted with for a consideration. The Tribunal further held that the two companies in question were distinct entities dealing at arm's length and it certainly could not be urged that the payment was made for any consideration other than business. The Tribunal, therefore, held in favour of the assessee that the payment of royalty in question was a revenue expenditure.
5. At the hearing of the present reference, Mrs. B. J. Shelat, learned counsel appearing for the Department, vehemently contended that the benefit of using the trade mark was conferred on the assessee-company for a number of years and, therefore, an asset of enduring value and duration was created in favour of the assessee-company, hence the payment of royalty for purchases of the said trade mark must be held to be a capital expenditure. Mr. Shelat also relied on the judgment of the Hon'ble Supreme Court in the case of Scientific Engg. House Pvt. Ltd. vs . CIT : 157ITR86(SC) .
6. Mr. J. P. Shah, the learned counsel for the assessee, on the other hand pointed out that the agreement in question is similar to the agreement dt. 30th Sept., 1972, between Mettur Beardsell Ltd. and Raipur ., Ahmedabad (which is the subject-matter of IT Ref. No. 174 of 1983 in respect of the asst. yr. 1977-78; at page No. 24 of the paper book in the said IT Ref. No. 174 of 1983). The said agreement shows that the agreement was only for a period of 8 years, i.e., between 1st Oct., 1972, and 31st Dec., 1980, and that it was terminable merely on six months prior notice which may be given by either party. Mr. Shah further pointed out that the agreement did not confer any right on Ashok Mills Ltd. (assessee in IT Ref. No. 200/1983) or on Raipur . (assessee in IT Ref. No. 174 of 1983) for exclusive user of the trade mark 'Tebilized', nor did any of the agreements dt. 30th Sept., 1972, transfer any ownership right in any patent or trade mark in favour of any of the above assessee-companies, but the technical knowhow was for a process employed merely to give anti-crease property to cloth and the use of the trade mark was to enhance the marketability of the cloth which was otherwise also being manufactured by the above two assessee-companies. It was, therefore, contended on behalf of the assessees that in case of neither of the assessees capital asset was brought into existence nor was any right of permanent character conferred on the assessee. The learned counsel also pressed into service a series of judgments of the apex Court in this behalf.
7. Having considered the material on record and the rival submissions, in our opinion, there is considerable force in the submissions of the learned counsel for the assessees. In a catena of decisions, their Lordships of the Hon'ble Supreme Court have held that while determining the question, whether a particular item of expenditure can be considered as revenue expenditure or capital expenditure, what is relevant is the purpose of the outlet and its intended object and effect, considered in commonsense way having regard to the business realities and that in a given case the test of enduring benefit might break down.
8. In the case of CIT vs . Ciba of India Ltd. : 69ITR692(SC) , the Hon'ble Supreme Court was concerned with an agreement under which the assessee acquired merely a right to draw, for the purpose of carrying its business activities as the manufacturer, and dealer of the pharmaceuticals, upon the technical knowledge of the Swiss company for a limited period of 5 years. Even for that limited duration, the assessee did not, under the said agreement, become entitled exclusively to the patents and trade mark of the Swiss company. The assessee was on that account merely licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and the trade marks of that company. It was held that under the above agreement the assessee did not acquire any asset of advantage of an enduring nature for the benefit of its business, and, therefore, the expenditure incurred for acquiring the benefit under the agreement was held to be a revenue expenditure.
9. Thereafter, in the case of Empire Jute Co. Ltd. vs . CIT : 124ITR1(SC) , the Hon'ble Supreme Court laid down as under : 'What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.' In the above case, their Lordships further quoted with approval the following observations made in the case of Hallstorm's Property Ltd. vs. Federal Commr. of Taxation 72 CLR 634 :
'What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'
10. It is clear from the facts of the present case also that the assessee was already carrying on an existing business of manufacturing cloth. The process employed under the trade name 'Tebilized' conferred anti-crease property on the cloth. The assessee thus entered into the above agreements dt. 30th Sept., 1972 for the purpose of enabling the assessee to carry on its business more efficiently and more profitably, while leaving the fixed capital untouched. The agreements permitting the assessee to make use of the particular process and the user of the trade mark 'Tebilized' did not create any asset nor did they confer any right of a permanent nature in favour of the assessee. Apart from the fact that the agreements in the present case do not confer any right for exclusive user, the duration of the agreement is for only eight years, that too terminable by six months prior notice. The agreements merely enable the assessee to confer on the product the advantages of better quality and marketability. The payment of royalty in the instant case was, therefore, clearly in the course of profit earning process and not for acquisition of an asset or right of a permanent character.
11. In the case of CIT vs . British India Corpn. Ltd. : 165ITR51(SC) , the Hon'ble Supreme Court was concerned with the agreement for use of trade marks and obtaining know-how on specialised tanning processes for a period of 7 years. The assessee was to appoint distributors for that period for selling of industrial leather manufactured by it. After considering the nature of agreement and the facts of the case, the Hon'ble Supreme Court opined that the payment made under the said agreement for user of trade marks and for obtaining the knowhow and specialised tanning processes for a period of seven years was a revenue expenditure.
