Rajesh Balia, J.
1. These four references have been submitted by the Tribunal in respect of the same assessee raising identical issues arising out of the same facts relating to asst. yrs. 1967-68, 1968-69, 1969-70 and 1970-71.
2. The relevant facts appearing from the statement of the case in IT Ref. No. 336 of 1982 are that the assessee had entered into an agreement with J. R. Geigy Basle w.e.f. 1st Jan., 1956 onwards and was getting assistance in the manufacture of wide range of products listed in the agreement as well as vide supplementary agreement from time to time. Tinopal was one such product the assessee was licensed to manufacture under the provisions of this agreement. In the manufacture of Tinopal cyanuric chloride is one of the raw materials and was being consumed in large quantities. Until the assessee decided to manufacture the said raw material by himself, the same was bought from the market. The assessee entered in another supplementary agreement on 14th July, 1965 for manufacturing cyanuric chloride. Under this agreement the assessee had to pay certain amounts in five equal instalments to J. R. Geigy for acquiring technical know-how. The first instalment was payable on the commission of the cyanuric plant on 31st March, 1966. The second instalment was payable in the financial year 1966-67 and each subsequent instalment was payable in the following financial years. Towards payment of these instalments in each year, which was paid in foreign currency and its rupee value was claimed as a deduction for the asst. yr. 1967-68, and subsequent assessment years. The first payment in respect of which was made in financial year 1966-67. The rupee value of these instalments was Rs. 1,51,500. The assessee claimed deduction thereof as business expenditure of manufacturing cyanuric chloride commencing from financial year 1966-67 as a revenue expenditure. The ITO rejected the contention of the assessee by taking the view that because the payments were made for getting sub-licence to manufacture cyanuric chloride for a period not less than 10 years, it could not be claimed as a revenue expenditure. The CIT(A) held that the payment in question represented normal revenue expenditure which should have been allowed as a deduction by the ITO. The Tribunal confirmed the order. It held that the agreement dt. 14th July, 1965 was entered into for manufacture of raw material for the purpose of production of Tinopal. It is also held that on termination of agreement there would be no useful knowledge left which would help the assessee in manufacturing cyanuric chloride. It also noticed that under clause 22 of agreement dt. 1st Jan., 1956 the assessee had to refrain from using any of the Geigy's patents.
3. In the first instance the Tribunal having rejected the application under s. 256(1) of the IT Act submitted the question of law arising out of its order, the Revenue applied under s. 256(2) before this Court and as per the direction contained in the order dt. 22nd Sept., 1981 in IT Ref. No. 233 of 1981 the following question of law has been referred to this Court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal has been right in law in holding that the amount of Rs. 1,51,500 being the instalment payable by the assessee to J. R. Geigy Basle under the agreement dt. 14th July, 1965 is allowable as revenue expenditure ?'
For subsequent years also the same question has been referred. However, the amount claimed in each case is different.
4. We have heard the learned counsel for the parties.
5. Shri B. J. Shelat, learned counsel appearing for the applicant-Revenue, contended that under the agreement dt. 14th July, 1965, the assessee was granted sub-licence which goes to show that J. R. Geigy Basle with whom the assessee had collaboration agreement w.e.f. 1st Jan., 1956 had acquired the right to manufacture in India cyanuric chloride under the licence from Musashino Chemical Laboratories Ltd. ('Musashino' for brevity) under or according to Musashino's patents processes, know-how and improvements under a supplemental agreement dt. 22nd April, 1963. Likewise, Geigy has also obtained licence from a German company 'Degussa' to manufacture in India cyanuric chloride under or according to Degussa's patents, processes, know-how and improvements.
Under this right to manufacture the said product in India from the said two companies. Geigy had a right to sub-licence Geigy's associates in India for manufacture of the said products. In exercise of that right Geigy had entered into the agreement with the assessee on 14th July, 1965. The Geigy sub-licensed the assessee to manufacture cyanuric chloride under Musashino's as well as Degussa's patents processes, know-how and improvements. In consideration of the said sub-licence permitting the assessee to manufacture cyanuric chloride under the said two processes, the assessee was to pay a fee of 50,000 US $ in five equal annual instalments of 10,000 US $ each to Geigy. On these precincts Shri Shelat, learned advocate, contends that the assessee has acquired an advantage or benefit of enduring nature. Under the said agreement by which cyanuric chloride was required to be manufactured by the assessee. Once technical know-how disclosed to the assessee, permanently with the assessee and even after the expiry of the agreement the knowledge of the process of manufacturing cyanuric chloride whether by Musashino or by Degussa will not be obliterated. Even on returning of the designs, etc. The plant for manufacturing cyanuric chloride would not be discontinued even after the expiry of the period, but continue to manufacture the same under the process already made known to the assessee, inasmuch as there was no stipulation under the agreement either principal or supplementary that on termination of the agreement, the assessee would discontinue the manufacture of cyanuric chloride.
