Patna High Court
Tata Robins Frazer Ltd. vs Commissioner Of Income-Tax on 8 April, 1986
JUDGMENT Uday Sinha, J.
1. These are two references under Section 256(1) of the Income-tax Act. Tax Case No. 196 of 1976 is at the instance of the assessee and Tax Case No. 197 of 1976 is at the instance of the Revenue, In these references, we are concerned with the assessment year 1971-72. The question referred to us at the instance of the assessee is :
"(1) Whether, on the facts and in the circumstances of the case, the royalty of Rs. 3,09,991 paid by the assessee in terms of the agreement with the foreign collaborators contains any element of capital nature ?"
2. Three questions have been referred at the instance of the Revenue. They are :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 80,688 representing sales tax could not be treated as assessee's income in view of the fact that the same amount represented the liability of the assessee in the mercantile system of accounting ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in bifurcating the expenditure of royalty into 2/3rds revenue expenditure and 1/3rd capital expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee could withdraw the claim of extra shift allowance before the Income-tax Officer ?"
3. The question referred at the instance of the assessee and question No. 2 at the instance of the Revenue cover common ground in the sense that the core question to be decided is whether the sum of Rs. 3,09,991 or any part thereof paid by the assessee in terms of the agreement with the foreign collaborators contained any element of capital nature/revenue nature. The Tribunal had directed that one-third of the payment should be disallowed as representing capital expenditure in the hands of the Indian company and the balance should be allowed as revenue expenditure. By this verdict of the Tribunal both the parties are aggrieved. That has led to two references challenging the correctness of the part decided against them.
4. It will be convenient at this stage to dispose of the third question referred at the instance of the Revenue here and now. This question had fallen for consideration before us in another reference of this very assessee which was the subject-matter of Tax Case No. 82 of 1976 disposed of on November 21, 1985 [CIT v. Tata Robins Frazer Ltd. [1987] 163 ITR 886 (Pat). ] by us. The assessee had claimed extra shift allowance. That claim had been negatived by the Income-tax Officer. The Tribunal had accepted the claim of the assessee. When the reference was taken up for hearing before us, Mr. Dinesh Vyas stated in candid terms that the assessee did not intend to contest the matter and that the assessee accepted the correctness of the Income-tax Officer's order. Learned senior standing counsel did not object to the stand of the assessee. That being the attitude of the parties, it was ordered that the order of the Income-tax Officer should be considered to be the effective order and the assessment order may be passed accordingly. We directed the Tribunal to pass orders accordingly. Without answering the question referred to us, the tax case was disposed of. The same position prevails in these references as well and Mr. Dinesh Vyas, for the assessee, has not shifted his stand. He sticks to the concession made in the earlier tax case. This question is, therefore, answered against the assessee to the effect that the assessee was not entitled to extra shift allowance. As we refused to answer the question in the earlier tax case in view of the concession of Mr. Dinesh Vyas-which concession has been repeated before us in these references as well--in like manner we refuse to answer the third question referred to us. The order of the Income-tax Officer shall be an effective order and the Tribunal will pass appropriate orders in accordance with the concession of the assessee. That disposes of question No. (3) at the instance of the Commissioner.
5. Question No. (1) of the Commissioner relates to the ascertainment of the nature of sales tax received by the assessee. The question is whether it can be treated as income in the assessment year in question. The assessee follows the mercantile system of accounting. In the course of its trade, it realised sales tax on sale of goods. The assessee was liable to deposit the sums in the treasury and in that sense, it was certainly the liability of the assessee. But the assessee did not deposit the sums in the Government treasury. In the relevant year in question, therefore, it must be held to be income. It will, of course, be entitled to allowance as expenses when it pays into the Government treasury. The liability to pay would arise when the assessment has been made. The nature of such realisations is related to the question whether the assessee follows the cash system of accounting or the mercantile system of accounting. Since the assessee was following the mercantile system of accounting, the liability to pay had accrued during the assessment year in question and the assessee did not pay it, it must be deemed to be the income of the assessee. The view that I have taken is supported by the decision of the Supreme Court in Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615 and our own decision in CIT v. Motipur Sugar Factory (P.) Ltd. [1985] 154 ITR 259 (Pat).