12. In the case of Alembic Chemical Works Co. Ltd. vs . CIT : 177ITR377(SC) , the assessee-company was an existing pharmaceutical firm manufacturing penicillin. On 8th June, 1961, the assessee was granted a licence for the manufacture of penicillin and in the year 1963 with a view to increasing the yield of penicillin, the assessee negotiated with M/s Meiji Seika Kaisha Ltd. ('Meiji' for short). Under the agreement dt. 9th Oct., 1963, between the said two parties, Meiji agreed to supply to the assessee requisite know how as to achieve substantially higher levels of performance or production. In the assessment proceedings for the asst. yr. 1964-65, the assessee claimed that the amount of 50,000 U. S. Dollars (then equivalent to Rs. 2,39,625) paid by the assessee to Meiji as 'once for all' payment was revenue expenditure. The ITO considering it to be expenditure for acquisition of asset or advantage of the enduring benefit held it to be capital expenditure. The AAC, the Tribunal, Ahmedabad, as well as this Court confirmed the view of the ITO. In the appeal preferred by the assessee before the Hon'ble Supreme Court, it was held that the improvisation in the process and technology employed by the assessee-company was supplementary to the existing business and that the agreement pertained to a product already in the line of the assessee's established business and not to a new product and that clearly indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enterprise. Their Lordships were pleased to make following significant observations, which were, of course, in the context of medical science, but which are as much applicable to other branches of science and technology :
'It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to have the element of the requisite degree of durability and endurability to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holding an outlay such as this as capital.'
13. The Calcutta High Court in the case of CIT vs . Avery India Ltd. : 207ITR813(Cal) and Andhra Pradesh High Court in the case of Coromandel Fertilizers Ltd. vs . CIT : 148ITR546(AP) have also taken the above view that having regard to the rapid pace of scientific and technical development in the global economic scene it is unrealistic to say that technical know-how is an advantage of enduring nature.
14. From the facts of the present case also, it is clear that the assessee-company which was in the existing business of manufacturing cloth had merely entered into agreements for improving the quality of its existing product namely cloth for yielding it anti-crease property by making cloth undergo the particular process and then applying the trade mark 'Tebilized' on every running metre of the cloth produced and the assessee-company was paying Mettur Beardsell Ltd. consideration for the use of the trade mark on the basis of per sq. metre of the cloth produced. In our opinion, therefore, the amount of royalty paid by the assessee-company to Mettur Beardsell Ltd. was for an improvement in the operations of its existing business and its efficiency and profitability and must, therefore, be held to be in the nature of revenue expenditure, and therefore, the same is required to be allowed to be deducted as revenue expenditure.
15. Of course, Mr. Shelat, the learned counsel for the assessee heavily relied on the judgment of the Hon'ble Court in the case of Scientific Engg. House Pvt. Ltd. vs. CIT (supra) contending that their Lordships have held the payment of Rs. 1,60,000 to a foreign collaborator for technical know how in that case as a capital expenditure. However, analysis of the said decision clearly reveals that the controversy in the said case was whether drawings, designs, charts, plans, process-data and other literature purchased by the assessee for commencing its manufacturing activities for two new scientific instruments constituted a depreciable asset or a non-depreciable asset (page 92, 95 and 97 of 157 ITR). It was in the context of the said controversy that the apex Court held that the payment was made for purchase of a depreciable asset. In fact, the counsel for the assessee in that case before commencing his arguments had accepted the High Court's view that the whole of the expenditure in question was of a capital nature (last para on page No. 91 of 157 ITR). The facts of the present case on the other hand clearly show that the assessee, who was an existing manufacturer of cloth, had entered into agreements dt. 30th Sept., 1972, clearly for the purpose of conferring the advantages of better quality and marketability on the existing product. Hence, the present case is squarely covered by the ratio in the case of Alembic Chemical Works (supra) and not by the ratio in the case of Scientific Engineering House Pvt. Ltd. (supra). In our opinion, therefore, after applying the test laiddown by the apex Court in various decisions, the irresistible conclusion is that the expenditure incurred by the assessee in the present case for the user of trade mark 'Tebilized' was a revenue expenditure. Our answer to question No. 2 is accordingly in the affirmative, i.e., in favour of the assessee-company and against the Revenue.
16. As far as question No. 3 regarding deductibility of interest paid under s. 220(2) of the IT Act is concerned, the learned counsel for the assessee fairly stated that the issue was practically covered by the decision of this Court in case of Saurashtra Cement & Chemical Industries Ltd. vs . CIT : 213ITR523(Guj) wherein this Court relied upon and followed the view of the Hon'ble Supreme Court in the case of Smt. Padmavati Jaikrishna vs . Addl. CIT : 166ITR176(SC) . It has been held that in view of difference in the nature of income-tax, which is a direct tax on the one hand, and sales-tax and excise duty which are indirect taxes on commodities as such on the other hand, the principle applicable to deductibility of interest for late payment of sales-tax or excise duty was not applicable to the claim for deduction of interest for late payment of income-tax. In our view, therefore, the assessee is not entitled to claim interest paid under s. 220(2) of the Act as a revenue expenditure. In this view of the matter, our answer to question No. 3 is in the negative, i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs.