Income Tax Appellate Tribunal - Pune
Inspecting Assistant Commissioner Of ... vs Bajaj Tempo Ltd. on 30 December, 1995
ORDER
V. Dongzathang, Vice-President
1. Though the question sought to be referred to the Full Bench is stated to have arisen in the appeals of the assessee, I. T. A. Nos. 271 and 272/(PN) of 1985, counsel appearing on both sides agree that it does not arise in the above assessee's appeals. Both the sides agree that the question referred to the Full Bench is relevant for disposal of the first ground in the Revenue's appeal in I. T. A. No. 253/ (PN) of 1985. Even while submitting so, both sides represented that the question as is framed for reference does not project pointedly the real controversy between the parties and there was need to modify the framed question. By consent both the sides filed a modified question which is as follows :
" Whether, on the facts and in the circumstances of the case and on a proper interpretation of the technical collaboration agreement dated September 27, 1978, the lump sum consideration of Rs. 1,74,27,386 is a revenue expenditure allowable under Section 37(1)
2. There is complete agreement between the parties that by answering the above modified question, we will be disposing of only the first ground in the Revenue's appeal (I. T. A. No. 253/(PN) of 1985. relating to the assessment year 1979-80). Both the sides were fully aware that the other grounds of I. T. A, No. 253/(PN) of 1985 are yet to be decided by the Division Bench. Therefore, to sum up the resultant position that by taking up the abovereferred question for consideration, we should be taken to be disposing of only the first issue involved in the Revenue's appeal (I. T. A. No. 253/(PN) of 1985 for the assessment year 1979-80). We feel that this clarification is necessary in order to correctly understand the sequence of the proceedings.
3. The brief facts are that the assessee, a company, was a manufacturer of light commercial vehicles and diesel engines for the last several years. Vide agreement dated September 27, 1978, the assessee entered into an agreement with Daimler Benz A. G., by which Daimler Benz A. G., West Germany, granted the assessee the sole and exclusive right to assemble and manufacture OM 615, version No. 615.960, subsequently amended by type OM 616/2.4 diesel engines at the plant at Pune. The contract is valid only for the territory of India. For the rights granted under the agreement, which include supply of the know-how and technical product documentation, etc., the assessee was to pay royalty of DM 4.2 millions (equivalent to Rs. 1,74,27,386) in three equal instalments in the following manner, subject to the approval of the Government of India :
(a) The first instalment of DM 1.4 millions shall be paid within 60 days after the contract is approved by the Government of India and taken on record.
(b) The second instalment of DM 1.4 millions shall be paid one year after the first instalment has been due or on transfer of the know-how as per articles 2.2 and 2.4, whichever is later.
(c) The third and final instalment of DM 1.4 millions shall be paid one year after the commencement of the series production.
4. The assessee, therefore, claimed deduction of the entire amount of Rs. 1,74,27,386. The Assessing Officer considered the claim and it was his view that the liability of the assessee during the previous year relevant to the present assessment year is a contingent liability which arises only after fulfilment of certain conditions, and if these conditions are not fulfilled or the agreement is terminated earlier, then the liability automatically ceases. The Assessing Officer also considered the .question whether the payment is in the nature of revenue or capital and it was his view that the payment is in the nature of capital expenditure. For coming to this conclusion, he relied on the decision in the case of Addl CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) and Ram Kumar Pharmaceutical Works v. CTT [1979] 119 ITR 33 (All). It was also held by him that the following decisions relied upon by the assessee are not applicable to the facts of the case :
(1) CIT v. Ciba of India Ltd, [1968] 69 ITR 692 (SC) ;
(2) Antifriction Bearings Corporation Ltd. v. CIT [1978] 114 ITR 335 (Bom) ;
(3) ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 (Bom).
