V. Ramaswami, J.
1. The assessee--M/s. Fenner Woodroffe & Company Ltd. (since changed to Gordon Woodrofle (Belting) Ltd.), Madras, was incorporated in India as a private limited company in 1959. It carries on business in the manufacture and sale of leather belting and other industrial leather, having been licensed under the Industries (Development and Regulation) Act. The assessee-company entered into an agreement onJuly 22, 1959, with M/s. Henry F. Cockill & Sons Ltd., a company incorporated in England, The relevant portions of the agreement read as follows :
'(A) Cockill has for many years been engaged in the manufacture of (inter alia) the product (as defined in Clause 1 of this agreement) and during that time has discovered and acquired valuable secret processes and technical knowledge in connection with such manufacture.
(B) The Indian company is proposing to undertake the manufacture of the product in India and has requested Cockill to make available to it Cockill's secret processes and technical knowledge in relation to the product which Cockill has agreed to do upon and subject to the terms of this agreement.
NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED AND DECLARED AS FOLLOWS :
1. In this agreement where the context so permits the following expressions shall have the meanings set opposite thereto respectively, that is to say:
(a) 'the product' means leather belting and such other products as may from time to time be agreed on by Cockill and the Indian company.
(b) 'the territory' moans the Rupublic of India as now constituted.
(c) 'technical data' means (subject as hereinafter provided) all processes, formulae, engineering drawings, tool designs, bills of material specifications and any other technical information in the possession of Cockill necessary to enable a competent manufacturer to undertake the manufacture on a commercial scale of the product to which the technical data relates PROVIDED that any such supplied to Cockill by a third party under licence or under a pledge of socrecy are excepted from the scope of this definition.
2. In consideration of the remuneration to be paid by the Indian company to Cockill as hereinafter provided, Cockill--
(a) shall within fourteen days after the date hereof supply to the Indian company the technical data relating to leather belting ;
(b) shall from time to time, when in Cockill's opinion the Indian company is able and ready to undertake the manufacture of the remainder of the products, disclose to the Indian company the technical data relating thereto;
(c) hereby grants to the Indian company the right without further let or hindrance from or by Cockill, to use the technical data for the purpose of the manufacture in the territory only of the product;
(d) shall promptly and to the best of its ability advise the Indian company in connection with any technical or manufacturing problems or difficulties which may (as provided in Clause 9 hereof) be referred to it by the Indian company during the continuance of this agreement.
3. (a) As consideration for the services to be provided by Cockill to the Indian company pursuant to this agreement the Indian company shall pay to Cockill in free sterling in England subject to deduction of Indian taxes and approval of the Reserve Bank of India a service fee equal to one-half of one per cent. of the amount of the ex-factory invoice prices of the Indian company in respect of the quantities of the product sold by the Indian company--......
5. (a) To assist the Indian company in the manufacture of the product, Cockill shall when required by the Indian company--
(i) provide technicians from its own staff to attend at the Indian company's factory in India but the full salary and first class travelling and board and lodging expenses of such technicians from the time of leaving home to the time of return shall be paid by the Indian company ;
(ii) provide training facilities at the works in England of Cockill and/or its associated companies for selected Indian technicians but the salary and all travelling and board and lodging expenses of such technicians shall be paid by the Indian company.
(b) The parties mutually agree that they will each inform the other of any new developments in design, texture, materials or methods of manufacture which they respectively may discover during the continuance of this agreement but only in so far as any such new developments are applicable to the product.
6. (a) The Indian company shall use upon or in connection with the product such trade marks as Cockill may from time to time designate by notice in writing addressed to the Indian company provided that nothing herein contained shall authorise the Indian company to use any trade marks owned by Cockill except as a registered user thereof in conformity with laws of the territory.
(b) Cockill shall grant or procure the grant to the Indian company and the Indian company shall enter into such registered user agreements as may be necessary for the purpose aforesaid and each party shall do all things necessary to procure the registration of any such registered user agreement. 7. The Indian company may not except with the prior written consent of Cockill assign, mortgage, charge or otherwise alienate its rights under this agreement and may not grant any sub-licence or sub-rights hereunder.
8. The Indian company shall use and maintain and procure its officers and employees to use and maintain the utmost secrecy in connection with any technical data supplied by Cockill to the Indian company hereunder.
9. The Indian company shall not during the continuance of the agreement refer any technical or manufacturing problems or difficulties to any one other than Cockill but shall regard and use Cockill as its sole technical consultant.
10. (a) Subject as hereinafter provided, the agreement shall continue in force for a period of ten years from the date hereof.
(b) If either party shall commit any breach of any of its obligations hereunder and shall fail to remedy the same within thirty days of written notice from the other party requiring that such breach shall be remedied or if either party shall become insolvent or go into liquidation whether voluntary or compulsory (otherwise than for the purpose of reconstruction or amalgamation) or shall have a receiver appointed of its assets or any part thereof or shall make any assignment or composition for the benefit of its creditors then the other party may by written notice forthwith determine this agreement.
(c) Determination of this agreement shall be without prejudice to any rights which may have accrued to either party hereunder prior to the date of such determination.....'
2. The company went into production in May, 1960. As per the above provisions in the agreement the assessee-company paid the sums of Rs. 5,808, Rs. 5,617 and Rs. 4,508 during the accounting years relevant to the assessment years 1962-63, 1963-64 and 1964-65, respectively. The company claimed deduction of these amounts from the income of the respective assessment years. The Income-tax Officer was of the view that the amount represented the consideration paid for making available to the assessee-company the technical know-how and the technical data for starting the new industrial venture in India and that it was obvious that the assessee had acquired a benefit or an asset of an enduring nature by such payment. In that view, he held that it is an expenditure of a capital nature and, therefore, disallowed the claim. The assessee preferred appeals before the Appellate Assistant Commissioner in respect of all the three assessment years. By a common order the Appellate Assistant Commissioner held that the fee paid was for the use of the technical data and that......... Though in the longer run the assessee might be benefited byexperience that would not make it a capital investment and that the amounts claimed were in the nature of a revenue expenditure. Revenue preferred appeals to the Tribunal. The Tribunal on an interpretation of the terms of the agreement held that till the date of the agreement theassessee was not manufacturing leather belts or any other leather products and it was for the first time entering into a new venture to manufacture those products with foreign collaboration and the foreign company had undertaken to supply the secret process and technical data required for the production. The Tribunal further held that the technical information or know-how supplied by the foreign collaborators to the assessee-company was a capital asset and that the payments made for the purchase of that was a capital expenditure. In any case, the assessee-company had acquired an asset or benefit of an enduring nature and, therefore, the amount spent or laid out for acquiring such enduring benefit would be a capital expenditure. In coming to this conclusion the Tribunal relied on the fact that there was no provision in the agreement that the technical data obtained by the assessee can be used by it for the duration of the agreement and there was also no provision for returning the drafts of formulae, engineering drawings, tool designs, etc., to the foreign collaborators on the expiry of the agreement or a prohibition to the use of the knowledge acquired beyond the period of the agreement. In support of this view, the Tribunal relied on the decision of the Mysore High Court in Mysore Kirloskar Ltd. v. Commissioner of Income-tax : 67ITR23(KAR) and distinguished the decision of the Bombay High Court in Commissioner of Income-tax v. Ciba Pharma Private Ltd. : 57ITR428(Bom) .
3. At the instance of the assessee, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the payment of the sums of Rs. 5,808, Rs. 5,617 and Rs. 4,508 made by the assessee to M/s, Henry F. Cockill and Sons Ltd. are admissible deductions under the Income-tax Act, 1961, for the assessment years 1962-63, 1963-64 and 1964-65, respectively ?'
4. The learned counsel for the assessee contended that this was a casewhere the foreign company had no business or goodwill in this countryand they did not part with any of their capital asset, but they just onlytaught the assessee as to how to make the specified articles. In otherwords, they shared the knowledge without in any way affecting or diminishing its value to them and, therefore, no asset was acquired by theassessee. They were only utilising their knowledge for the purpose ofearning profit. The assessee also incurred the expenditure not for thepurpose of bringing into existence any such asset or advantage of anenduring nature but for running the business or working it with a view toproduce profit. Though the assessee-company was started with the agreement before commencing its business, the expenditure is linked with themanufacture and, therefore, it was an allowable business expenditure. In any case the money paid subsequent to the company commencing production is only a revenue expenditure. On the other hand, the learned counsel for the revenue submitted that the technical data and know-how was given for the very establishment of the assessee-company and that know-how derived by the assessee is a capital asset. Even otherwise, the learned counsel for the revenue contended, the expenditure incurred by the assessee would amount to an outlay which brings in an advantage of an enduring nature to the trade and, therefore, not an allowable expenditure.
5. We may now notice three cases decided by the House of Lords which throw some light on the point to be considered. They are--Evans Medical Supplies Ltd. v. Moriarty,  37 TC 540;  35 ITR 707 , Jeffrey v. Rolls-Royce Ltd.,  40 TC 443;  56 ITR 580 and Musker v. English Electric Co. Ltd.,  41 TC 556. In Evans Medical Supplies case the facts as summarised in the headnote were as follows :
'The appellant-company, which manufactured pharmaceutical products and had a world-wide trade, carried on business in Burma through an agency. In 1953 the Burmese Government wished itself to establish an industry there for the production of pharmaceutical and other products, and the company secured a contract, dated 20th October, 1953, from the Burmese Government to assist in setting up this industry. The company undertook to disclose secret processes to the Burmese Government and to provide other information in consideration of the payment of a 'capital sum of 100,000'. The company also undertook to provide certain services and to manage the proposed factory in return for an annual fee, which was admitted to be subject to tax. No similar agreement had been entered into by the company with any other foreign Government or any other party.'
6. It was held that the sum of 100,000 received by the company represented consideration for the sale of a capital asset and was a capital receipt in the hands of the company. There the members of the House of Lords--Lord Simonds, Lort Morton of Henry ton and Lord Tucker agreeing with the Court of Appeal and Upjohn J. in the Chancery Division--also held that the know-how should be regarded as capital asset of the company.
7. In Rolls-Royce case the facts as set out in the head-note were as follows:
'The respondent-company, during the manufacture of aero engines, had engaged in metallurgical research and the development of engineering techniques and acquired a fund of technical knowledge commonly called 'know-how'. During the period 1946 to 1953 it entered into a number of agreements with foreign governments and companies under which it agreedto supply information necessary to construct certain engines which it had developed and to license the other party to manufacture these engines. For example, by an agreement with the Republic of China the company undertook to license the Chinese to manufacture a Rolls-Royce jet aero engine and to supply the necessary information and drawings ; to advise them from time to time as to improvements and modifications in manufacture and design ; to instruct Chinese personnel in their works and to release one or two members of their own staff to assist in China with the manufacture of the engine in consideration of the payment of ' a capital sum of fifty thousand pounds' plus royalties. Agreements in similar terms were entered into with the Governments of Argentina, Belgium and Australia and companies in France, the United States of America and Italy. Some of these agreements provided for payment of an annual technical liaison fee in addition to the capital sum.'
8. The Special Commissioners and the High Court upheld the contention of the company and held that the consideration paid for the know-how represented a capital receipt in the hands of the company. But the Court of Appeal and the House of Lords took a different view and held that the sums in question were receipts on revenue account of the company's trade. The Court of Appeal held that know-how was part of the capital equipment of a company and the nature of the receipt depends almost entirely on the circumstances of each case and the nature of the contract or contracts under which the lump sum or sums were paid. The company could exploit this capital equipment in producing the articles they sell or alternatively or in addition they can be imparted to others for reward. The nature of the consideration for imparting the know-how, whether capital or revenue, would depend on the circumstances of each case and the nature of the contract. If the knowledge imparted is some secret of permanent value given by the owner while transferring or terminating the business the consideration received would amount to a sale of a fixed asset and the consideration also a capital receipt. The House of Lords also took the view that know-how is an intangible asset of sui generis. Lord Radcliffe, as he then was, as to the nature of know-how, said,  56 ITR 580.:
'First, as to 'know-how'. I see no objection to describing this as an asset. It is intangible: but then so is goodwill. It would be difficult to identify with any precision the sources of the expenditure which has gradually created it and, patents apart, I would not have thought of it as a natural balance-sheet item. But it is a reality when associated with production and development such as that of Rolls-Royce, and a large part, though not the whole of it, finds its material record in all those lists drawings and manufacturing and engineering data that are specified in the various licence agreements.
It is fundamental to the appellants' case that we should categorise this asset as being part of their fixed capital. Indeed, their argument proceeds from the premise that it is fixed capital. That, I think, is to start from too assured a base. An asset of this kind is, I am afraid that I must use the phrase, sui generis. It is not easily compared with factory or office buildings, ware-houses, plant and machinery or such independent legal rights as patents, copyrights or trade marks, or even with goodwill. 'Know-how' is an ambience that pervades a highly specialised production organisation and, although I think it correct to describe it as fixed capital so long as the manufacturer retains it for his own productive purposes and Expresses its value in his products, one must realise that in so describing it one is proceeding by an analogy which can easily break down owing to the inherent differences that separate 'know-how' from the more straightforward elements of fixed capital. For instance, it would be wrong to confuse the physical records with the 'know-how' itself, which is the valuable asset: for, if you put them on a duplicator and produce one hundred copies, you have certainly not multiplied your asset in proportion. Again, as the facts of the present appeal show, 'know-how' has the peculiar quality that it can be communicated to or shared with others outside the manufacturer's own business, without in any sense destroying its value to him. It becomes, if you like, diluted, and its value to him may be affected, though, in my view, it begs the question to say that that value is necessarily reduced because the asset is used for outside instruction. These considerations lead me to say that, although 'know-how' is properly described 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.'
9. In English Electric Company's case, the facts as summarised in the head-note were as follows :
'The respondent-company, in the course of carrying on its trade of engineering manufacturers, acquired a fund of specialised information and technique in engineering processes. It had not been its practice to turn this information and technique to account by imparting it to others. In 1949, however, at the request of the Admiralty, the company entered into an agreement to design and develop a marine turbine and to license its a manufacture by a limited number of companies in the United Kingdom, Australia and Canada. Later, in 1950 and 1952, the company, at the request of the Ministry of Supply, entered into agreements with the Government of Australia and an American aircraft manufacturing corporation, respectively, under which it licensed them to manufacture the Canberra bomber which it had designed and developed. All three agreements provided, inter alia, for the imparting of 'manufacturing technique' to the licensees and in consideration of this the company received specified lump sum payments.'