6. On the other hand it was contended by the learned counsel for the assessee Shri Shah that the technical know-how acquired under the said agreement was operational cost for the running the business and the amount paid to the collaborator of technical know-how was only paid for the use of the process developed by Musashino or Degussa for manufacturing cyanuric chloride in India and acquisition of right to use is distinct from acquisition to the right itself. Expenditure for regularly operating the business cannot be considered to be the capital expenditure. Mere right to use technical know-how without having proprietary right therein cannot be considered capital in the hands of the assessee. He relied on the decision of the Hon'ble Supreme Court in CIT vs . British India Corpn. Ltd. : 165ITR51(SC) .
7. We have given careful consideration to the rival contentions. Under s. 37 of the IT Act, 1961 all expenditure laid out wholly and exclusively for the purpose of business or profession are to be allowed as deduction while computing the income provided the same are not in the nature of capital expenditure or personal expenses of the assessee, apart from the condition that the same may not be governed by any other express provision of the Act. In the present case the only question that arises for consideration is other condition being satisfied that the expenses are wholly and exclusively for the purpose of business and are not governed by any other express provision, whether the expenses claimed are of capital nature.
8. The expression 'capital expenditure' has not been defined in the statute, nor the words in the 'nature of capital expenditure' has been subject to any definition clause. Therefore, the expression has to be construed in ordinary business term. The Courts, in the course of determining this question have evolved various tests to determine as to when any expenditure can be said to be a capital and when a particular expenditure can be said to be of revenue nature.
9. In some cases it has been held that expenditure which brings into existence asset or advantage of enduring benefit is to be considered as capital expenditure. A disbursement, when it is referable to fixed capital or capital asset is treated as capital expenditure, but when it relates to circulating capital or stock in trade it is treated as revenue. Yet another test that has been applied is that where an expenditure relates to the framework of the assessee's business, it is to be treated as capital as opposed to revenue when it is related to running of the business. Initial expenditure for commencement of a business is ordinarily considered a capital outlay. So also money spent on acquiring goodwill has been held to be capital outlay. But no one test is of universal application. Supreme Court in Alembic Chemical Works Co. Ltd. vs . CIT : 177ITR377(SC) quoted with approval following observation of Lord Pearce in B. P. Australia Ltd. vs. Commr. of Taxation of the Commonwealth of Australia (1966) AC 224 :
'The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction and some in the other. One consideration may point so clearly that it dominates other and vague indications in the contrary directions. It is a common sense appreciation of all the guiding factors which must provide the ultimate answer.'
10. Test which was laid by Viscount Cave L. C. in the case of Atherton vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cas 155. 'When an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade. I think that there is good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such expenditure attributable not to revenue but to capital.'
11. The opinion was quoted with approval by the Supreme Court in CIT vs . Finlay Mathew : 20ITR475(SC) and in catena of cases thereafter.
12. Lord Dunnedin in Vallambrosa Rubber Co. vs. Farmar (1910) Tax Cases 529 opined that the capital expenditure is a thing which is going to be spent once and for all income expenditure is a thing which is going to be recur every year. In the same case Lord Atkinson in his concurring opinion said :
'It is also not essential that the word 'asset' be confined to something material.'
What is meant by expression 'once and for all' However, the test is as was explained in Assam Bengal Cement Co. Ltd. vs . CIT : 27ITR34(SC) the expression 'once and for all' in Viscount Cave's test does not mean that the payment should be made in a single sum and at one time. The expression 'once and for all' is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinct from recurring expenditure in the nature of operational expenses. It was said :
'If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage for but for running the business or working it with a view to produce the profit, it is a revenue expenditure.
The aim and object of expenditure would determine the character of expenditure whether it is a capital expenditure or a revenue expenditure.'
