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The assessee is a company engaged in the business of manufacture of motor vehicle accessories. The assessee entered into a technical collaboration agreement with Mitsubishi Heavy Industries Ltd., Tokyo (for short 'MHF) on 10th April, 1972, according to which the Japanese company provided technical know-how to the assessee-company for the manufacture of certain precision tools such as, hobs, gear shaper cutters, broaches, shaving cutters, etc. The assessee- company agreed to pay, according to the agreement, a lump sum amount of thirty four millions of Japanese Yen in four installments in US Dollars and the assessee- company was also obliged to pay royalty at 4 per cent of the selling price of the products manufactured commencing from the fourth year. The assessee paid a sum of Rs. 9,40,250 to MHI under the technical collaboration agreement and claimed the same as revenue expenditure to be deductible as such from business income for the asst. yr. 1975-76, and the ITO initially allowed the claim of deduction of the assessee which was debited to the P&L a/c under the head, 'technical know-how charges'. The ITO, subsequently, reopened the assessment, and in the assessment proceedings, he called for the agreement of technical collaboration and after considering the terms of the agreement of technical collaboration, he came to the conclusion that the assessee had acquired assets of an enduring nature, as the assessee had right to use the technical know-how even after the expiry of the agreement and, therefore, he held that the payment of Rs. 9,40,250 was capital in nature and not admissible as revenue expenditure. He also disallowed the claim of the assessee towards the provision made towards gratuity. The assessee preferred an appeal challenging the order of the reassessment made by the ITO both on the ground of jurisdiction and on the merits of the case. The CIT(A) upheld the order of the ITO as regards the jurisdiction of the ITO to reopen the assessment. He also held that the assessee was not entitled to allowance on provision made towards gratuity. As regards the payment towards technical know-how charges, he held that the assessee had the benefit of technical information received even after the expiry of the agreement in the manufacture of the products, but the only restriction that was imposed was that the assessee was not entitled to mark the products as provided under art. 9 of the agreement. He came to the conclusion that the assessee. by obtaining information, did not merely improve the products, but started manufacturing new products and in this view of the matter, he held that the amount paid cannot be regarded as revenue expenditure, but should be regarded as capital expenditure and dismissed the appeal preferred by the assessee.

6. We have carefully considered the submissions of the learned counsel for the parties. It is necessary to scan the various articles of the agreement entered into between the assessee and MHI. The preamble portion of the agreement positively provides that the purpose of the agreement was to adopt better production methods, improving the quality and taking up the manufacture of other types of products. Under art. 2, the assessee was granted an exclusive licence and right to use and obtain the technical information knowledge and experience including the technical assistance and training of technical personnel for the purpose of manufacture of products in India and selling the products. We have seen the nature of technical information provided under art. 3 of the agreement and a study of art. 3 indicates that the assessee was keen on the production of the products and other matters connected with the manufacture of the products. The technical assistance required to be rendered by the foreign company relates to the inspection of the sample products submitted by the assessee and training the personnel in the foreign country. It is permissible for MHI to depute its technicians for the purpose of carrying out the works relating to the manufacture of the products. Though the agreement makes a distinction between the payments of consideration, the assessee was required to pay a lump sum for the first 3 years and from the commencement of the fourth year, the assessee agreed to pay royalty at a fixed percentage on the sales and it is apparent that the assessee was required to pay lump sum in the initial years as there would be teething problems during the initial years and soon after the assessee established its market for the products, the amount was to be paid by way of royalty at a fixed percentage of the sales. The period of agreement is provided for in art. 6 of the agreement and it is no doubt true that the assessee was given a right to use the technical information for the manufacture of the products even after the expiry of the period of the agreement, but the assessee was not entitled to mark the products after the expiry of the agreement with the wordings, 'manufactured by SRP Tools Ltd. under technical collaboration of Mitsubishi Heavy Industries Ltd., Japan', as provided for in art. 9 of the agreement. There are other usual articles found in the agreement. A close study of the agreement clearly shows that the assessee was entitled to draw upon the technical information for the manufacture of the products and the object of the agreement is for the running of the business and not for setting up any new factory. The assessee no doubt, on the basis of the finding of the CIT(A) started manufacturing new products, but, on that account, it cannot be stated that the object of the assessee in entering into the agreement and making the payment was not for running of the business. It is impermissible, in our view, when construing the nature of the payment to concentrate on one particular clause of the agreement for the manufacture of certain new products. The products cannot be new for all time to come as the novelty attached to the new product would wane off and the tag of newness of the products would wear off after some years of production. Therefore, the expression, 'new' in any production would lose its charm after some years of production and in the changing economic scenario and rapid technological development, the word, 'new' has only an euphemeral value. That apart, a distinction must be made in case where the knowledge was acquired to set up a new plant from those cases where the assessee had the right to get the technical know-how for the running of the business. The cumulative effect of the entire agreement has to be seen. The assessee is an existing company and though it entered into an agreement for the manufacture of new products, the knowledge that was obtained can neither be regarded as capital in quality nor the entire amount fund can be branded as capital in nature.