10. Justice Pennycuick held that the case was governed by the decision in Rolls-Royce case. As for the difference between Evans Medical Supplies  35 ITR 707 ;  TC 540 case and Rolls-Royce case, the learned judge observed :
'It was held, then, in the Rolls-Royce case, that what is called 'know-how', in the hands of a manufacturer is an asset of such character that it may be communicated for value to another, on the one hand in such manner that it loses its value to the trader--in which case the consideration is capital--or on the other hand in such manner that it retains its value to the trader--in which case the consideration must be brought into account in the computation of income profit. I hope that is not an undue simplification of the decision for the purpose of the present case. The Evans Medical Supplies case was an instance of the former, the Rolls-Royce case, an instance of the latter type.'
11. While confirming this decision, Lord Denning M. R. in the Court of Appeal said:
'Now it seems to me that this is a typical case of 'know-how'. 'Manufacturing technique' is just 'know-how'. 'Know-how' is an intangible asset, just as intangible as goodwill and just as worthy of recognition. It is a revenue-producing asset, just as goodwill is. ' Know-how can be put to use so as to produce revenue in two ways. The manufacturer can use it himself to make things for sale and make profit in that way: or he can teach it to others, so that they can make their own things, in which case he gets paid for the knowledge and information which he imparts to them. His fees and rewards are then revenue in his hands. I assume, of course, that the manufacturer, although teaching it to others, still retains the knowledge himself and intends to go on using it himself and making things from it. So long as he does this, he, retains his capital asset himself and is only using it to produce revenue. But 'know-how' can be used to produce a capital receipt. It can be sold outright and bring in a capital fund. This happens when a trader or manufacturer sells his goodwill or 'know-how' outright to a purchaser, withdraws from the business himself, and agrees not to use the 'know-how' or goodwill to the prejudice of the purchaser. The purchase price he receives is then capital in his hands.'
12. The House of Lords also was of the opinion that the case was governed by the Rolls-Royce case. They distinguished Evans Medical Supplies case, as one in which 'know-how' is imparted as one element of a comprehensive arrangement by virtue of which a trader effectively gives up his business in a particular area, and the said monies paid for the know-how, whether or not independently quantified, may properly rank as capital receipts. But the Rolls-Royce case provides a different context in which the imparting is no more than a service, of however special a kind, attendant upon an activity that arises out of the appellant's trading.
13. Updating the references, we find two cases applying these principles. In Wolf Electric Tools Ltd. v. Wilson,  45 TC 326 (Ch D), the facts were these : The company which carried on business as mechanical and electrical engineers manufactured electric power tools among others in which it had an extensive export trade. About 1950 its sole agency in India was taken over by Rallis Ltd., which bought from the company on a principal to principal basis. On a representation from the Indian company about the Indian Government's policy of encouraging the setting up of local factories for making tools and the possibility of losing the entire market in India, the company agreed with Rallis India to the formation of a new company in the name of Ralliwolf Private Ltd. for the manufacture of electric power tools. In consideration of the issue to the company by Ralliwolf of 3,625 ordinary shares of Rs. 100 each fully paid, which represented 45% in the capital of the Ralliwolf, the company agreed to provide and make available to Ralliwolf, all present and future drawings, designs, schedules and technical knowledge and data necessary for the establishment, erection and installation of the factory and the production thereat of the selected electric tools. It was held that the fund of confidential material in relation to its manufacturing process and the connection the company had with India which was in the nature of a goodwill are capital assets of the company's trade and that the company agreed for consideration to the supply of confidential material to Ralliwolf in order that Ralliwolf should carry on the manufacture of selected tools and undertook not to compete in effect with Ralliwolf in India as regards the selected tools. Since the subject-matter of the transfer is of capital asset the consideration received was also capital. The case, according to Justice Pennycuick, was covered by the decision in Evans Medical Supplies case and distinguishing Rolls-Royce case and English Electric Company case, observed:
'I would add only this that in the Rolls-Royce and English Electric cases the companies concerned had no pre-existing goodwill in the countries with the governments of which they made the contracts for imparting 'know-how'. Here the company did have this pre-existing connection of goodwill in India and that circumstance, it seems to me, is the crucial factor which places the present case within the former and not the latter of the two alternatives.'
14. The next decision is one in Coalite & Chemical Products Ltd. v. Treeby,  48 TC 171. Shortly stated, the facts in that case were these : A company which was doing research in chlorinated phenols for use in agriculture, among others, joined a consortium to advise and assist in a project to instal a plant for the large-scale production of herbicides in East Germany, wherein production already existed, but in insufficient quantities. The company was paid a sum of 68,000 for the provision of know-how. In the assessment to corporation tax, the company contended that the sum was a receipt on capital account but the Crown said it was a revenue receipt. Agreeing with the Special Commissioners it was held that the company did not dispose of any of its existing trade in East Germany and, therefore, it was a revenue receipt.
15. All the above cases related to the nature of the receipt in the hands of the company which disclosed the know-how, but they do help us to understand the nature of know-how itself, and it is because of this we have dealt with these cases in extenso.
