Income-tax---

----Capital or revenue expenditure ---Assessee engaged in manaufacture of oil engines---Entering into collaboration agreement with foreign company for supply of technical assistance for products to be manufactured and assembled and supply of drawing, specifications, etc., for foreign company's engines-- Technical know-how obtained supplemental to existing business---Payment to be measured annually in terms of gross sales--- Though agreement was for period of 10 years, it was liable to be terminated by either party at one year's notice---On termination of agreement assessee to return all plans, designs, drawings, patent rights etc. to foreign company---Secrecy clause id agreement which precluded assessee from divulging any information supplied to it to any third party---No enduring benefit obtained by assessee under agreement-- Amount paid under agreement to foreign company for supply of technical assistance, etc., is revenue expenditure.

`The assessee-company was engaged in the manufacture and sale of oil engines, etc. It entered into a collaboration agreement with a foreign company and, in pursuance of the agreement, paid to the foreign company a sum of Rs.20,79,513 as consideration for supply of (i) technical assistance for products to be manufactured and assembly thereof and (ii) supply of drawings, specifications for procedures and operating and maintenance manuals for the foreign company's engines. The assessee claimed the amount paid as a deduction in computing its income. The Income Tax Officer took the view that one-half of the amount paid was in the nature of royalty and hence partook of the character of capital expenditure. With regard to the remaining half, the Income Tax Officer took the view that 50 percent thereof related to technical assistance for the products to be manufactured and assembled and the remaining 50 per cent related to supply of manaufacturing drawings, specifications, etc., and the consideration relatable to technical assistance received from day to day in respect of the products manufactured was revenue expenditure and the remaining 50 percent was capital expenditure. The Appellate Assistant Commissioner concurred with the view of the Income Tax Officer. The Tribunal held that the entire expenditure constituted revenue expenditure. On a reference:

Held, that the expenditure incurred by the assessee related to the carrying on of its business and, under the facts and circumstances of the case, it was an integral part of its profit-making process. The aim and object of the expenditure was to run the business more profitably. The technical know-how obtained by the assessee under the collaboration agreement was supplemental to the existing business of the assessee and there was no evidence to show that the assessee obtained a completely new plant with a completely new process and a completely new technical know-how. The agreement pertained to a product already in the line of the established business of the assessee. All these factors clearly indicated that the various services under the collaboration agreement were for improvement in the operation of the existing business and its efficiency and profitability. Another fact, which was also relevant was that there was no once for all payment. The payment was related to the sales of the product and it was calculated at 2.5 per cent. of the sale value of the product Besides, the agreement, though for a period of ten years, was liable to be terminated by either party at one year's notice. On termination of the agreement,; the assessee was required to return all plans, designs, drawings as well as patent rights, trade marks, etc. to the foreign company. There was also a secrecy clause in the agreement which precluded the assessee from giving an` of the information supplied to it to any third party. This was also a relevant factor in deciding whether the benefit derived by the assessee was of an enduring nature. Therefore, the expenditure of Rs. 20,79,513 incurred by the assessee for getting the technical know-how and other assistance was revenue expenditure and was allowable as a deduction.

Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC).

G.S. Jetley with P.S. Jetley for the Commissioner.

G. Krishnan for the Assessee.

JUDGMENT

Dr. B.P. SARAF, J: --By this reference under section 256(1) of the Income Tax Act, 1961 made at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the whole amount of Rs.15,83,934 paid by the assessee to Messrs Cummins Engine Company of U.S.A. in accordance with the terms of the agreement, dated March 15, 1962, constituted revenue expenditure?"

The assessee is a public limited company engaged in the manufacture and sale of oil engines etc. The assessment year under reference is 1973-74, the relevant previous year being year ended September 30, 1972. In the above previous year, the assessee paid to one Messrs Cummins Engine Company incorporated in the U.S.A. ("Cummins") an amount of Rs.20,79,513 as consideration for the following services:

(i) Technical assistance for products to be manufactured and assembly thereof.

(ii) Supply of drawings, specifications for procedures and operating and maintenance manuals for Cummins diesel engines.

This payment was made pursuant to a collaboration agreement, dated March 15, 1962 between the assessee-company and Cummins for supply of technical know-how by Cummins. The assessee claimed this amount as a deduction in the computation of its income. The Income Tax Officer, on an interpretation of the terms of the agreement, was of the opinion that one-half of the amount of Rs.20,79,513 which the assessee had paid during the previous year was in the nature of royalty and, therefore, partook of the character of capital expenditure. With regard to the remaining one-half, the view of the Income Talc Officer was that 50 percent thereof related to technical assistance for the products to be manufactured and assembled and the remaining 50 per cent. was relatable to the supply of manufacturing drawings, specifications, etc. In the opinion of the Income Tax Officer, the consideration relatable to the technical assistance received from day-to-day in respect of the products manufactured was of the character of revenue nature and the remaining 50 percent was of the character of capital nature. For the above reasons, the Income Tax Officer held that three-fourths of the total expenditure was of capital nature. The Appellate Assistant Commissioner concurred with the view of the Income Tax Officer.

The assessee took the matter further by way of second appeal to the Income Tax Appellate Tribunal (for short "the Tribunal"). The Tribunal, on a detailed examination of the terms and conditions of the collaboration agreement and the case-law on the subject, held that the entire expenditure of Rs.20,79,513 (and not 1/4th thereof, as held by the Income Tax Officer and the Appellate Assistant Commissioner) constituted revenue expenditure. Hence, this reference at the instance of the Revenue.

