Gujarat High Court
Commissioner Of Income-Tax vs Sayaji Iron And Engg. Co. Ltd. on 22 September, 1993
Equivalent citations: [1994]210ITR950(GUJ)
Author: J.M. Panchal
Bench: J.M. Panchal, M.B. Shah
JUDGMENT J.M. Panchal, J.
1. At the instance of the Commissioner of Income-tax, Central, Ahmedabad, the Income-tax Appellate Tribunal, Bench "B" ("the Tribunal", for short), has made the present reference to this court under section 256(1) of the Income-tax Act, 1961 ("the Act", for short), as the Tribunal was satisfied that two questions of law arise out of the order passed by it in Income-tax Appeal No. 1956/(Ahd.) of 1979.
2. The reference has arisen in the background of the following facts :
The assessee, Messrs. Sayaji Iron and Engineering Company, is a private limited company, which manufacturers road making machines, quarry equipments and turn-key plants. The assessee entered into two contracts with : (i) Klaus Gerd Hoes of West Germany, and (ii) Aulmnn and Neckscheulte of West Germany, on November 13, 1972, and March 26, 1973, respectively. The assessee received technical know-how for manufacture, construction and assembly of various sizes of jaw crushers, impact breakers, grinding attachments double shifts mixtures and curring and crushing machines under the contract with Aulmnn and Neckscheulte; whereas it received know-how for manufacture, construction and assembly for asphalt paver finishers models under the contract with Klaus Gerd Hoes. The contracts were to be operative initially for a period of five years, renewable for a further period of 5 years. The blue prints, drawings and information relating to the manufacture of the machinery under these know-how agreements were to be received by the assessee in West Germany within three months from the date of each contract coming into force. The assessee was to pay for the supply of the documents a sum of Rs. 2,40,000 to Aulmnn and Neckscheulte of West Germany and a sum of Rs. 1,10,000 to Klaus Gerd Hoes in five equal yearly instalments. The first instalment was payable within three months against airway bill as proof of dispatch of the necessary blue print and plan and the next four instalments in the four consecutive years after the first instalment. Besides, the assessee was to manufacture under licence from these two West German companies the machinery in question in accordance with technical know-how using the name of the two companies. For use of the patent, experience and know-how for manufacture of the machinery, the assessee was to pay a royalty at the rate of four per cent. of the net ex-factory sale price of the products. As a result of the abovereferred agreements, the assessee was required to pay Rs. 22,000 to Klaus Gerd Hoes of West Germany and Rs. 48,000 to Alumnn Neckscheulte of West Germany.
3. The assessee submitted its return of income for the assessment year 1975-76 declaring a total income of Rs. 9,45,826. Before the Income-tax Officer, the assessee claimed deduction of Rs. 70,000 paid to the above referred two foreign companies as revenue expenditure. The Income-tax Officer took the view that the documents pertaining to designs, blue prints and other information became the sole property of the assessee at the fixed cost of Rs. 2,40,000 payable to Aulmnn and Neckscheulte of West Germany and Rs. 1,10,000 payable to Klaus Gerd Hoes of West Germany and the payment in question of Rs. 70,000 was an expenditure of a capital nature. The Income-tax Officer, therefore, rejected the assessee's claim of deduction of Rs. 70,000 as revenue expenditure.
4. The assessee, therefore, preferred an appeal before the Commissioner of Income-tax (Appeals), Baroda, without any success. The assessee thereupon filed Income-tax Appeal No. 1056/(Ahd.) of 1979 before the Tribunal.
5. The Tribunal considered the nature of the contracts in question and following the view taken in the case of CIT v. L. G. Ramamurthi [1977] 110 ITR 453 (Mad) held that Rs. 70,000 paid by the assessee to the two foreign collaborators to obtain technical know-how was allowable as a revenue expenditure.