5. Aggrieved by the said order, the assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals) and it was submitted that the assessee was already engaged in the manufacture of light commercial vehicles and diesel engines for the last several years. The technical know-how obtained under the agreement was not for any new business or for factory or plant layout but merely to upgrade the technology in the manufacture of diesel engines by adopting the latest designs. It was further submitted before him that the company only obtained a licence to manufacture in accordance with the designs and techniques of Daimler Benz and there was no outright purchase of the know-how. The agreement was only for a period of ten years and on completion of the term, the assessee was under obligation to return all data, drawings, documentations, etc., received by it under the agreement. It was, therefore, claimed that the payment of technical know-how could not be regarded as capital expenditure. Reliance was placed on the decision of the Bombay High Court in the case of CIT v. Tata Engg. and Locomotive Co. P. Ltd. [1980] 123 ITR 538. An affidavit of the managing director was also placed on record to show that the mode and manner in which the technical know-how was furnished under the agreement was only a continuous flow of information for efficient and economical running of the business. It was further pointed out that the broad features of the present agreement compared fully with the case before the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692.
6. With regard to the question of accrual of liability for the payment, it was submitted that the liability accrued immediately on the signing of the agreement and, therefore, the deduction was to be allowed for the entire amount in the assessment year 1979-80 itself. The learned Commissioner of Income-tax (Appeals) considered the submissions and it was held by him that the payment for technical know-how claimed by the assessee is a revenue expenditure. In doing so, he relied on the decisions cited before him as also in the case of CIT v. S. L. M. Maneklal Industries Ltd, [1977] 107 ITR 133 (Guj) and in the case of CIT v. T. Maneklal Mfg. Co. Ltd. [1978] 115 ITR 725 (Bom) and C/Tv. Caltex Oil Refining (L) Ltd. [1979] 116 ITR 404 (Bom).
7. With regard to accrual of the liability, the learned Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the payment for technical know-how on the basis of actual payment, i.e., as and when the payment is made, the deduction will be allowed.
8. The assessee came up in appeal before the Tribunal contending that the learned Commissioner of Income-tax (Appeals) was not justified in directing the Assessing Officer to allow the claim on actual payment basis and not on the basis of the liability which accrued in the present assessment year. However, this issue is not relevant for the disposal of the appeal before us as this issue is to be decided by the Division Bench in I. T. A. No. 271/(PN) of 1985.
9. The Revenue has come up in appeal against the order of the Commissioner of Income-tax (Appeals) allowing the technical know-how fees as revenue expenditure. When the matter came up before the Tribunal, (Pune Bench), the Bench considered the issue to be quite crucial and thought it fit to refer it to the hon'ble President for constituting a Special Bench to consider the question and accordingly framed the following question :
" Whether expenditure incurred in obtaining technical know-how from foreign collaboration in the form of drawings, designs, operative conditions and for keeping abreast of the latest advancement and innovations constitutes plant and machinery for the purpose of depreciation and investment allowance, where the payments are not specifically indenti-fiable with dues for documentation data for drawings and designs ?"
10. Before the Special Bench, both the parties are agreed that the abovereferred question did not clearly bring out the real controversy and mutually agreed to the suggested question extracted in the earlier part of the order (paragraph 1).