We have heard learned counsel for the Revenue, Mr. G.S. Jetley, and also learned counsel for the assessee, Mr. G. Krishnan. We have carefully perused the foreign collaboration agreement, dated March 15, 1962, between the assessee and Cummins. Under the agreement, the assessee is given exclusive Manufacturing rights and licence under the patent rights of Cummins. For that purpose, Cummins had to give the following assistance to the assessee:

(a) Technical assistance for products to be manufactured and assembly thereof.

(b) Complete technical know-how of plant and machinery to be set up.

(c) Manufacturing drawings, specifications for procedures and operating and maintenance manuals for Cummins diesel engines.

As remuneration for the technical assistance, technical information and services rendered to the assessee-company, the assessee-company had to pay a technical assistance fee to the foreign company at the rate of 2-1/2 percent of the gross sales of C.I. products (Cummins diesel engines). The agreement, in the first instance, was for a period of ten years and thereafter subject to the approval of the Government of India, for further five-year periods subject to termination-at one year's notice by either party. It was provided that, on termination of the agreement, the assessee would cease to use the patent rights and trade marks acquired pursuant to the said agreement and return all plans, designs, drawings, specifications and technical papers to Cummins.

There is no dispute in this case that the amount of Rs.20,79,513 for which deduction had been claimed by the assessee relates to the services rendered under items (a) and (c) only. This payment does not relate to any "technical know-how of the plant and machinery to be set up". It is also evident that technical fees up to September 30, 1967, were waived by the foreign company Cummins. '

On a scrutiny of the above facts and the relevant terms of the collaboration agreement, it is evident that the assessee wanted to avail of the benefit of the technical know-how possessed by Cummins for the manufacture and assembly in India of diesel engines and the various components thereof in accordance with specified designs, which had been developed by Cummins. For that, the assessee entered into a collaboration agreement under which the assessee was to get exclusive rights 'and licence under the patent rights of Cummins and technical information to manufacture and assemble in India Cummins diesel engines and parts and accessories thereof. It was also to get non-exclusive rights and licence to sell the said products in any part of the world. It was, however, stated in clear terms in the said agreement that, by the agreement under consideration, patents or trade marks of Cummins could not be deemed to have been transferred to the assessee. There was also a secrecy clause in the agreement. which required the assessee not to divulge the information to third parties. The assessee was also to get technical assistance in the manufacture and assembly of C.I. products. So also during the subsistence of the agreement, Cummins was to furnish to the assessee fresh technical information coming into its possession. The products manufactured by the assessee were to conform to the designs, drawings, etc., of Cummins. The agreement was in the first instance to last for a period of ten years and thereafter, subject to the approval of the Government of India, for further periods of five years each. There was, however; a clause which entitled either party to terminate the same at any time with prior notice of one year. On termination of the agreement, the assessee was obliged to return all plans, designs, drawings, etc., as well as the patent rights, trade marks, etc., to Cummins. For all these cumulative services rendered by Cummins, the assessee was to pay a technical assistance fee equal to 2-1/2 percent of the gross sales of C.I. products annually. Thus, the payment of technical fees was to be measured annually in terms of gross sales and it was not a one-time lump sum payment or payment in instalments of any agreed sum.

It is also an agreed position that the assessee was already engaged in the business of manufacturing oil engines. The technical assistance obtained under the collaboration agreement was not for the purpose of setting up any new industry or manufacturing any new product as such. It was only to get the latest technology. The Income-tax Officer held that only 25 percent of this payment was revenue expenditure whereas the Tribunal came to a finding that the entire expenditure was revenue expenditure. The Revenue has challenged this finding of the Tribunal.

Learned counsel for the Revenue placed before us the terms of the agreement quoted in the order of the Tribunal and stated that though the, payments in question were not for obtaining technical know-how for setting up of a new plant the benefit derived from the technical assistance was of enduring nature and that being so, the Income-tax Officer was right in holding that 75 per cent of the total payment was expenditure of capital nature. According to counsel, the Tribunal erred in law in reversing the said finding of the Income-tax Officer and holding the entire payment to be revenue expenditure.

We have carefully considered the submissions of learned counsel for the Revenue. We, however, find it difficult to accept the same as, on -a persual of the facts of the case, the aim and object of the expenditure, the services rendered, the nature and character of the advantage obtained by the assessee, commercial expediency and the nature of the payment, we do not find that, in the instant case, the assessee derived any enduring benefit at all. The expenditure incurred by the assessee related to the carrying on of its business, and, under the facts and circumstances, it is an integral part of its profit making process. The aim and object of the expenditure is to run the business more profitably. The technical know-how obtained by the assessee under the collaboration agreement was supplemental to the existing business of the assessee and there is no evidence to show that the assessee obtained a completely new plant with completely new process and a completely new technical know-how. The agreement pertained to a product already in the line of the established business of the assessee. All these factors clearly indicate that the various services under the collaboration agreement were for improvement in the operation of the existing business and its efficiency and profitability. Another fact, which is also relevant is that there was no once for all payment. The payment was related to the sales of the product and it was calculated at 2-1/2 percent of the sale value of the product. Besides, the agreement; though for a period of ten, years was liable to be terminated by either party at one year's notice. On termination of the agreement, the assessee was required to return all plans, designs, drawings, as well as patent rights, trade marks, etc., to the foreign company. There was also a secrecy clause in the agreement, which precluded the assessee from giving any of the information supplied to it to any third party. This is also a relevant factor in deciding whether the benefit- derived by the assessee was of any enduring nature. As observed by the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 at 390:

"The: circumstances that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition."

Thus, from a careful analysis of the facts and circumstances of this case, it is clear that the expenditure of Rs.20,79,513 incurred by the assessee for getting the technical know-how and other assistance represented revenue expenditure and was allowable as a deduction in the computation of the income of the assessee.

In that view of the matter, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue. Under the facts and circumstances of the case, we make no order as to costs.

M.BA./12/T.FReference answered.