6. That brings us to the vexed question, question No. (2), hotly contested by the parties in regard to the nature of the payments made by the assessee to its foreign collaborators. According to the assessee, the entire sum of Rs. 3,09,991 paid as royalty was revenue expenditure and allowable as such. According to the Revenue, the whole of it was capital expenditure and not allowable deduction in terms of Section 37 of the Income-tax Act.
7. The assessee is an incorporated company (hereinafter to be referred to as "the T.R.F."). The assessee-company was to establish a plant for the purpose of manufacturing and selling certain "materials handling and processing equipment and components and providing certain engineering services and undertaking the execution on engineered systems contracts". With that object, in December, 1963, it entered into a set of agreements with Hewitt Robins International (H. R. Int.) and the General Electric Company Ltd. (hereinafter called "the G. E. C."). This set of agreements may be described as agreement No. 1, the agreements between TRF and H. R. Int. being exhibit A and with GEC as exhibit B. The object of the agreements was to set up and establish a plant of which H. R. Int. was possessed of technical data and information. The GEC was to execute the electrical part and H. R. Int. the mechanical/structural parts. In terms of these agreements, TRF was to make a lump sum payment of $50,000 U.S. to H. R. Int. as well as to GEC as soon as at least 50 per cent. of the issued capital of the TRF had been paid up. The plant of the TRF was to be set up for manufacturing specified equipments. "Specified Equipment" was defined as follows:
"(a) 'Specified Equipment' shall mean equipment to be manufactured by TRF which is listed and described in Appendix I forming part of this agreement, which is a copy of Appendix I to the Application on Form D, submitted by the parties to the Indian Government on November 28, 1961."
8. Appendix I to exhibit A, referred to above, was as follows :
"APPENDIX--I Materials Handling & Processing Machines :
Jaw crushers of various types, including hammer mills, gravity breakers, etc. Vibrating equipment, mechanical and electrical including screens, feeders, conveyors, shake-outs, bunker vibration, etc. Mechanical Feeders, such as apron and table feeders.
Washing Trommels.
Blade Mills.
Log Washers.
Spiral Concentrators.
Ball, Rod and Tube Mills.
Concentrating tables.
Sand and Slurry pumps.
Wagon Tipplers.
Stocking, blending and reclaiming machines.
Drag Scrappers.
Belt conveyors including idlers, but not including rubber-belting.
Mine hoists.
Screen cloth for vibrating screens.
Speed reducers.
Industrial Chain."
9. These agreements show that the TRF was to establish a factory/plant and TRF would set up materials handling and processing machines for its own constituents. It is not in controversy that the payments made under these agreements were capital expenses and development allowance and rebate were allowable accordingly, but the said sums were not allowable as business expenditure in terms of Section 37 of the Act.
10. Apart from the above set of agreements, there was another set of agreements between the very same parties which may be referred hereto as agreement II. In terms of these agreements, H. R. Int. and the GEC were , to render technical services and technical assistance to TRF for which the latter was to pay to H. R. Int. royalty at the following rates :
"(a) One half per cent. of the total value of engineered contract sales of TRF less the value of the components and services imported from foreign sources, but including the value of the manufactured product.
(b) One per cent. of the ex-works value of all products sold as merchandise by TRF less the value of imported components thereof purchased by TRF."
11. The royalty payable by the assessee has been claimed as deductible allowance on the footing that it was revenue expenditure for the purpose of assisting TRF in manufacturing the material handling and processing plants of third parties. The initial agreements were entered into in December, 1963. They were amended in February, 1965. Those expired on December 3, 1973. Thereafter, it was once again extended for a period of five years in 1974. This extension was deemed to be effective from December 4, 1973. The question is whether the royalties payable to the foreign companies were revenue expenditure or not.
12. The question whether an expenditure is capital expenditure or revenue expenditure has since long been a vexed question. The line of demarcation is very thin, yet from time to time some broad outlines have been set out to distinguish capital from revenue expenditure. Bowen L.J. in City of London Contract Corporation v. Styles [1887] 2 TC 239 at page 243, described capital expenditure as one which "you do not use 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern". N. H. Bhagwati J. in Assam Bengal Cement Co. Ltd. v. C1T [1955] 27 ITR 34 (SC) explained that "the expenditure in the acquisition of the concern would be capital expenditure ; the expenditure in carrying on the concern would be revenue expenditure". This has been one of the important aspects to be considered in deciding whether an expenditure is capital or revenue in nature. Lord Hanworth M.R. in Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 KB 124 at page 138, [1931] 16 TC 253, page 268, observed that "the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested" for deciding whether the expenditure is capital or revenue. Dixon J. in Sun Newspapers Limited and the Associated Newspapers Limited v. The Federal Commissioner of Taxation (61 Com LR 337 at page 360) observed in this behalf as follows :
"But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a 'profit-yielding subject', the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners [1930] SC 215 at p. 220. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose."