16. It is seen from these judgments that it is difficult to give a comprehensive definition for the word 'know-how', but it may be safely taken as comprehending within it the fund of knowledge or experience gained by a manufacturer during the long number of years in which they had been manufacturing on how to make each component accurately, quickly and efficiently, how to adapt standard machine tools for particular purposes, how to stretch or bend materials to particular shapes, how to assemble the components accurately, quickly and efficiently into a complete article, the formulae, the engineering drawings and specifications, mechanical details or processes and general knowledge that is associated with the production and development which is in the exclusive knowledge of the trader. Know-how is also referred to as a manufacturing technique. The disclosure of this know-how is generally made by handing over documents relating to the processes, formulae, manufacturing and engineering data, drawings and specifications and other information necessary for the manufacture and also by oral disclosure at lectures and demonstration and training of staff and inter-change of employees. It is an intangible asset of sui generis and forms capital equipment of the company. It is not necessarily a balance-sheet item. It could form the subject-matter of a sale as illustrated by Evans Medical Supplies case or it may be imparted or shared without any diminution or destruction in its value to the trader with another.
17. In support of his argument, the learned counsel for the assessee strongly relied on the decision of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. The facts in that case were these : Ciba Ltd., Basle, Switzerland (hereinafter referred to as 'Ciba Basle'), which deals in drugs, medicals, chemicals, pharmaceuticals and biological products, was carrying on its business in India through its subsidiary called Ciba India Ltd. The activities of Ciba Basle carried on in India through Ciba India Ltd. consisted of dealings both in pharmaceutical sales, dealings in dyes and chemicals. These activities in India which were carried on through Ciba India Ltd. were bifurcated in the year 1948. The pharmaceutical section was carved out and given to another subsidiary company of Ciba Basle called Ciba Pharma Ltd. (hereinafter called 'Ciba Pharma') which was Incorporated on December 13, 1947, and the rest of the activities in dyes and chemicals were continued by Ciba India Ltd. under a changed name Ciba Dyes Ltd. On December 17, 1947, Ciba Basle entered into an agreement with Ciba Pharma. Under the terms of the agreement Ciba Basle, as found by the Supreme Court, undertook to deliver to Ciba Pharma all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of product discovered and developed in the Ciba Basle laboratory and to forward to Ciba Pharma as far as possible all scientific and bibliographic information, pamphlets or drafts which might be useful to introduce licensed preparations and to permit their sale in India. Ciba Basle had also granted to the assessee full and sole right under the licences listed in Schedule I to the agreement to make, use, exercise and vend the inventions referred to in India and had also granted a licence to use the trade marks in the territory of India. In consideration of this right to receive scientific and technical assistance, Ciba Pharma agreed to pay the following percentage of contributions of the net selling prices of all pharmaceutical products manufactured or processed and are sold by Ciba Pharma.
(a)Contribution towards technical consultancy and technical service rendered and research work done...5%(b)Contribution towards cost of raw material used for experimental work...3%(c)Royalties on trade marks used by Ciba Pharma...2%
18. Ciba Pharma was prohibited from divulging or assigning the benefit of the agreement or sub-licensing of the patents and trade marks to third parties without the consent of the Swiss company any confidential information received under the agreement. The agreement further provided that it shall be in force for a period of five years from January 1, 1948, and that upon termination of the agreement for any cause Ciba Pharma shall cease to use the patents and trade marks and to return to the Swiss company all copies of information, scientific data, or material sent to it and refrain from communicating any such information, scientific data or materials received by it to any person. It was not in dispute that the 2% of the consideration referable to royalties on trade marks used by Ciba Pharma are allowable but so far as the remaining 8% paid by Ciba Pharrna was concerned the revenue contended that it was an expenditure incurred for the acquisition of an asset or an advantage of an enduring benefit and, therefore, capital. The High Court held that Ciba Pharma did not acquire any asset or an advantage of an enduring nature and that, therefore, the amount was allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. This decision was confirmed by the Supreme Court. Both the High Court and the Supreme Court in coming to this conclusion relied on the following facts: Ciba Pharma 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 Ciba Basle commanded. Ciba Pharma was on that account a mere licensee for a limited period of the technical knowledge of Ciba Basle with a right to use the patents and trade marks. Ciba Pharma was prohibited from divulging or assigning the information or data connected with the manufacturing process received by it. On the termination of the agreement Ciba Pharma is required to return to Ciba Basle all copies of information, scientific data or materials sent to it. The use of the knowledge or practical experience which Ciba Pharma gets by knowing the technical know-how was thus limited only for the purpose of conduct of the business during the period of five years provided for in the agreement. There was no attempt by the Ciba Basle to part with the technical knowledge absolutely in favour of Ciba Pharma,
19. In the instant case, we do not find any such limitation. Under the agreement, in consideration of the remuneration to be paid, the foreign company shall supply to the assessee the technical data relating to leather belting and grant the assessee the right to use the technical data for the purpose of manufacture in the territory of India. The assessee shall not, except with the prior written consent of the foreign company, assign, mortgage, charge or otherwise alienate its rights under the agreement andshall not grant any sub-licence or sub-right thereunder. The assessee was also under an agreement to maintain utmost secrecy in connection with the technical data supplied. Though the agreement is stated to be in force for a period of ten years there was no prohibition of the use of the technical data by the assessee after the period of ten years nor is there any clause requiring the assessee to return the technical data as in Ciba's case implying that the benefit under the agreement is to be enjoyed only during the period of the agreement. Even the prohibition against assignment, mortgage or charge or otherwise alienating the rights under the agreement was not made to enure beyond the period of ten years provided under the agreement. Nor even the assessee was required to keep the knowledge secret after the period of ten years. Under these circumstances, we have no doubt that the assessee has acquired an asset or an advantage of enduring benefit to his trade.