13. Another test evolved was to find out as to whether the expenses incurred are part of the working expenses or the expenditure laid out as part of the process of profit earning. In other words, it is capital outlay if such expenditure is necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all. This was said by the Lord Clyde in Robert Addie & Sons' Collieries Ltd. vs. IRC (1924) 8 Tax Cas 671.
'Is it part of the company's working expenses Is it expenditure laid out as part of the process of profit making Or on the other hand is it a capital outlay; is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?'
14. The test was quoted with approval by the Supreme Court in Empire Jute Co. Ltd. vs . CIT : 124ITR1(SC) . Further principle which their Lordships of the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra) quoted with approval from the case of Hallstorm's Property Ltd. vs. Federal Commr. of Taxation 72 CLR 634 is that - '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.'
15. The apex Court said that 'when dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, 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 profit earning process and not the acquisition of asset or right of a permanent character, the possession of which is a condition of carrying on business, the expenditure may be regarded as revenue expenditure.'
16. Another test which was laid out that the advantage which is secured must be in the capital field that the expenditure would be disallowed. 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 by leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. That was the view expressed by the House of Lords in IRC vs. Carron Co. (1968) 45 Tax Cas 18 (HL) and was approved and applied by the Supreme Court in Empire Jute Co. Ltd. vs. CIT (supra).
17. This test invariably lead to another inquiry. What is meant by enduring or advantage of permanent nature. The words 'permanent' and 'enduring' are not the words of art, but are only relative terms. They are not synonymous. What is the degree of durability of permanence always depends upon the facts of each case. Another test which has been applied while considering the nature of expenses is that if it is made for initiation of business or extension of business or substantial replacement of equipment. The outlay is deemed to be the capital. This is so because initial expenditure is incurred not for earning profit, but for setting it in motion. However, it is now well settled that no one test dealt with in various cases distinguishing between the capital and revenue expenditure is of permanent or conclusive nature or of universal application.
18. Here it will be appropriate to notice another decision of the Supreme Court. In CIT vs . Ciba India Ltd. : 69ITR692(SC) , the assessee was Indian subsidiary of Ciba Ltd., a Swiss company. The pharmaceutical section of Swiss Company in India was taken over by the assessee in 1948. Under an agreement, the Swiss Company undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing products discovered and developed in the Swiss Company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts which might be useful to introduce the licensed preparation and to promote their sale in India, it granted to the assessee full and sole rights and licence under patent listed in the agreement to make use of the same and also a licence to use certain specified trade marks in the territory subject to any existing licence to third parties held at the date of the agreement or the Swiss Company may grant to third party thereafter. In consideration of that right to receive scientific and technical assistance, payments were to be made to the Swiss Company Repelling the Revenue's contention that the contribution made to the Swiss Company was not entitled to deduction under s. 10(2)(xv) because expenses were capital in nature, the Court said :
'The assessee did not under the agreement become entitled exclusively even for the period of the agreement, to the patents and trade marks of the Swiss Company; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded. The assessee was on that account mere licensee for a limited period of the technical knowledge of the Swiss Company with the right to use the patents and trade marks of that company. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss Company for a limited period; by making that technical knowledge available the Swiss 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.'
19. In CIT vs. British India Corpn. Ltd. (supra) lump sum payment was made to a distributor chosen by the foreign collaborator as a condition of the agreement under which the assessee became entitled to the benefit of using trade marks and specialised process of the collaborator. The Revenue sought to disallow the said expenses treating it to be the capital in nature. The Court said applying tests that aim and object for incurring expenses is one of the guiding factors and as the expenses in the case was for the acquisition of the know-how as it was a condition on which the collaboration agreed to part with the technical knowledge to the assessee, it was treated to be the revenue expenditure on commercial principle.