13. A rough and ready test has, however, been followed in this country by trying to ascertain whether a particular expenditure brings about "enduring benefit".
14. In that situation, it would be a capital expenditure. This test leaves many gaps, but has generally been adopted as the answer to the question. This subject cannot be complete without referring to the decision in Benarsidas Jagannath, In re [1947] 15 ITR 185, 199 (Lah) [FB], where Mahajan J., as he then was, laid down the following tests:
"(i) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.
(ii) Expenditure may be treated as property attributable to capital when it 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. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.
(iii) Where the expenditure incurred was part of the fixed capital of the business, it would be capital expenditure, but if it were part of its circulating capital, it would be revenue expenditure. ' Fixed capital' is what the owner turns to profit by keeping it in his own possession. ' Circulating capital' is what he makes profit of by parting with it or letting it change masters."
15. In Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), N. H. Bhagwati J. approved the synthesis of Mahajan J., as he then was, in the above Full Bench case. Elaborating the matter a little further, Bhagwati J. observed that the question which arises for consideration is--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, whether it could be capital expenditure. And his Lordships answered the question in the following terms (at page 45):
"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."
16. And even after laying down the laws so succinctly, Bhagwati J. observed as follows (at pages 45 and 46):
"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 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 in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles."
17. 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 situations. The above principles have universally been adopted in our country. I, therefore, do not consider it necessary to refer to the plethora of decisions in this behalf.
18. The principles laid down by the Supreme Court must now be applied to the facts of our case. In this behalf, it would be relevant to state that in terms of the two agreements, the TRF was to set up a factory. The expenses incurred in setting up a factory would obviously be capital expenditure. This activity would be covered by agreement No. 1. In order to highlight the incidents under the two contracts, it would be relevant hereto quote some of the features of agreement No. 1. The preamble reads as follows:
"WHEREAS, TRF is an Indian company specially formed for the purpose of manufacturing and selling certain materials handling and processing equipment and components providing certain engineering services and undertaking the execution of engineered systems contracts as described in exhibit ' A' hereto.
AND WHEREAS GEC is possessed of technical data and information for the establishment of the plant and acquisition of the machinery and equipment for the manufacture of the above-mentioned products.
AND WHEREAS it has been agreed between the parties hereto that GEC will furnish to TRF, the information, drawings, and so forth in order to enable TRF to establish a plant and acquire the machinery and equipment for the manufacture of the above-mentioned products at Jamshedpur on the terms and conditions hereinafter mentioned."
19. Further, Clause 2 of that agreement reads as follows:
"2. To enable TRF to establish its plant at Jamshedpur for the manufacture of the specified equipment, GEC shall supply to TRF entirely outside India the following :
(i) The general layout of the plant to be erected by TRF at Jamshedpur incorporating up-to-date improvements and designs to meet a performance guarantee to be mutually agreed to by the parties hereto.
(ii) The necessary drawings and specifications of machinery and plant and the drawings and plants for the arrangement and installation of the machinery and plant in the factory to be established by TRF.
(iii) Advice on tenders and placing of orders for the purchase of machinery and equipment and for the construction of the plant and factory at Jamshedpur."
20. Other several clauses need not be referred to. It is not in controversy that the expenditure for carrying out exhibit I was capital expenditure. I have, however, quoted from the agreement only to highlight the distinction between agreement No. I and agreement No. II.
21. We must now look at the contents of agreement No. II. In the preamble to this agreement, it is stated that TRF is an Indian company specially formed for the purpose of manufacturing and selling certain materials handling and processing equipment and components and providing certain engineering services, as described in exhibit "A" (appendix I) to the agreement. It is also recited in the preamble that TRF shall manufacture the products mentioned in annexures (exhibits 1 and 2). H-R Int. agreed to give to TRF technical aid and active assistance as well as the benefit of their research in the manner and for the consideration mentioned thereafter. The contents of Specified Equipment and Services were spelt out in Clause 1 read with Appendices I and II of the agreement. The undertaking by H.R. Int. is contained in Clause 2. It is significant to note therein that the steps to be taken by H.R. Int. were to enable TRF to manufacture, sell and provide in India the Specified Equipment and Services. In their behalf, it agreed to supply as follows :
"2. To enable TRF to manufacture, sell and provide in India the Specified Equipment and Services.