20. The decision in Commissioner of Income-tax v. Hindustan General Electrical Corporation Ltd. : 81ITR243(Cal) is to the effect that the facts in that case were very similar to the facts in Ciba's case and, therefore, that decision has no application.
21. The learned counsel for the revenue relied in this connection on two decisions--one of the Mysore High Court in Mysore Kirloskar Ltd. v. Commissioner of Income-tax and the other of the Andhra Pradesh High Court in Hylam Ltd. v. Commissioner of Income-tax : 87ITR310(AP) . In Mysore Kirloskar's case, the assessee entered into an agreement with a foreign company under which the foreign company was to provide the assessee with manufacturing technique from time to time and also furnish two complete sets of detailed and general arrangement drawings, material specifications and particulars relating to appropriate machines. They had also to supply patterns, jigs, fixtures and special tools at certain agreed prices. One of the employees of the foreign company was to superintend the assessee's factory and manufacture. The assessee is also to send its employees for training to the foreign company in England. The agreement also provided that the machines manufactured by the assessee should be sold under the trade mark, Herbert Kirloskar. In consideration of the above facilities of information and manufacturing technique the assessee had to pay a certain sum of money to the foreign company. The assessee undertook and agreed that it would observe strict secrecy as to all confidential and secret documents, information and know-how supplied to it. On the facts, the High Court found that the assessee was not manufacturing the machine tools, workshop equipment, etc., on the date of the agreement and it was to go into production of these machines on the basis of the know-how supplied by the foreign company. Whatever know-how came to be supplied to the assessee, it was also found, the same became a part of its own know-how. There was no objection for utilising the know-how by the assessee even after the period of the agreement came to an end which was 15 years. In pursuance of the agreement the assessee had paid during the relevant accounting year a sum of Rs. 26,713. The question for consideration was whether this expenditure should be considered as a capital expenditure or as a revenue expenditure. Justice Hegde (as he then was), speaking for the Bench, held that the knowledge acquired would be available for the assessee for all time to come in the future if the assessee carried out the terms of the agreement. Further, know-how is primarily a capital asset. Therefore, either way there can be no doubt that the expenditure incurred by the assessee for acquiring that know-how is a capital expenditure. In support of the finding that know-how is a capital asset, the learned judges also relied on the decision of the House of Lords in Rolls-Royce case. This decision is, therefore, directly in point and is in favour of the revenue,
22. In Hylam Ltd. v. Commissioner of Income-tax the facts were these : Under one agreement the assessee-company who was carrying on the business of manufacture of laminated materials obtained an exclusive non-assignable licence to manufacture laminates in accordance with the process covered by the patents owned by an English company in India. The licence granted was to continue for an unexpired term of Indian Letters Patent and any extension or regrant thereof. As a consideration for the grant the assessee was to pay 5% royalty on the net selling price of all laminated products made and sold by it in accordance with the patented processes. When the total of the royalty payment reached 5,000, the assessee was no more liable to pay royalty. Under another agreement the English company agreed to furnish exclusively to the assessee technical information relating to the manufacture and testing of the products. As a consideration thereof, the assessee agreed to pay a consultancy fee at 2% of the net sales on certain products and at 5% of the net sales on other products sold by the assessee during every year during which the agreement remained in force. The assessee claimed deduction of the amounts paid as royalties and consideration under the above agreements in the computation of its income for the respective assessment years on the ground that it is an expenditure of a revenue nature. The assessee's claim was rejected. But, so far as the consultancy fee is concerned, in the view that certain items enumerated in the agreement related to the routine operation of the business, they apportioned the consultancy fee between capital and revenue in the ratio of 1: 2 and allowed only 2/3rds of theconsultancy fee as revenue expenditure. On a reference, the High Court distinguished the Ciba's case as relating to facts which showed that the special knowledge in scientific data and materials relating to it had to be returned to Ciba Basle after the expiry of the agreed period and could not be utilised by Ciba Pharma after such expiry. The learned judges considered that the ratio of the decision in Mysore Kirloskar case would apply and in that view they upheld the decision of the Tribunal.