11. Dr. Sunil Pathak, the learned Senior Departmental Representative, vehemently objected to the order of the learned Commissioner of Income-tax (Appeals). According to him, the Assessing Officer in this case carefully examined the various clauses of the agreement entered into by the assessee with Daimler Benz A. G. and recorded a specific finding that the right obtained by the assessee was in the capital field being of an enduring nature. The finding of the Assessing Officer is duly supported by the various clauses of the said agreement dated September 27, 1978, According to him, the assessee is desirous of obtaining technical know-how, designs, drawings and technical information in respect of assembly and manufacture of 0. M. 615 diesel engines from Daimler Benz. A. G. Daimler Benz had not made available its technical know-how for the assembly and manufacture of O. M. 615 engines to any party outside Europe. By this agreement, the assessee was granted sole and exclusive licence to assemble and manufacture in its plant in Pune, India, the said D. B. diesel engines vide article 1 of the agreement. The assessee was entitled to receive the know-how which consisted of technical product documentation as listed in article 2.2 of the said agreement. Over and above this, the assessee was entitled to continuous supply of technical product document from time to time. The assessee was authorised to give the drawings, specifications, production standards and other related documentation under its responsibility to its suppliers imposing upon them corresponding obligation to treat all documentation, know-how and information received from Daimler Benz A. G. as secret and confidential. There is, however, no debarment for sharing the documents and know-how with the suppliers vide article 10 of the agreement. The assessee was entitled to sub-license the said know-how to another Indian party for use and implementation in India on the same terms and conditions to be mutually agreed upon by all parties including Daimler Benz A. G. and subject to the approval of the Government of India. The duration of the terms of the agreement, subject to the approval of the Government of India, was for a period of ten years from the date of commencement of series production. However, the assessee was allowed to continue the assembly and manufacture as well as the sale of the licensed products even after the termination of the contract, though the data, drawings and documentation received by it from Daimler Benz A. G. were to be returned in terms of article 16 of the said agreement. Though the terms of the agreement are couched in such a language, the overall effect of the agreement is that the right purchased by the assessee is an outright purchase of sole and exclusive rights and assume the character of an asset of enduring nature in the capital field. The terms of the payment are also not decisive and, therefore, it is submitted that the order of the learned Commissioner of Income-tax (Appeals) is liable to be set aside and that of the Assessing Officer is to be restored. The learned Departmental Representative further drew our attention to the decisions relied by the Assessing Officer as follows :
(1) Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad) ;
(2) Transformer and Switchgear Ltd. v. CIT [1976] 103 ITR 352 (Mad) ;
(3) Addl. CIT v. Southern Structural Ltd. [1977] 110 ITR 890 (Mad) ;
(4) Ram Kumar Pharmaceutical Works v. CIT [1979] 119 ITR 33 (All).
12. Since the above decisions squarely cover the case of the assessee, it is submitted that the said expenditure is to be treated as capital expenditure.
13. On the other hand, Shri S. N. Inamdar, learned counsel for the assessee, vehemently supported the order of the learned Commissioner of Income-tax (Appeals). According to him, there is no dispute with regard to the fact that the assessee is a company manufacturing light commercial vehicles and diesel engines for the last several years. The business was set up in 1958 and the production of light commercial vehicles commenced in the year 1962. Ever since 1978, the assessee started production of not only light commercial vehicles, but also engines (including H. S. E. diesel). The assessee, therefore, entered into this agreement with a view to upgrade the technology in the manufacture of high speed diesel engines and to streamline the process of manufacture so as to achieve more efficiency and economy. The agreement is directly related to the manufacture of the product and assumes the character of running expenses of the business. Relying on the decision in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC), it is submitted that the amount paid for the provision of know-how and licence is in the revenue field and is an allowable expenditure. Learned counsel before us further drew our attention to the various provisions of the agreement to highlight the fact that the ownership of the know-how continues to remain with Daimler Benz A. G. and the right acquired by the assessee is only for upgradation of the technology so as to improve the efficiency and quality of the product. According to him, the assessee has only the right to exploit the know-how for a period of ten years and the same is to be returned to Daimler Benz in terms of article 16 of the agreement. During the period of agreement, the assessee cannot divulge the secret and even where the assessee was permitted to give sub-licence, it is with that limited right and not to pass on the ownership. The nature of the know-how is fully explained in terms of article 2 of the said agreement and the same is in the nature of technical information for the production of superior H. S. E. diesel engines. In such a case, the learned Commissioner of Income-tax (Appeals) is fully justified in following the decision of the jurisdictional High Court in the case of Tata Engg. and Locomotive Co, P. Ltd. [1980] 123 ITR 538 (Bom). The facts of the case of the assessee are on all fours and, therefore, the said decision fully covers the issue. It is further submitted that the said decision followed the decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692. Reference was also made to the decision of the Madras High Court in the case of Fenner Woodroffe and Co, Ltd. [1976] 102 ITR 665 which was dissented from. In such a case, the Tribunal is bound by the binding decision of the jurisdictional High Court and, therefore, there is no reason to interfere with the order of the learned Commissioner of Income-tax (Appeals).
