Calcutta High Court
Commissioner Of Income-Tax vs Shriram Bearings Ltd. on 21 June, 2001
Equivalent citations: (2001)170CTR(CAL)142, [2001]251ITR155(CAL), [2001]119TAXMAN970(CAL)
JUDGMENT
1. On an application under Section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the following question, for the opinion of this court: "Whether, on the facts and in the circumstances of the case and on an interpretation of the technical collaboration agreement, the Tribunal was justified in allowing" the payment of Rs. 2 lakhs as revenue expenditure ?"
2. The assessee is a public limited company manufacturing ball bearings. The assessment year is 1980-81. The assessee entered into an agreement styled "Technical Collaboration Agreement" with Industriework Echsof-flar, INA Ingenieur Disast GmbH, Federal Republic of Germany (INA). The agreement provided for the supply of technical know-how, which the INA had already developed, being in the same line of business, for a lump sum consideration of Rs. 3 lakhs and subject to Indian tax is sold to the assessee. According to Clause 7 of the agreement, the lump sum was to be paid in the instalments as under :
(a) Rs. 2 lakhs after the agreement has been taken on record by the Government of India.
(b) Rs. 1 lakh after the commencement of the commercial production.
3. The assessee claims before the Assessing Officer that the payment for technical know-how, which includes Rs. 2 lakhs is in the nature of revenue expenditure.
4. The Income-tax Officer did not accept the claim of the assessee. According to him, when the assessee on payment, for technical know-how under the technical collaboration agreement, acquires the benefit of enduring nature, therefore, the expenditure is a capital expenditure.
5. In appeal before the Commissioner of Income-tax (Appeals) the view taken by the assessee was endorsed. In the appeal before the Tribunal, the Tribunal considered the view taken by this court in the case of CIT v. B. N. Elias and Co. P. Ltd. [1987] 168 ITR 190, and the decision of the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT , and allowed the claim of the assessee that the expenditure was a revenue expenditure and, therefore, deduction should be allowed to the assessee in the assessment year in hand.
6. The matter was listed ten times. But none appears for the assessee. Heard learned counsel for the Revenue, Mr. Agarwal.
7. Mr. Agarwal submits that the issue is covered by the decision of the Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. v. CIT . He further submits that the decision relied on by the Tribunal has no application as in that case the assessee was not allowed to use the technical know-how after the expiry of the agreement, while in the case in hand the assessee can use the technical know-how, even after the period of the agreement.
8. The fact that under the agreement the assessee had to pay Rs. 2,00,000 to the German company, after the agreement has been taken on record by the Government is not disputed. Under that agreement the assessee has paid Rs. 2,00,000 to the German company. The expressions, "products", "technical know-how", "INA patents" and "territory" are all defined in the agreement itself. Clause 10 of the agreement provides that the agreement will be for a period of five years from the date of the commencement of the production and on production the assessee has to pay the royalty as per the terms of the agreement for five years. Sub-clause (b) of Clause 10 of the agreement provides that upon the expiry of the period pursuant to Sub-clause (a) of Clause 10 of the agreement, SBL, that is, the assessee, may continue to use the technical know-how, provided to it by INA and to manufacture the products whether patented or not.
9. In Jonas Woodhead and Sons (India) Ltd. , their Lordships have observed as follows (page 352) :
"But, in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the Revenue and against the assessee."
10. When under the agreement itself the assessee has been allowed to make use of the technical know-how even after the expiry of the period of the agreement, there is no doubt that the benefit the assessee has got is of enduring nature.
11. Considering the view expressed by their Lordships in the case of Jonas Woodhead and Sons (India) Ltd. , we find that the Tribunal has committed error in treating Rs. 2,00,000 as revenue expenditure. The expenditure, the assessee has incurred before the commencement of the production on use of the technical know-how which has been transferred by the INA to the assessee acquires the benefit of enduring nature. Thus, we are of the view that the expenditure is capital expenditure. The Income-tax Officer has rightly disallowed the claim of assessee.
12. In the result, we answer the question in the negative, that is, in favour of the Revenue and against the assessee.
13. The reference, thus, stands disposed of accordingly.
14. All parties concerned are to act on a xeroxed signed copy of this dictated order on the usual undertaking.