20. In Alembic Chemical Works Ltd. vs. CIT (supra), the assessee-company was engaged in manufacture of antibiotics and pharmaceuticals. It was granted licence for manufacture of penicillin. Until 1963 it has already made substantial investment of over Rs. 66 lakhs for setting up plants, etc., for production of penicillin. Initially, the appellant was able to achieve only moderate yield. With a view to increasing the yield the appellant negotiated with Meiji, a reputed Japanese enterprise whereunder in consideration for once for all payment of 50,000 US $ it agreed to supply the assessee pilot plant, technical information, know-how and written description of Meiji's process for fermentation of penicillin with a flow sheet of the process on pilot plant and to arrange for the training of appellant's representatives in various plants in Japan at assessee's expenditure and advise the assessee in large scale manufacture for a period of 2 years. The assessee was to get technical know-how confidentially and secretly and not to seek any patent for the processes. Assessee's claim for deduction of the sum paid to the Japanese company as revenue expenditure was disallowed by the Department holding that the expenses were capital in nature. For the purpose of setting up of new plant and new process and that the for complete replacement of the business inasmuch as the new process and new establishment of plant was to be put up in place of old process and old plant. The High Court also rejected the assessee's claim. Reversing the decision of the High Court, Hon'ble Supreme Court observed that there was no material before the Tribunal to come to the finding that the appellant had obtained under the agreement a completely new plant with a completely new process and completely new technical know-how. The business of the appellant was to manufacture penicillin. Even after the agreement the product continued to be penicillin. There was no material before the Tribunal that the area of improvisation was not part of the existing business.
21. There was no material to hold that it amounted to a new or fresh venture. What was stipulated was improvement of operation of existing business and its efficiency and profitability not removed from the area of day to day business of the appellants' established enterprise. The financial outlay under the agreement for the better conduct and improvement of the existing business and as revenue in nature and was allowable deduction in computing the business profit of the appellant.
22. In coming to this conclusion the Court also noticed the principles which should govern while deciding such issues by the Courts.
23. The most important aspects relevant for the present purpose which can be culled out from above discussion is that where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement of acquiring technical know-how pertain to product already in the line of the established business which was intended to improve the operations of the existing business, its efficiency and profitability from the area of day to day business of the appellant's established enterprise's expenses be treated as revenue and not capital. On the other hand, if the technical know-how is acquired for the purpose of establishing altogether a new or fresh venture, launching of a new enterprise, the same expenditure may be treated as capital and not revenue. In such cases the test of enduring benefit might break. That to say the argument that knowledge having become once the part of knowledge bank of the acquirer, cannot be taken back in a sense and will always remain with the assessee and is enduring. But looking to the business realities, namely, the purpose of which knowledge has been enduring knowledge acquired becomes determining true character of the expenditure.
24. In view of the aforesaid, looking to the facts of the present case the mere fact that the knowledge to the Musashino, the process of manufacturing cyanuric chloride would become permanent part of the assessee's knowledge bank and will remain with the assessee even after expiry of the agreement and will not be determinative of the character of the expenditure.
25. The principal agreement with the Geigy was to last for 20 years commencing from 1st Jan., 1956. The supplementary agreements in furtherance of the principal agreement were co-terminus with the principal agreement. In fact, the agreement was terminated even before the expiry of the period of the agreement. Under the principal agreement (clause 14) the assessee was though free to purchase raw materials and intermediaries from any source, but the purchase of products manufactured by Geigy or from those who produce and manufacture raw material and intermediaries under the Geigy patent, there was a prohibition to purchase such raw material from any source manufacturing the intermediary products in violation of Geigy patent. From the agreement under which the assessee was licensed to manufacture in India cyanuric chloride as per the process developed by Musashino or Degussa, Geigy was the person authorised under respective patent orders to manufacture that product in India. It was also permissible for Geigy to sub-licence its associates in India for the manufacture of the said product in India. However, Geigy himself was not the proprietor of the patents, nor it could transfer proprietary rights in such patents to any of his associates in India. From this it is apparent that the period for which the agreement was to operate was barely 11 years which in fact lasted less than that. The assessee was purchasing raw materials, namely, cyanuric chloride from the market. However, the same was not being produced under a licence from Geigy. Once Geigy having licensed to manufacture cyanuric chloride which was through Musashino or Degussa process in India had decided to start manufacturing that product either by himself or through his associates, the assessee was under obligation to purchase that raw material required for its principal product - Tinopal from such manufacturer only under clause 14 of the principal agreement. It is in the light of these circumstances the case has to be examined. The question will be whether such knowledge was for establishing the business or for running the business. In the former it shall be capital, in the latter it is revenue.
