Madhya Pradesh High Court
D. & H. Secheron Electrodes vs Commissioner Of Income-Tax on 14 August, 1980
JUDGMENT Sohant, J.
1. By this reference under Section 256(1) of the I,T. Act, 1961, hereinafter referred to as "the Act", the Income-Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing only 20% of Rs. 1,93,790, paid to the technical collaborators by the assessee as per the agreement dated 10th June, 1964, to be capitalised for the purpose of allowing development rebate and depreciation as per Sections 33 and 32, respectively, of the Income-tax Act, 1961, and in rejecting the assessee's claim in respect of the balance 80% of the aforesaid payment ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that 20% of the lumpsum payment of Rs. 1,93,790 was allocable for services rendered under Clause 1 of the agreement dated 10th June, 1964, for treating it as actual cost of plant and machinery and directing the ITO to allow development rebate and depreciation thereon ?"
2. The material facts giving rise to this reference briefly are as follows : The assessee is a private limited company which carries on business of manufacturing welding electrodes. The assessment year in question is 1967-68 for which the accounting period ended on 31st March, 1967. The company was incorporated on 3rd June, 1965. Before incorporation, an agreement dated 10th June, 1964, was entered into between S. A. des Ateliers de Secheron, a Swiss Corporation, having its head office at Geneva, Switzerland, hereinafter referred to as "the collaborators" and M/s. Hiranand Sons, the promoters of the assessee-company, for technical collaboration. On incorporation, the company ratified that agreement. During the assessment proceedings for the assessment year 1967-68, the assessee contended before the ITO that in accordance with the terms of the collaboration agreement, the initial lump sum payment of Rs. 1,93,790 made to the collaborators for their guidance and technical help in the setting up of the plant was revenue expenditure. This contention was not upheld by the ITO and, on appeal, the AAC also rejected that contention. On further appeal before the Tribunal, it was contended on behalf of the assessee that the expenditure of Rs. 1,93,790, incurred by the assessee-company as aforesaid, held by the assessing authorities as capital in nature, should be added to the actual cost of plant and machinery and the assessee should have, therefore, been allowed deduction on account of depreciation and development rebate on that account. The Tribunal examined the terms of the agreement entered into by the promoters of the company with the collaborators and held that the payment made to the collaborators was not merely for the purpose of technical know-how and that only twenty per cent. of the amount of expenditure so incurred should be capitalised towards the actual cost of plant and machinery. The Tribunal, accordingly, directed the ITO to allow development rebate and depreciation thereon subject to other requirements of law to be satisfied. Aggrieved by the order passed by the Tribunal, the assessee as well as the revenue sought reference to this court. That is how, the first question has been referred to this court for its opinion at the instance of the assessee and the second question has been referred to this court for its opinion at the instance of the revenue.
3. Now, before we proceed to answer the questions referred to us, it would be useful to refer to the relevant clauses of the agreement entered into by the promoters of the assessee-company with the collaborators.
"1. Secheron shall make available at its plant in Geneva, Switzerland, to Hiranand or to any person or company duly appointed as Hiranand's TECHNICAL ADVISER and concerned with the design, supervision of erection, start-up and maintenance, if any, all its files, data, experience and advice for the performance of this task.
Secheron shall approve all documents and drawings relating to the new plant including layouts, location of machinery, purchases of this machinery from foreign or Indian sources, so as to satisfy its requirements for the installation of the best possible manufacturing plant.
These services shall commence as soon as the agreement is signed and approved by the proper authorities and the technical adviser is accepted by mutual agreement.
In consideration of the obligations undertaken by Secheron under the scope of supply of know-how, Hiranand shall pay in Switzerland, in Swiss francs, such sum as will leave in the hands of Secheron or a bank of their choice in Geneva, Switzerland, an amount equal to Swiss francs 175,000 (One hundred and seventy-five thousand) on the day the agreement is executed.