7. That apart, the nature of the agreement is such that it could not be stated that the assessee had acquired absolutely any asset and merely because a lump sum amount was paid, it is not possible to hold that it will assume a different character of acquisition of knowledge. A study of various articles of the agreement also shows that the assessee had mere access to the information which was essential for carrying on its business activities and for running its business efficiently and it is not of much significance that some of the products manufactured by the assessee are new products. Another significant aspect that is noticed is that the assessee has an existing business and even assuming that certain new products are manufactured with the aid and assistance of the technical knowledge obtained under the technical collaboration agreement, it cannot be stated that the assessee obtained a new plant with a complete new process and complete new technology for the manufacture of the products. The test laid down by the Supreme Court in Jonas Woodhead & Sons (India) Ltd. case, cited supra that whether the assessee obtained a new plant with complete new process and new technology has to be seen in the light of the other tests laid down by the Supreme Court, viz., whether there was an improvisation of existing business or a new business was set up and whether on the expiry of the agreement, the assessee could manufacture the product that had been set up with the collaboration of the foreign company. In effect, the cumulative effect of the various terms and. conditions of the agreement have to be considered in the determination of the question whether the payment can be regarded as revenue in nature or capital in nature. The various articles in the technical collaboration agreement clearly show, as seen earlier, that the assessee was granted only a licence giving the right to use the technical knowledge and even after the expiry of the agreement, though the assessee was not prohibited from using the knowledge, there was a clear mandate against the assessee not to use the mark on the products indicating that the products were manufactured not with the technical collaboration of the foreign company. Considering the object of the agreement, namely, it is for adopting better production methods and improving the quality and also taking up the manufacture of products, we are of the opinion that the Tribunal was not correct in focussing on only one clause of the agreement and then to come to the conclusion that the expenditure was capital in nature.

10. In Shriram Refilgeration Indusnies Ltd. vs. CIT (supra), the assessee entered into a technical collaboration agreement for the manufacture of sealed compressors for air- conditioners and refrigerators on 26th June, 1961, and the commercial production started in October, 1964, and the business was set up in the accounting year ending September, 1965. The question that arose before the Delhi High Court was whether a sum of Rs. 2,39,084 paid towards collaboration agreement can be regarded as revenue expenditure. The Delhi High Court held that the object of the agreement was to obtain the benefit of technical assistance for the running of the business and it could not be stated that the assessee had acquired any knowledge or asset of enduring nature. The facts of the decision of the Delhi High Court, in our opinion are similar to the facts of the case and in the collaboration agreement in the instant case, the assessee had only a licence and there was no parting of any secret formula in favour of the assessee- company and the assessee had merely an access to certain technical information regarding production and improving the quality of the products and therefore, the payment cannot be said to be capital in nature.