26. From the statement of the case, we find that Tinopal was one of the products which was manufactured by the assessee under the provisions of the principal agreement. Cyanuric chloride was one of the raw materials used in the manufacture of Tinopal which was consumed in large quantities. The object of the assessee undertaking manufacture of cyanuric acid was stated to be manufacturing raw materials for the purpose of production of Tinopal. If, therefore, applying the test laid down in Alembic Chemicals case (supra), which in our opinion does apply to the facts of the present case, the assessee's existing business was the business of manufacturing Tinopal, the product which the assessee intended to manufacture, namely, cyanuric chloride was one of the raw materials which until it started manufacturing was being purchased in large quantities from the market, the purpose of production of cyanuric chloride was found by the Tribunal to be the manufacture of raw material or production of Tinopal, that is to say, the purpose was in the area of existing business of the assessee for carrying on the existing business with more profitability and was not for the purposes of entering into a new adventure for operating in a new area of business. If that be so, the expenses incurred for acquiring the technical know-how to manufacture raw material necessary for the principal product of the assessee to cut down the cost of producing raw materials from the market was the operational cost of the existing business incurred for the purpose of cutting down the day to day cost of the business and not for the purpose of installing a new business, the expenses had to be held to be revenue in nature and not capital though we observe that the Tribunal was not correct in observing that there would be no useful knowledge left which would help the assessee in manufacturing cyanuric chloride after the agreement is concluded. As a result of operation of clause 22 which required the assessee to return Geigy Ltd. all documents put at the assessee's disposal and relating to manufacturing of engineering plants, designs, etc., in respect of the patents and the assessee was refrained from using Geigy patents and trade marks which knowledge was acquired in respect of patents vesting in a third party. But, the knowledge bank of the assessee and production is already in process, according to that method, ordinarily it would not come to an end with the expiry of the agreement and would remain with the assessee. However, as we observe in the present case particularly, in the matter of acquisition of the technical know-how it is of great importance that for what purpose technical know-how was acquired.
27. In this connection concerning expenses incurred for acquiring the right to acquire raw material for the purpose of running business the matter was examined by their Lordships of the Supreme Court in Empire Jute Co. vs. CIT (supra); by way of illustration it is said :
'Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the assessee purchases the quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost.'
The principle fully applies to the facts found by the Tribunal in the present case, according to which the assessee had entered into an agreement on 14th July, 1965 for manufacturing raw material for the purpose of production of Tinopal.
28. Even applying the test of 'acquisition of assets' it can be said that under the agreement the assessee did not acquire the capital asset itself, namely, the technical know-how as a proprietor thereof. What it acquired under the agreement on 14th July, 1965 was only the right to use technical knowledge available with Musashino or Degussa. It had right only to use that knowledge for the purpose of manufacturing cyanuric chloride within India. Therefore, what the assessee has acquired was not the capital asset, but only the access to the knowledge to the method. The finding that said two companies had developed process of manufacturing cyanuric chloride does not mean that these were only two methods known for manufacturing cyanuric chloride and the assessee could not at all have been able to commence production, but for acquisition of technical know-how from the said two concerns. Therefore, mere right of use of the technical knowledge of others has to be distinguished from the acquisition of right as proprietor to the knowledge in the sense that no one else could use that knowledge except with the permission or at the wish of the owner. A patent holder is the proprietor or the owner of the knowledge so long as that right remains with the proprietor and his permission is required by the users thereof, when such owner permits to use that knowledge under that name with condition of confidentiality/secrecy, what is transferred is not the capital asset, but only the right to use. So far as knowledge of such process is concerned that always remains with the acquirer and can never be recalled back. But it cannot be said that by such acquisition of knowledge the assessee has acquired any capital asset. So far as question as to whether it amounts to acquisition of advantage/benefit of enduring nature is concerned as we have already discussed, it depends upon the object with which such advantage or benefit has been acquired. If the advantage or benefit had been acquired to facilitate running of the existing business, it should be treated as the expenditure on revenue account. If the advantage or benefit acquired for establishing a fresh venture it may be treated as part of expenditure on capital account. As in the present case the finding of the Tribunal reveals that the advantage was acquired for the purpose of manufacturing raw material for production of Tinopal which was the existing business of the assessee, we have no hesitation in coming to conclusion that the expenditure incurred was rightfully held to be on revenue account.
29. Accordingly we answer the question referred to us in affirmative in all the four cases in favour of the assessee and against the Revenue. There shall be no order as to costs.