12. In consideration of the obligations undertaken by Secheron under the scope of supply of technical services in Switzerland, Hiranand shall pay to Secheron during the currency of the agreement in Swiss francs in Switzerland a royalty fee on all products covered by this agreement manufactured by the company, irrespective of whether such products are or are not built in accordance with the know-how and/or technical assistance granted by Secheron calculated on the net selling price at the rate of 2 1/2%.
It is thus clear from the terms of the agreement that the amount of Swiss francs 175,000, equal to the amount of Rs. 1,93,790 payable under the agreement to the collaborators was in consideration of the supply of know-how so that the assessee may be able to erect and commission the plant. For the assistance to be rendered during the currency of the agreement, the collaborators were to be paid royalty. The Tribunal, however, has found that 20% of the amount of Rs. 1,93,790 paid to the collaborators by the assessee was for the services rendered in relation to the designing, selection, purchase and installation of plant and machinery. We are unable to find any basis for such bifurcation, and learned counsel for the department was also unable to point out any basis for bifurcating the amount of lump sum payment made to the collaborators and he fairly conceded that the finding of the Tribunal in that behalf could not be supported. Learned counsel for the department, however, strenuously contended that no part of the amount paid to the collaborators could be treated as actual cost of plant and machinery for the purpose of allowing depreciation and development rebate. On behalf of the assessee, it was contended that the Tribunal erred in not holding that the entire amount of lump sum payment made to the collaborators was for the purpose of erection of the plant for manufacturing goods and should have been capitalised for the purpose of allowing depreciation and development rebate thereon. It was, however, common ground before us that the expenditure incurred by the assessee as aforesaid was capital in nature.
Now, Sections 32 and 33 of the Act provide for depreciation and development rebate in respect of plant owned by the assessee. Under Section 43(3) of the Act, an inclusive definition of the expression "plant" is given. In this connection, we may usefully refer to the following observations of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd, [1974] 96 ITR 672, 698 :
"On reviewing these authorities, a broad consensus emerges from which the essential characteristics of plant can be clearly gleaned. The word 'plant', in its ordinary meaning, is a word of wide import and in the context of Section 32 it must be broadly construed. It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on as distinguished from a part of the plant with which the business is carried on. An article to qualify as plant must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called 'plant'. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on business. In the ultimate analysis the enquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is : Does it fulfil the function of plant in the assessee's trading activity ? Is it the tool of the taxpayer's trade ? If. it is, then it is plant no matter that it is not very long-lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose."
We respectfully agree with the aforesaid view.
Learned counsel for the department then contended that technical knowledge supplied to the assessee cannot be held to depreciate as knowledge never depreciates. The contention, though attractive, cannot be upheld. Dealing with a similar contention, the Karnataka High Court observed in Nippon Electronics (P.) Ltd. v. CIT [1979] 116 ITR 231 as follows (p. 239) : "The time has now come when we may have to revise our views in some respects regarding the distinction which is being observed so far between tangible assets and intangible assets while considering the question of depreciation allowance. We cannot forget that as time passes, it is not only that tangible assets that depreciate but also intangible assets like technical knowledge become obsolete as progress is made in scientific research. Moreover, when technical know-how is acquired by incurring expenditure, there is no justification in denying appropriate deduction in respect of its cost while computing taxable profits if it can be brought under the heading 'Plant'."
4. We respectfully agree with the aforesaid observations. As held by the Supreme Court in Challapalli Sugars Ltd, v. CIT [1975] 98 ITR 167, the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. It, therefore, follows that the entire lump sum payment made to the collaborators by the assessee, which was for the purpose of bringing the plant of the assessee into existence and to put it in working condition, would have to be included in the actual cost of the plant and machinery, and that the assessee would be entitled to deduction on account of depreciation and development rebate thereon, in accordance with the provisions of the Act.
5. For all these reasons, our answer to the first question referred to us is in the negative and against the department. In view of our answer to the first question, it is not necessary to answer the second question referred to us. Parties shall bear their own costs of this reference.