6. The Commissioner of Income-tax, Central, Ahmedabad, submitted an application under section 256(1) of the Act requiring the Tribunal to draw up a statement of case and refer the questions of law for the decision of this court. The Tribunal was satisfied that two questions of law arose out of the order passed by it in Income-tax Appeal No. 1056/(Ahd.) of 1979. The Tribunal, therefore, drew up a statement of case and he made reference of the following two questions of law for the decisions of this court :
"(1) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 48,000 and Rs. 22,000, respectively, payable to the German companies know in short as 'Aubema' and 'Hoes' are allowable as revenue expenditure?
(2) Whether the finding of the Appellate Tribunal that, on the facts and in the circumstances of the case, the amounts of Rs. 48,000 and Rs. 22,000 payable under the contract respectively to 'Aubema' and 'Hoes' are allowable as revenue deduction, is correct in law and sustainable from the material on record?
Reasons :
7. The question, therefore, which requires to be examined and answered is whether the expenditure in question is revenue or capital? In determining whether a particular expenditure is revenue or capital, what is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to business realities. There is also no single definitive criterion which, by itself, if determinative whether a particular outlay is capital or revenue. The "once for all payment" test is also inconclusive and in a given case, the test of "enduring benefit" may breakdown. In Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), the company which was engaged in the manufacture of antibodies and pharmaceuticals was granted a licence for manufacturing penicillin on June 8, 1961. The company started negotiations in 1963 with a reputed the Japanese enterprise engaged in the manufacture of antibodies with a view to increasing the yield. By an agreement dated October 9, 1963, the Japanese enterprise agreed to supply to the company technical information know-how, etc., in consideration of a "once for all payment" of U.S. $ 50,000. The company was supposed to keep the technical know-how confidential and secret. For the assessment year 1964-65, the company claimed deduction of Rs. 2,39,625 as revenue expenditure. The Department and the Tribunal rejected the claim holding that the expenditure was capital in nature. On a reference, the High Court held that the said sum was not a revenue expenditure. While reversing the decision of the High Court, the Supreme Court deprecated the unrealistic approach to ignore rapid advances in research and to attribute a degree of endurability and permanence to the technical know-how at any particular stage. The Supreme Court has, inter alia, held as under (page 391) :
"The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstances that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enterprise.
It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692."
8. Therefore, the question to be considered is whether improvisation by acquisition of blue prints, drawings, technical know-how, etc., from the foreign collaborators in some areas of enterprise of the assessee was supplemental to the existing business or it amounted to a new or fresh venture? It appears to us that the financial outlay under the contracts was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. There is no material on the record of the case for coming to the conclusion that the assessee had obtained under the agreement a completely new plant with completely new process and completely new technical know-how from the foreign collaborators. The business of the assessee right from the beginning is manufacture of road making machines, quarry equipment and turnkey plants. Even after the contracts, the products continued to be the same. There is also no material to hold that the area of improvisation was not part of the existing business or that the entire gamut of the existing manufacturing operations, for the commercial production of road making machines, quarry equipment and turnkey plants had become obsolete or inappropriate in relation to the exploitation of blue prints, drawings, technical know-how, etc., supplied by the foreign collaborators. The improvisation in some areas of the enterprise was supplemental to the existing business and there is no material to hold that it amounted to a new or fresh venture. The contracts pertain to products already in the line of the assessee's established business and not to a new product. In our view, the financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the assessee.
9. In view of the foregoing discussion, we are of the view that on the facts and in the circumstances of the case, the amounts of Rs. 48,000 and Rs. 22,000, respectively, paid to the German companies known in short as "Aubema" and "Hoes" are allowable as revenue expenditure. Therefore, the finding of the Appellate Tribunal that, on the facts and in the circumstances of the case, the amounts of Rs. 48,000 and Rs. 22,000 paid under the contracts respectively to "Aubema" and "Hoes" are allowable as revenue deduction, is correct in law and sustainable from the material on record. Both the questions referred to us are, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
10. The reference stands accordingly disposed of, with no other as to costs.