14. Learned counsel for the assessee further cited the decision in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) and submitted that the Supreme Court in that case reviewed all the earlier decisions in this regard and eventually held that the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions ; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. Applying its earlier decision in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and in the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC), it was held that acquisition of know-how to produce higher yield and sub-culture of high-yielding strain of penicillin assumes the character of revenue expenditure. Since the facts of the case are identical to the facts before the Supreme Court, it is submitted that there is no infirmity in the order of the Commissioner of Income-tax (Appeals) and the same is liable to be upheld.
15. Learned counsel for the assessee also referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Venkateswara Transmission (P.) Ltd. [1988] 171 ITR 476 and of the Punjab and Haryana High Court in the case of CIT v. Super Steels [1989] 178 ITR 637 for the proposition that fee paid to a foreign company for obtaining technical information is revenue expenditure. Learned counsel also gave a compendium of decisions to support the claim that the expenditure is in the field of revenue as per the list given as part of the paper book.
16. Learned counsel for the assessee further submitted that the decisions relied upon by the Assessing Officer and the Senior Departmental Representative are distinguishable on facts as in those cases the acquisition of know-how was for setting up a new industry, whereas in the case of the assessee, the acquisition of the technical know-how is only for updating and improving the technology of the existing production. It is, therefore, submitted that the case of the assessee is fully covered by the decision of the jurisdictional High Court and the Supreme Court and, therefore, no interference is called for in this regard.
17. On a careful consideration of the rival submissions in the light of the material on record, we are of the view that there is no infirmity in the order of the learned Commissioner of Income-tax (Appeals). The facts of the case have been fairly brought on record by the Assessing Officer as well as the Commissioner of Income-tax (Appeals). The terms of the agreement also have been fully highlighted by both the parties. On these faets, we are of the view that the issue in question is squarely covered by the decision of the Bombay High Court in the case of CIT v. Tata Engg. and Locomotive Co. P. Ltd. [1980] 123 ITR 538. The Bombay High Court in that case considered the decisions of the Madras High Court in the.case of Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 and in the case of CIT (Addl) v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) and consciously dissented from the said view observing as follows (at page 553) ;
" The decision in Fenner Woodroffe and Co.'s case [1976] 102 ITR 665 (Mad), therefore, seems to have turned mainly on the consideration that there was no bar against use of the technical know-how beyond the period of agreement and that was why that court was persuaded to hold that the assessee had acquired an asset or an advantage of enduring benefit to his trade. With great respect to the learned judges who decided that case, it is not possible for us to follow the view taken in that decision.
As already pointed out by us from the mere fact that the assessee is entitled to use the know-how even after the expiry of the period of the agreement, it cannot be held that the assessee had acquired a benefit of an enduring character because the know-how does not remain stagnant. We have also pointed out that in essence the agreements in question were for acquiring technical knowledge regarding methods of production and in addition in case of Messrs. Daimler Benz the payment was for the use of the trade name. The decision in the case of Southern Structurals Ltd. [1977] 110 ITR 890 (Mad) merely followed the decision in Fenner Woodroffe and Co.'s case [1976] 102 ITR 665 (Mad). Since we are inclined to dissent from the view taken in that case, it is not possible to hold on the strength of the authority in that case that the expenditure in question in respect o? any of the agreements in question must be treated as capital expenditure."
