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Whereas BHPV is a company fully owned by the Government of India and has the necessary equipment and shops for the construction of such plants.

Whereas BHPV wishes to undertake in India the design and construction of low temperature gas separation plants by using the processes, methods of manufacture, know-how and techniques developed by A.L. and benefit from the technical assistance of AL therefor.

The above clearly shows that the activity of the assessee is manufacture of various units of machinery for supplying them to various other industries. The payments made the foreign company are nothing but an expenditure incurred for the purpose of acquiring a knowledge in order to turn out its stock-in-trade, namely various machines it fabricates for supplying to others. Thus, it is stated that the payments are made for the purpose of carrying on of business and not for the purpose of acquiring any capital asset. The fact that the assessee had treated this amount as capital expenditure or sought to write off this amount in a particular manner in the books of account does not decide the issue whether the payment is in the nature of capital or revenue. He also points out that what the assessee obtained was only a licence from the collaborator under its patents to manufacture and sell in India the equipment comprising the plants. Article 3 of the agreement stipulates that after signing the agreement and after receipt of an enquiry from a customer by the assessee, the foreign collaborator shall supply the details required for preparing the proposal from the assessee to its customer. On the acceptance by the assessee of a firm order for a plant AL shall supply to the assessee the basic engineering, the basic design and fabrication details, the details necessary to enable experienced engineers to prepare detailed engineering drawings to be used for the manufacture, assembly etc. and detailed engineering designs in the case of the first unit of each type of capacity, if BHPV require it. AL was also prepared to train BHPV's personnel in this matter and also assist BHPV in procurement, progressing and inspection of equipment that may have to be purchased outside India. Should any services of its employees be necessary, AL was also prepared to send them. Article 4 states that BHPV agreed that during the terms of this agreement, they shall not conclude directly or indirectly a similar collaboration agreement with any other party in the same field as covered by Article 1, without the written consent of AL. This clearly shows that BHPV is not the owner of the information obtained from AL. BHPV is also supposed to ensure secrecy of the technical data and know-how obtained and it shall not pass on to other parties except inasmuch as is necessary to procure sub-deliveries and to enable the customers to operate and maintain the plant supplied. Transfer of technical data and know-how obtained by BHPV from AL to another Indian party is permitted subject to written approval by AL on such transfer and on mutually acceptable terms and conditions. In lieu of the above services rendered, AL was to be paid a lump sum of 750,000 French Francs in different instalments. In addition, fees for services rendered by AL by way of engineering fees and technical documentation fees were also to be paid. Royalty was also payable at the rate of 4% on the net ex-works sale value. On the basis of these terms of agreement, Sri Seetharamayya argues that the payments made by the assessee to AL were for the purpose of carrying on of its business viz., manufacture of plant and machinery which are to be used by its customers and not for the purpose of acquiring any capital asset. Reliance in this connection was sought to be placed on the decisions of the Andhra Pradesh High Court in Praga Tools Ltd.'s case (supra) and Veljan Hydrair (P.) Ltd. v. CIT [1989] 177 ITR 552 (AP), the Bombay High Court in CIT v. Tata Engg. & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538, the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, the Patna High Court in Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 and the Calcutta High Court in CIT v. B.N. Elias & Co. (P.) Ltd. [1987] 168 ITR 190.

5. We have considered the rival submissions. In our opinion, these appeals filed by the revenue have no substance and deserve to be dismissed. The nature of the assessee's business is that of manufacturing or fabricating machines for use in other industrial undertakings. After getting firm orders from various customers, the assessee fabricates the machines required by them according to their orders and delivers them after completely manufacturing them. In order to enable it to fabricate these machines, it has to use its own expertise either developed by itself or by borrowing the knowledge from others. The machines manufactured by it for supply to others are in the nature of stock-in-trade of the assessee. Any expenses incurred to bring out this stock-in-trade are in the nature of manufacturing expenses which are always revenue in nature. Manufacturing expenses also include expenses incurred for procurement of expertise to enable it to manufacture the machines which it is selling. In order to equip itself properly to manufacture certain special items of machinery used in steel and chemical industries, the assessee had been licenced by Government of India for manufacture of cryogenic units by which Oxygen, Nitrogen and Argon are separated from air. The equipment is also used for separation of converted or coke oven gas for the production of ammonia synthesis mixture by liquid nitrogen wash process. The assessee found that the foreign collaborator AL, has the expertise for manufacture of these machines and entered into an agreement to procure this knowledge. As pointed out by Sri Seetharamayya, the preamble of the agreement clearly states that the knowledge has been sought to be acquired in order to enable the assessee to carry on its business of manufacture of machines. The scope of the agreement as given in Article 1 shows that the assessee intended to design, fabricate, erect and commission plants for separation of various gases and also to produce ammonia synthesis mixture. For this purpose, it obtained a licence from AL. The collaborator is supposed to grant the assessee a licence and its patents, know-how and technical data to manufacture and sell in India the equipment comprised in the plants mentioned in Article 1. The assessee is not entitled to export the machines manufactured by it to certain countries stipulated in Article 2.2 whereas it is permitted to export them to other countries. Article 3 stipulates that on signing the agreement, AL will remit to the assessee the general data and standard norms as per Schedule 2. On receiving an enquiry from a customer by BHPV, the collaborator shall supply the details required for preparing the proposal from BHPV to its customer, on acceptance by BHPV of a firm order for a plant, AL will supply to BHPV the basic design and fabrication details, details necessary to enable experienced engineers to prepare detailed engineering drawings to be used in the manufacture, assembly etc. Detailed engineering designs will be supplied in the first unit of each type of capacity if so required by BHPV. AL had also agreed to train the personnel of BHPV technically in the matter of manufacture of the above machines and to assist BHPV in procuring the necessary machinery for use in its factory for production of the above machines. If considered necessary by BHPV, AL was also willing to make available to BHPV services of their experts to work in India and to help the assessee in the manufacture of the machines. Article 4 stipulates that BHPV agrees that during the term of the agreement, BHPV shall not conclude directly or indirectly a similar collaboration agreement with any other party in the same field. Article 5 states that BHPV will ensure that the technical data and know-how received by it will not be passed on to any other party excepting to the extent as necessary to procure sub-deliveries. Article 6 stipulates that BHPV will be permitted to transfer the technical data and know-how obtained from AL to other Indian parties subject to written approval by AL and on such mutually acceptable terms and conditions. Any improvement made in the manufacturing methods and processes by either party will be informed to the other party from time to time. For these services rendered by AL, the assessee is supposed to pay an amount of 750,000 French Francs in various instalments in lump sum. In addition, certain lump sum payments were also to be made as engineering fees, technical documentation fees etc. Royalty was also payable on the ex-works sale value of the plant when the machines are sold.