(a) H.R. Int. shall, as and when required by TRF, supply or furnish the following in such country or countries outside India as may be convenient to the parties at no cost to TRF other than the fees provided in Clause 13 hereof:
(i) Standard manufacturing drawings, bills of material and material specifications covering the specified equipment ;
(ii) Information regarding the manufacturing methods and assembling practices and techniques as known to H.R. Int. or its affiliates on the date of this agreement and relating to the Specified Equipment ;
(iii) All other technical data and information regarding sources of supply of all materials requisite or necessary for enabling TRF to manufacture the Specified Equipment in India ;
(iv) Technical data and information available to H.R. Int. or its affiliates and requisite or necessary for enabling TRF to provide in India the said services;
(v) Such typical layout drawings, data sheets and other design information available to H.R. Int. or its affiliates as may be necessary to enable TRF to manufacture or render the Specified Equipment and Services.
(b) H.R. Int. shall during the period of this agreement supply periodically to TRF at no cost to TRF other than the fees provided in clause 13 hereof, information available to H.R. Int. or its affiliates concerning modifications or improvements in designs and manufacturing and assembling techniques and practices in regard to the said Specified Equipment and Services including the use of all patents or patented processes and inventions,
(c) H.R. Int. grants to TRF the right and licence (including non-transferable and non-exclusive licence under all patents owned or controlled by H.R. Int. or its affiliates or under which H.R. Int. or its affiliates have power to grant sub-licences without payment of additional royalty to their respective licensors) to make, use, sell and provide the Specified Equipment and Services in India in accordance with the designs, technical data, processes formulae and procedures used by H. R. Int. or its affiliates for the commercial production of the Specified Equipment and Services. It is understood that drawings, data, technical services and other technical information which H.R. Int. is required to provide under this Clause 2 shall be that which is available to H.R. Int. or its affiliates at any given time during the period of this agreement including the benefit of all research and development and H.R. Int. shall not be required to perform or provide any new or special design or engineering work for TRF. "
22. From the above, it will be seen that whereas the first agreement was for setting up a plant at Jamshedpur, the second agreement was for enabling TRF to manufacture, sell and provide Specified Equipment and Services. The second agreement provided for activity which may be regarded as profit-earning activity. Thus Clause 2 inevitably leads to the inference that the activity covered by the second agreement would be profit making activity. The expenses on that account would, therefore, inevitably be revenue expenditure. Some confusion may arise in regard to the nature of the activity on account of Sub-clause (v) of Clause 2(a). This shows that H.R. Int. was to supply some typical layout drawings. The confusion would not sustain, if it is appreciated that these drawings would not be the drawings of the plant of TRF at Jamshedpur, but would be drawings of the projects to be undertaken by TRF for its customers. In fine, by the test of profit-earning activity, the sums paid as royalties by TRF must be held to be revenue expenditure.
23. Let us test the nature of the payment by the other test, namely, whether the expenditure would result in "enduring benefit" to the assessee. That is the rough and ready accepted formula for deciding whether expenditure is capital or revenue. This matter can be tested only by an appraisal of the terms of the agreement which I have described in the judgment as Agreement No. II. The agreement was for ten years.
24. Royalty was payable for that period. Clause 13 of the agreement has been quoted earlier in paragraph 7. Clause 19 lays down that the agreement would be effective and in full force for a period of ten years from the date of the agreement and would continue thereafter, unless terminated , by either party by six months' notice in writing. The period of agreement has been extended on two occasions in the past. The last extension--if the word "extension" could be used--took place on September 23, 1976, when the period of agreement was extended for further five years. Learned senior standing counsel contended that since the agreement was to remain effective and the benefit to the assessee was for a long duration, the benefit to the assessee must be deemed to be "enduring benefit" and, therefore, the expenses on account of royalty payments must be deemed to be capital expenditure. It was submitted that not only did the agreement remain valid for ten years, but in effect it remained valid till 1978 by a supplemental agreement. On account of the length of the agreement, learned counsel for the Revenue contended that the conclusion is inescapable that the assessee had derived enduring benefit and, therefore, the expenditure must be deemed to be capital expenditure.