23. We may also deal with one of the reasonings of the Tribunal for holding that the Mysore Kirloskar case is applicable to the facts rather than the decision in Ciba's case. Ciba's case was distinguished by the Tribunal on the ground that Ciba Pharma was an existing company on the date when it entered into an agreement relating to the know-how. But, on the other hand, in Mysore Kirloskar case, the agreement was for the purpose of the very establishment of the concern. It is true that Mysore Kirloskar case related to a case where the assessee was to go into production on the basis of know-how supplied to it not for the purpose of manufacturing any machine that the assessee was already manufacturing, and this fact excluded the applicability of Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was also true that the learned judges in that case have pointed out that know-how was to be utilised not for the purpose of manufacturing the machine that the assessee was already manufacturing but for the purpose of bringing into production new types of machines solely on the basis of the know-how supplied by the foreign company. In this connection, the learned judges also referred to Parisutha Nadar v. Commissioner of Income-tax,  46 ITR 1041 , where it was held that Section 10(2)(xv) indicates that the expenditure should relate to a business which is already in existence and not one that is to come into existence in future. But that was not the point on which the case was decided. Relying on Rolls-Royce case, they first held that know-how is a capital asset or an advantage of enduring nature. They referred to the decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : 27ITR34(SC) and observed that if the know-how supplied by the foreign company can be considered as a capital asset then there is no doubt that the expenditure incurred by the assessee for acquiring that know-how is a capital expenditure. Therefore, the ratio of the judgment is that know-how is a capital asset and that, therefore, the expenditure was a capital expenditure. On facts, they also found that the knowledge acquired was an enduring benefit to the assessee and on that ground also the expenditure is capital.
24. The learned counsel for the assessee then sought to distinguish the decision in Mysore Kirloskar's case on the basis that the consideration paid was a lump sum payment and not a periodical payment as in the instant case. The learned counsel was prepared to concede that if a lump sum was fixed as consideration the terms could provide for payment in instalments of the same but if no fixed amount was agreed and a periodical payment will have to be made with reference to the production or sale either for a definite or indefinite period, such payment would point to the revenue nature of the expenditure and not a capital expenditure. In this connection, he referred to the oft-quoted dictum of Lord Cave in Atherton v. British Insulated & Helsby Cables Ltd.,  10 TC 155 which reads as follows:
'But 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 a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'
25. He also relied on the decision of the Supreme Court in Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax : 62ITR566(SC) in support of his contention that if the consideration paid was a periodical payment it is a revenue expenditure. It is true that in Mysore Kirloskar case the consideration paid was a lump sum but we do not think that made any distinction. Further, if the aim or object of the expenditure was the acquisition of an asset or advantage of an enduring nature, as we would presently show with reference to decisions, the expenditure is only capital in nature and the mere fact that the payment was not a lump sum or instalment payment but a periodical payment, that it was from the profits or linked with the trading activity of the assessee would not in any way change the nature of the expenditure.
26. The Supreme Court, after consideration of the tests laid down in various cases to determine the nature of the expenditure, summarised the principles in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax in the following words :
'In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay, whatever be its source, whether it is drawn from the capital or the income of the concern, is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. 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 but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all the situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure......'
27. The above decision was later on followed by the Supreme Court in State of Madras v. G.J. Coelho : 53ITR186(SC) .
28. Lord Greene M. R. in Associated Portland Cement . v. Kerr,  27 TC 103 on the question whether an item of expenditure is of capital or a revenue nature observed:
'Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and indeed in the majority of cases I should have thought, depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset whichproperly appears as a capital asset in the balance-sheet, then that is an end of the matter. But it must never be forgotten that an asset, which may properly and quite correctly appear and only appear in the balance-sheet as an asset, may be acquired out of revenue. There is nothing in the world to force a company or a trader who buys a capital asset to debit the cost of it to capital. Conservatively managed companies every day pay for capital assets out of revenue if they are fortunate enough to have the revenue available. It is, therefore, no sufficient test to say that an asset has been paid for out of revenue, because the consequence does not by any means necessarily follow that it is an asset of a revenue nature as distinct from a capital nature. Similarly, there is nothing to prevent a company or a trader who has acquired a capital asset from refraining from placing any value on that asset in his balance-sheet. I put to Mr. King an example which I think is worth repeating. If a trader buys up somebody-else's business and pays 10,000 for the goodwill, that being the price on which the vendor insists, there is nothing in the world to prevent the purchaser paying the 10,000 out of revenue and debiting it to revenue account, and then writing down the goodwill in his own balance-sheet to nothing. The fact that he has written it down in his own balance-sheet does not mean that he has not got an asset. He has ; he has the goodwill, but for his own domestic purposes he chooses not to put a value upon it: just in the same way as many companies, who have patents of very great value indeed, are in the habit of valuing them at a pound in their balance-sheet, or at some other nominal sum. I venture to think, therefore, when one is considering the nature of an asset acquired by a piece of expenditure, it is by no means conclusive to find that the asset does not have any definite value set upon it in the balance-sheet.'
29. In Sargent v. Eayrs also it has been held that if the object of the expenditure was for the purpose of setting up a new or extended business it would amount to capital expenditure and the nature of the expenditure would not change according to whether it be successful or unsuccessful.