18. Since the jurisdictional High Court in this case dissented from the decision of the Madras High Court relied upon by the Assessing Officer, there is no alternative for the Tribunal but to follow the binding decision of the jurisdictional High Court. The decision of the Allahabad High Court relied upon by the Assessing Officer also was decided on the same lines as in the case of Fenner Woodroffe and Co. [1976] 102 ITR 665 (Mad) by holding that since the assessee acquired ownership of the know-how and data for use by it in future without any limit of time, the assessee obtained an advantage of an enduring nature and, therefore, the payment was clearly capital in nature. Since the Bombay High Court dissented from following this view taken in the case of Fenner Woodroffe and Co. [1976] 102 ITR 665 (Mad), it can be said that this decision is also of no assistance to the Revenue.
19. From the records and also on the basis of the submissions made by learned counsel for the assessee, it is seen that the business of the assessee was set up some time in 1958 and it commenced production of light commercial vehicles since 1962. It started production of light commercial vehicles including engines since 1978 and the assessee acquired the technical know-how from Daimler Benz A. G. under this agreement for upgrading the technology in the manufacture of high speed diesel engines. In such a case, the decision of the Supreme Court in the case of Alembic Chemical Works Ltd. [1989] 177 ITR 377 is squarely applicable. It can also be safely held that the case of the assessee is squarely covered by the earlier decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692. In that case, 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 the technical knowledge available, the foreign company did not part with any of its business assets, nor the assessee acquired any asset or advantage of an enduring nature for the benefit of its business. The Supreme Court further found that the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period and the object of the agreement was to obtain the benefit of the technical assistance for running the business and the assessee was further expressly prohibited from divulging confidential information to third parties without the consent of the foreign company. The stipulated payment was recurrent dependent upon the sales and only for the period of the agreement. On these facts, it was held that the assessee-company did not acquire any asset or advantage of an enduring nature for the benefit of its business. If the ratio of the above decision is applied to the facts of the present case as done by the Bombay High Court in the case of CIT v. Tata Engg. and Locomotive Co. P. Ltd. [1980] 123 ITR 538, it emerges that the assessee-company had not acquired any asset or advantage of an enduring nature for the benefit of its business. Firstly, the right under the agreement under consideration was granted only for a period of ten years. The object of the agreement was to obtain the benefit of technical assistance for updating the technology and for the running of the business more efficiently and economically. The assessee was to maintain secrecy and could only share technical know-how with the permission of Daimler Benz A. G. The technical data, etc., were to be returned to Daimler Benz A. G. on the expiry of the period of agreement. Applying the ratio of the decision in Ciba of India Ltd.'s case [1968] 69 ITR 692 (SC), it is apparent that the assessee-company in this case had not acquired any asset or advantage of an enduring nature for the benefit of its business.
20. One of the objections raised by the Revenue is that the assessee can continue production even after the expiry of the agreement and, there-fore, the assessee was deemed to have sole and exclusive rights in terms of the agreement. This issue came up before the Bombay High Court in the case of CIT v. Tata Engg. and Locomotive Co. P. Ltd. [1980] 123 ITR 538 and it was held that the fact that the production can still be. continued after the expiry of the agreement is wholly immaterial for deciding whether such know-how can be treated as a capital asset. In that view of the matter, we hold that the objection raised by the Revenue on this account also is to be rejected as the same is not relevant for deciding whether the know-how acquired by the assessee can be treated as capital in nature. Respectfully following the ratio of the decisions cited above, we hold that the issue is squarely covered and there is no infirmity in the order of the learned Commissioner of Income-tax (Appeals). It is accordingly upheld.
21. In view of the above, we do not consider it necessary to go into the details of the various decisions cited before us by learned counsel for the assessee, as, in our view, we are bound by the decision of the jurisdic-tional High Court, which is sufficient to dispose of the issue placed before us.
22. This appeal will now go back to the Division Bench for disposal of the same along with other grounds raised in the appeal.