25. The submission is fallacious. The number of years for which an agreement is to remain operative or for which the expenses have to be incurred are not a conclusive index for determining whether the assessee can be said to have obtained enduring benefit. A similar argument was advanced before the Bombay High Court in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 (Bom). This submission was rejected with the observation that the duration of the agreement cannot be decisive of the matter. The same view was taken by a Full Bench of the Mysore High Court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443 (Kar) where the user was for fifteen years. The submission urged on behalf of the Revenue was rejected by their Lordships with the observation that the period of agreement by itself is not determinative of the nature of the payments made under it. I am in respectful agreement with the views of the Bombay and Mysore High Courts in this behalf. The length of the period of expenditure does not indicate that the expenditure is capital in nature.
26. Learned senior standing counsel drew our attention to some of the Clauses of the agreement (Agreement No. II) to show that special treatment had been given to the assessee and that was of an "enduring" nature. Reliance was placed upon some of the clauses of the agreement. Clause 15 of the agreement provides that H.R. Int. would make available to TRF in the United States of America and/or such other country or countries outside India as may be convenient to the parties, the benefits of any agreements it may have entered into with third parties regarding the use of patents and trade marks, the sharing, acquiring or disclosing to each other of any technical information relating to the Specified Equipment and Services or any of them. Special reliance was placed by learned senior standing counsel on Clause 22. I shall, therefore, quote in extenso:
"22. Even after the termination or determination of this agreement under Clauses 19 and 21(b) hereof, TRF will be entitled to continue to manufacture sell and provide the Specified Equipment and Services according to H.R. Int.'s patents and other technical information communicated by H.R. Int. to TRF or acquired by TRF from H.R. Int., provided, however, that TRF shall not be entitled to use the trade marks of H.R. Int. but will manufacture, sell and provide the Specified Equipment and Services under its own name and trade marks."
27. It was contended on behalf of the Revenue that the above clause brought out a clear distinction between the instant case and the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). In terms of Clause 22, it was submitted that the assessee would be deriving the advantage of supply of know-how by H.R. Int. for all times. The submission, in my view, is fallacious. The import of Clause 22, quoted above, is that even after the contract had been terminated or determined, TRF will continue to manufacture, sell and provide the Specified Equipment and Services according to H.R. Int. patents and other technical information which may have been communicated by the former to the assessee or acquired by the assessee from H.R. Int. What does it imply ? It implies that the assessee shall be free to supply to its constituents Specified Equipment and Services. The entire project of TRF was to indulge in establishment of material handling processes. It necessarily follows that even after the termination or determination of the agreement, TRF would be carrying on its business of executing material handling projects. Surely, having set up a factory for providing material handling projects on turnkey basis, the factory would not be closed down on the termination of the agreement. But what did H.R. Int. part with ? Not its rights in the patents or the drawings in regard to setting up of the plant of the constituents of TRF. It only gave TRF the right to use the patent and the technical knowledge acquired by H.R. Int. It is true that this agreement does not provide for return of documents. Even so, H.R. Int. did not part with any of its assets absolutely for ever. This would be so for two reasons. Firstly, that knowledge cannot be returned back, once it has been acquired by TRF, it could not be returned to H.R. Int. The conclusion would be the same for still another reason, namely, the knowledge or know-how provided by H.R. Int. would pale into obsolescence. After a number of years, the knowledge imparted to TRF by H.R. Int. by the drawings and layouts would become outmoded and of no use to either party. In that view of the matter, the drawings, the ideas and the inventions were not transferred to TRF for all times. The absence of the clause relating to the return of documents and layout would ' not, therefore, make any difference between the Ciba's case [1968] 69 ITR 629 (SC) and the instant case.