30. Now, let us consider whether the Supreme Court in Gotan Lime Syndicate v. Commissioner of Income-tax : 59ITR718(SC) and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax have laid down any principle different from that stated above. Gotan Lime Syndicate case related to the payment of royalty under a mining lease. After observing that it is difficult to distinguish between revenue expenditure and capital expenditure their Lordships referred to the decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax above referred to. They further stated that in view of the argument of the respondent and the judgment of the HighCourt they had to concentrate only on the test laid down by Viscount Cave in Atherton's case. Applying the test, the learned judges held that it is a revenue expenditure. It is true that in coming to this conclusion the fact that no lump sum payment was ever settled or paid was relied on but two other observations which are material have to be quoted :
At page 726 it is said ;
'The reason why royalty has to be allowed as revenue expenditure must be the relation which the royalty has to the raw material which is going to be excavated or extracted.' And again in another place they said that; 'We have not been referred to any case in which payments of royalty under a mining lease have been treated as capital expenditure.'
31. As already pointed out, Viscount Cave's dictum in Atherton's case is only one of the tests and not the sole and exclusive test for deciding the question as to whether it is a capital expenditure or a revenue expenditure.
32. In Travancore Sugars & Chemicals case, the short facts were these : The assessee-company took over the assets of three undertakings run by the Travancore company. The consideration for the sale was a fixed cash consideration, agreed to be paid for the sale. In addition to the fixed cash consideration the agreement provided a payment of 20% of the net profits earned by the assessee in every year subject to a maximum of Rs. 40,000 per annum. The question for consideration was whether this 20% share in the net profits payable to the company was a capital expenditure or a revenue expenditure. On the ground that the amount was payable for an indefinite period and was related to annual profits and the 'payment has no relation to the capital value of the asset' it was held that it was a revenue expenditure. If we take the ratio of the judgment it was more on the ground that the payment has no relation to the capital value of the asset that the decision was rendered. We, therefore, think that these two decisions in no way help the assessee.
33. We may also now notice a note of caution made by Lord Reid in Regent Oil Co. Ltd. v. Strick  73 ITR 301 which reads as follows :
'Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind--in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case.'
34. In the same judgment, Lord Wilberforce had the following observation to make with reference to the tests propounded in the various judgments  73 ITR 301 :
'In the course of the numerous decisions which have distinguished between capital and revenue expenditure in relation to widely different trades and varying circumstances, certain ' tests ' have emerged. These may be useful, so long as it is recognised that they have emerged a posteriorari from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I begin by asking two questions, which may be said to be generally relevant: what is the nature of the payment, and for what was the payment made These, together with a third question, namely, how that, for which the payment was made, was to be used, were stated by DJxon J. in his classic judgment in Sun Newspapers Ltd. v. Federal Commissioner of Taxation, 61 CLR 337. There are, he said, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a perodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
35. I may add to this another statement by the same learned judge in the later case of Hallstroms Proprietary Ltd. v. Federal Commissioner 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.'
36. It may be seen from the foregoing discussions that it is the aim and object of the expenditure that would determine the character of the sum whether it is a capital or revenue expenditure and neither the source nor the manner of payment may be of any consequence. The fact, therefore, that the agreement did not fix any lump sum consideration but referred to a periodical payment linked to the production or sale of the articles does not in any way take it out of the category of a capital expenditure.
37. The foregoing discussions would show that if the facts and circumstances of the case and the nature of the contract are such as to warrant a finding that there was a sale of the know-how it could safely be inferred that even in the transferee's hand it is capital asset unless the same is considered as a trading asset of the transferee. If, on the other hand, it is considered to be an exploitation of its know-how by a trader without any diminution or destruction in the value to him there may not be a sale but still the knowledge acquired by the transferee by the disclosure of the know-how will be an asset or an advantage of an enduring nature unless there are any limitations in the agreement on its endurability or otherwise pointing to the contrary. If the agreement was for the very establishment and the production is to be on the basis of the know-how supplied to it, the above principle will apply a fortiori as in that case Section 10(2)(xv) of the Indian Income-tax Act, 1922, or the corresponding Section 37 in the Income-tax Act, 1961, would not apply as an expenditure relating to a business which is not already in existence but that is to come into existence in future.
38. We have already noted that there was no such limitation in the agreement on its endurability. The assessee could use the technical data and the knowledge acquired even after the period of ten years and could deal with it as if it were their own asset. We are, therefore, of opinion that the amounts paid are not admissible deductions under the Income-tax Act, 1961.
39. The learned counsel for the assessee relying on certain clauses in the agreement wanted to submit that the agreement is a composite document providing for not only the supply of know-how but also for providing training facilities at their workshop in England for the selected Indian technicians and that only that portion of the consideration relatable to the technical know-how alone could be disallowed. The revenue on the other hand contended that the whole thing is know-how and there is no question of apportionment for any revenue expenditure. We may point out that the allocation, if any, in the consideration paid is not covered by the question referred for our decision and it had not even been argued before the Tribunal or the authorities. Therefore, we cannot consider this point.
40. For the foregoing reasons, we answer the reference in the negative and against the assessee with costs. Counsel fee Rs. 250.