28. The relevant aspect to be considered is about the right to use the patents and trade marks. In this behalf, it would be useful to appreciate that H. R. Int. clearly prohibited the use of trade marks or patents of H. R. Int. After the determination of the agreement, TRF would be free to sell and provide Specified Equipment and Services, but only under its own name and trade mark and not under the trade mark or patent of H.R. Int. It is obvious, therefore, that for the duration of the agreement all that H.R. Int. had transferred was the use of its trade marks and patents. Thereafter, the assessee could neither use the patents and trade marks nor would H. R. Int. be required to give its fresh knowledge or know-how to the assessee. Mr. Dinesh Vyas, learned counsel for the assessee, heavily relied upon the case of Ciba of India [1968] 69 ITR 692 (SC), in support of his stand that the royalty payments were revenue expenditure. Learned senior standing counsel, on the other hand, contended that the said case was distinguishable and could not be of any assistance to the assessee. In Ciba of India Ltd. [1968] 69 ITR 692 (SC), the Supreme Court held that the royalty payments were revenue expenditure. According to them, the agreement showed that the secret processes had not been sold by the Swiss company to the assessee. The conclusion was based for the reasons--(a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business ; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons ; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement. For those reasons, their Lordships of the Supreme Court held that the royalty payments were revenue expenditure. In this connection, I cannot refrain from quoting the observations of Shah J. (at p. 700):
"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."
29. It is thus obvious that Ciba of India Ltd.'s case [1968] 69 ITR 692 (SC) was decided in favour of the assessee not on the consideration that the Indian company had to return the documents to the Swiss company, but upon the footing of the six circumstances enumerated above. It is not necessary for me to refer to the English cases, as Ciba's case [1968] 69 ITR 692 (SC) has already taken note of them. The assessee in this case, as in Ciba's case [1968] 69 ITR 692 (SC), did not under the agreement become entitled exclusively even for the period of the agreement to the patents and trade marks of the foreign company. It had merely access to the technical knowledge and experience which H. R. Int. commanded. Judged by those standards, the assessee was on that account, in the instant case, as in Ciba of India Ltd.'s case [1968] 69 ITR 692 (SC), a mere licensee for a limited period of the technical knowledge of H. R. Int. with the right to use the patents and trade marks for a limited period. In my view, Ciba of India Ltd.'s case [1968] 69 ITR 692 (SC) does support the assessee's stand. Learned senior standing counsel for the Revenue was candid in conceding that if the instant case came within the periphery of Ciba's case [1968] 69 ITR 692 (SC), the point at issue must be decided in favour of the assessee. In my view, the ratio in Ciba's case [1968] 69 ITR 692 (SC) does support the assessee's case.
30. Further, the point at issue in Ciba's case [1968] 69 ITR 692 (SC), was whether the royalty paid to the Swiss Company was an allowable deduction in terms of Section 10(2)(xii) or 10(2)(xv) of the Indian Income-tax Act, 1922, and in that connection, their Lordships laid down that the sums paid were allowable in terms of Section 10(2)(xv) and not 10(2)(xii). The return of the documents could not have been the index for deciding whether the expenditure was of enduring nature or not, since knowledge once acquired is incapable of being returned back. The decision of the Supreme Court in Travancore Sugars and Chemicals Ltd. v. CIT [1966] 62 ITR 566 (SC), entirely supports the assessee's claim. To conclude matters, reference, however, must be made to the Full Bench decisions of the Andhra Pradesh and the Mysore High Courts in Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP), Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443 (Kar) and the Division Bench decisions of the Calcutta High Court in CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal), CIT v. Aluminium Corporation of India Ltd. [1973] 92 ITR 563 (Cal) and of the Bombay High Court in CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom) and CIT v. Bajaj Electricals Ltd. [1984] 148 ITR 83 (Bom), to name only some of the decisions on this point which support the stand of the assessee. I am in respectful agreement with the law laid down in those cases. Thus, judged from the test of "enduring benefit" to the assessee, the assessee did not derive the same in terms of the agreement.
31. Learned senior standing counsel for the Revenue heavily placed reliance on the case of Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86 (SC). The decision apparently appears to support the Revenue. It will, therefore, need consideration in some greater detail. The assessee in that case manufactured scientific instruments and apparatus like dumpy levellers, staves, prismatic compass, etc. It entered into two separate collaboration agreements with a Hungarian Trading Company for undertaking the manufacture of microscopes and theodolites, which, in consideration of payment of Rs. 1,60,000 under the two agreements, agreed to supply to the assessee all the technical know-how required for the manufacture of these instruments. The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the assessee under the agreements acquired the right to manufacture in India under its own trade mark and name the said instruments and the right to sell the same in India. To enable the assessee to manufacture these instruments in India, the foreign collaborator agreed to render "documentation service" by supplying to the assessee an up-to-date and correct complete set of each of the five types of documents. The sum of Rs. 1,60,000 was debited by the assessee under the head "Library" as capital expenditure. In the assessment proceedings for the assessment year 1966-67, the assessee claimed a sum of Rs. 12,000 by way of depreciation on "Library". Such depreciation was claimed on the ground that the payment of Rs. 1,60,000 had been made really for the outright purchase of designs, drawings, charts and other literature which were voluminous occupying almirah-full of storage space and these collectively constituted the pages of the books and the assessee claimed depreciation at the appropriate rate on acquisition of capital. The Income-tax Officer held that the sum of Rs. 1,60,000 did not represent the value of books purchased by the assessee but represented the price paid for acquiring the technical know-how which amounted to capital expenditure, but since no tangible or depreciable asset was brought into existence, no depreciation allowance could be claimed. It will thus be seen that it was not disputed in that case that the amount paid was capital expenditure. The question falling for consideration before us or which fell for consideration before the Supreme Court in the case of Scientific Engineering House (P.) Ltd. [1986] 157 ITR 86, did not fall for consideration in Travancore Sugars and Chemicals Ltd.'s case [1966] 62 ITR 566. The basic question falling for consideration was thus entirely different. The question for consideration in Scientific Engineering House (P.) Ltd.'s case [1986] 157 ITR 86, was whether the assessee was entitled to claim depreciation allowance in terms of Section 43(3) within the definition of "Plant" and what would be the measure thereof. It will be relevant here to quote the contention of the assessee as put by the Supreme Court (at page 91) :
"In support of the appeals, counsel for the assessee accepted the High Court's view that no part of the expenditure (Rs. 80,000 under each of the two agreements) was on revenue account and the whole of it was of a capital nature."
32. Counsel for the Revenue, on the other hand, had contended before the Supreme Court that the entire expenditure was of a capital nature. It had brought into existence a non-depreciable asset. On these rival contentions, the Supreme Court observed as follows (at page 92) :
"Having regard to the rival contentions that were urged before us, it is clear that two questions really arise for determination in the case. The first is whether the 'documentation service' (supply of 5 complete sets of documents) agreed to be and actually rendered by the foreign collaborator to the assessee under the two agreements was incidental to the other services contemplated therein or whether it was the principal service for which mainly the payment of Rs. 1,60,000 was made by the assessee as a result whereof the assessee acquired all the technical know-how requisite for the purpose of manufacturing the instruments in question ? And, secondly, whether the said expenditure which was entirely of a capital nature, brought into existence a depreciable asset ? The answer to the former question depends upon the proper interpretation of the terms and conditions of the two agreements while the answer to the latter depends upon whether a capital asset like the technical know-how acquired in the shape of drawings, designs, charts, plans, processing data and other literature which formed the basis for the business of manufacturing the instruments in question would fall within the wide and inclusive definition of 'Plant' given in Section 43(3) of the Income-tax Act, 1961."
33. It will be appreciated from the above that the entire question falling for consideration before the Supreme Court in Scientific Engineering House (P.) Ltd. [1986] 157 ITR 86, was entirely different from the one before us. The ratio of that case would have no relevance to the case before us.
34. Learned senior standing counsel for the Revenue made a marathon endeavour to persuade us to hold that the sum paid as royalties to H.R. Int. was capital expenditure and relied upon Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad), Addl. C1T v. Southern Structures Ltd. [1977] 110 ITR 890 (Mad) and Ram Kumar Pharmaceutical Works v. CIT [1979] 119 ITR 33 (All). I have no desire to encumber this judgment by attempting to distinguish these cases, as they are distinguishable from the Supreme Court cases. Where they are indistinguishable, they must be deemed to have not laid down the correct law.
35. Thus, judged by the test whether the payments were to be made in the process of profit-earning transaction, the payments in the instant case must be held to be revenue expenditure. Judged by the standard of enduring benefit, it must be held that the payments were not made for obtaining enduring benefit. Judged by the standard whether the payment was to be made from capital account or from circulating capital, it must be held that it was to be paid from the circulating account because it was to be paid on the basis of (i) one-half per cent., of the total value of engineered contract sales of TRF and (ii) one per cent. of the ex-works value of all products sold as merchandise by TRF. Judged by all the three tests, the sum of Rs. 3,09,991 must be held to be revenue expenditure.
36. Learned senior standing counsel for the Revenue raised yet another submission to establish that the payments were capital expenditure on the basis of the terms in the agreement that they were meant to confer monopoly rights on the assessee. This submission also is once again fallacious. It is true that in terms of Clause 4 of the Agreement No. II, H.R. Int. granted to TRF the exclusive right to be a registered user of any trade mark or trade name pertaining to the Specified Equipment and Services owned or controlled which were to be owned or controlled by H.R. Int. or its affiliates. In terms of Clause 5, TRF was granted non-exclusive right to sell in, or for use in, neighbouring countries the Specified Equipment and Services manufactured by it in India. In terms of Clause 6, H.R. Int. covenanted with TRF not to sell or supply by itself or through any of its subsidiaries to any other party in India, the technical information and services which it had agreed to supply to TRF. These are not strictly monopoly rights. Further, the agreement was terminable on six months' notice by either party. That would bring about an end to the monopoly, if any, which existed. In this connection, the terms of Clause 20 are rather significant which read as under :
"20. This agreement is subject to the obtaining of all approvals and consent required by law in India and if the last of such approvals and consents has not been obtained by December 1, 1963, H. R. Int. may terminate the same at its option by giving 30 days' notice in writing to that effect to TRF. In the event of termination as aforesaid, TRF will return to H. R. Int. all materials and documents whatsoever furnished to TRF by it prior to the date of such termination and TRF shall not divulge to any other person, firm or company any information whatsoever derived from H.R. Int."
37. From the above, it will be seen that H.R. Int. could terminate the agreement within 30 days' notice and the clause enjoins obligation upon the assessee to return all documents whatsoever furnished to TRF and restrained upon TRF against divulging to any other person, firm or company any information whatsoever derived from H.R. Int. This clearly shows that there was no monopoly right conferred upon the assessee. In my view, therefore, judged by standards of strict monopoly right the agreement did not create any monopoly in the assessee. The view that I have taken is on the basis of the decision of the Supreme Court in CIT v. Coal Shipments Pvt. Ltd, [1971] 82 ITR 902 (SC) and of the Calcutta High Court in Agarwal Hardware Works P. Ltd. v. CIT [!980] 121 ITR 510 (Cal).
38. For all the reasons stated above, I am clearly of the view that the sum of Rs. 3,09,991 paid to H.R. Int. by the assessee was revenue expenditure and was deductible allowance in terms of Section 37 of the Income-tax Act. They were not capital expenditure.
39. That leaves another problem to be resolved. The Tribunal bifurcated the sums spent between revenue and capital expenditure. It estimated 2/3rds of the payment as of revenue nature and 1/3rd attributable to advantage of an enduring nature. On that basis, the Tribunal directed that 1/3rd of the payment should be disallowed as representing capital expenditure in the hands of the assessee and the balance should be allowed as revenue expenditure. I am unable to appreciate the basis of this bifurcation. If the sum was paid to H.R. Int. for the services rendered by it in terms of the Agreement No. II, the whole sum should have been allowed as revenue expenditure allowable as such. Either the whole sum had to be allowed or the whole sum had to be disallowed. There is no basis for the bifurcation. In my view, the entire sum paid by the assessee was revenue expenditure and has to be allowed as such.
40. To sum up, question No. (1) referred to us at the instance of the Commissioner must be answered in favour of the Revenue and against the assessee. The Tribunal was not correct in holding that the amount of Rs. 80,688 representing sales tax could not be treated as the assessee's income. Question No. (2), as a whole, must be answered in favour of the assessee and against the Revenue. The Tribunal was not justified in bifurcating the expenditure on royalties into 2/3rds revenue expenditure and l/3rd capital expenditure. The entire sum of Rs. 3,09,991 was allowable as revenue expenditure. Question No. (3) we refuse to answer, in view of the concession of Mr. Dinesh Vyas that the order of the Income-tax Officer was acceptable to the assessee. The references are thus disposed of.
41. Since the references have been decided partly in favour of the assessee and partly in favour of the Revenue, there shall be no order as to costs.
42. Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal in terms of Section 260 of the Income-tax Act, 1961.
Nazir Ahmad, J.
43. I agree.