COMMISSIONER OF INCOME-TAX VS METALLURGICAL ENGINEERING CONSULTANTS (INDIA) LTD.
1997 P T D 1503
[221 ITR 90]
[Patna High Court (India)]
Before D.P. Wadhwa, C. J. and S. J. Mukhopadhaya, J
COMMISSIONER OF INCOME-TAX
Versus
METALLURGICAL ENGINEERING CONSULTANTS (INDIA) LTD
Tax Cases Nos.232 to 234 of 1981 and 57 and 58 of 1986 and Tax Cases Nos. 17 to 19 of 1983, decided on 25/04/1996.
(a) Income-tax---
----Depreciation---Plant---Drawings and designs constitute plant-- Depreciation allowable on amount spent on acquiring them---Income Tax Act, 1961, Ss.32 & 43(3).
The company, H.S., entered into an agreement in February, 1969, for ten years with a foreign company, U, under which H.S. acquired certain know-how from the foreign company. The know-how comprised technical and manufacturing information, data, detailed design and related calculations, plans, drawings, blue prints and specifications, relating to contract articles which were to be designed by HS for manufacture by others and sold by HS. It was stipulated that on the execution of the agreement HS would pay $1.00,000, and each year thereafter from the date of the execution of the agreement (through the ninth year) a similar amount of $1,00,000 provided of course the agreement was not terminated earlier. In addition to this payment, HS was to pay to the foreign company an amount equal to 4-1/4 per cent. of the net sales comprising all contract articles designed and manufactured by HS. HS had a unit known as Central Engineering and Design Bureau which unit was giving technical consultancy to other and for which purpose HS had entered into the aforesaid agreement with the foreign company. On the formation of Metallurgical and Engineering Consultants (India) Limited (the assessee), HS assigned all its rights and benefits under the agreement dated February 11, 1969, with the foreign company for an outright consideration of Rs.1.49 crore under an agreement, dated September 13, 1973 (relating to the assessment year 1974-75). For the year 1974-75, the assessee paid a sum of Rs.16,55,980 as licence fee, royalty etc., to the foreign company after the agreement was assigned to it by HS for the use of the technical know-how. Initially, the assessee claimed the entire amount of Rs.1.49 crore and Rs.16,55,980 as revenue expenditure. Subsequently, however, it revised its return claiming Rs.136 lakhs as revenue expenditure and Rs.30 lakhs was- capitalised and depreciation was claimed at the rate of ten per cent. The Assessing Officer treated the entire payment as capital expenditure but he declined to allow any depreciation. The Tribunal concluded that as far as the amount of Rs.1.49 crore was concerned, the same was payable in terms of the assigning agreement dated September 13, 1973, entered into with HS for which a capital asset was acquired by the assessee and hence it was a capital expenditure. As regards the balance payment of Rs.16.56 lakhs, the Tribunal concluded that it was in the nature of revenue expenditure because the assessee was a dealer of technical know-how services. The Tribunal was of the view that depreciation was allowable on the payment of Rs.1.49 crore. On a reference:--
Held, (i) that drawings, designs and charts constitute plant within the meaning of section 43(3) of the Income Tax Act, 1961. The acquisition of technical know-how is entitled to depreciation and thus the amount of Rs.1.49 crore paid by the assessee to HS could not be treated as revenue expenditure. The Tribunal was correct in holding that the assessee was entitled to depreciation on the said amount of Rs.1.49 crore:
Scientific Engineering House P. Ltd. v. CIT (1986) 157 ITR 86 (SC) and CIT v. Elecon Engineering Co. Ltd. (1987) 166 ITR 66 (SC) fol.
(b) Income-talc--
----Capital or revenue expenditure---Collaboration agreement---Amount paid on account of licence fees and for engineering services and services of foreign technicians---Revenue expenditure---Income Tax Act, 1961, S.37.
Payments to the foreign company on account of licence fees, engineering services and foreign technicians' services were deductible as revenue expenditure:
CIT v. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC) fol.
(c) Income-tax---
----Business expenditure---Expenses incurred for giving tea to its customers- Is deductible---Income Tax Act, 1961, S.37.
The Tribunal was correct in holding that the assessee was entitled to deduction of expenses incurred on giving tea to its customers.
CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC) fol.
CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj.); CIT v. Patel Brothers & Co. Ltd. (1977) 106 ITR 424 (Guj.) and CIT v. Rajasthan Mercantile Co. Ltd. (1995) 211 ITR 400 (Delhi) ref.
K.K. Vidyarthi and S.K. Sharan for the Commissioner:
K.N. Jhan, Senior Advocate and Ramesh Kumar Agrawal for the Assessee.
JUDGMENT
D.P. WADHWA, C.J.--- The Income-tax Appellate Tribunal, Patna Bench, Patna, drew up a statement of case as directed by the High Court in proceedings under section 256(2) of the Income-tax Act, 1961 (for short "the Act"), for the assessment years 1974-75, 1975-76, and 1976-77. A common statement for six cases, three at the instance of the Revenue and three at the instance of assessee, was drawn up. For the assessment year 1974-75, the tax case at the instance of the Revenue is Tax Case No.232 of 1981 and at the instance of the assessee is Tax Case No.19 of 1983, for the assessment year 1975-76, the tax case of the Revenue is Tax Case No.233 of 1981 and that of the assessee is Tax Case -No.18 of 1983 and for the assessment year 1976-77, the tax case of the Revenue is Tax Case No.234 of 1981 and that of the assessee is Tax Case No. 17 of 1983.
The questions which have been referred to this Court for decision are as under:
"(1)Whether the Tribunal was correct in holding that the assessee would be entitled to depreciation on the amounts of Rs.1,66,54,990, Rs.11,50,981 and Rs.11,52,709 incurred by the assessee during the assessment years 1974-75, 1975-76 and 1976-77, respectively?
(2)Whether the finding of the Tribunal that the abovementioned amounts had been spent by the assessee on acquiring patents and drawings is vitiated?
(3)Whether the Tribunal was correct in law in holding that the assessee was entitled to deduction of Rs.84,834 and Rs.1,51,033 incurred on giving tea to its customers for the assessment years 1975-76 and 1976-77', respectively?"
Whereas, the questions framed by the High Court at Patna in the assessee's reference application are as under:--
Assessment year 1975-76 (Tax Case No. 18 of 1983)
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs.11,50,981 paid to the foreign collaborators on account of licence fees, engineering service fee and foreign technicians services was not deductible as revenue expenditure?"
Assessment year 1976-77 (Tax Case No. 17 of 1983)
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 11,52,709 paid to the foreign collaborators on account of licence fees, engineering services fee and foreign technicians' services was not deductible as revenue expenditure?"
Assessment year 1974-75 (Tax Case No. 19 of 1983)
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the expenditure of Rs.1,19,92,816 paid to Hindustan Steel Limited and the sum of Rs.16,55,980 paid to the foreign collaborators were not deductible as revenue expenditure?"
Then at the instance of the Revenue for the assessment year 1978-79 and the assessment year 1979-80 again a common question has been referred by the Tribunal to this Court in Tax Cases Nos.57 and 58 of 1986 for its decision and it is as under:--
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee would be entitled to depreciation on the amounts of Rs.1,36,48,796, Rs.11,50,981 and Rs.11,52,709 incurred by the assessee during the earlier assessment years?"
To understand the controversy a brief background of the case may be necessary. The Hindustan Steel Limited (for short "H.S.L.") entered into an agreement dated February 11, 1969, for ten years with the United Engineering and Foundry Company, U.S.A. (for short, "foreign company"), incorporated in the United States of America under which H.S.L. acquired certain know-how from the foreign company. The know-how comprised technical and manufacturing information, data, detailed design and related calculations, plans, drawings, blue prints and specifications relating to contract articles which were to be designed by H.S.L. for manufacture by others and sold by H.S.L. The agreement contained details of know-how and the compensation payable by H.S.L. to the foreign company for this know how. It was stipulated that on the execution of the agreement H.S.L. would pay $1,00,000 and each year thereafter from the date of the execution of the agreement (through the ninth year) and a similar amount of $1,00,000 provided of course, the agreement was not terminated earlier. In addition to this payment, H.S.L. was to pay to the foreign company an amount equal to 4-1/4 per cent. of the net sales comprised of all contract articles designed and manufactured by the H.S.L. This H.S.L. had a unit known as Central Engineering and Design Bureau (for short "the Bureau") which unit was giving technical consultancy to others and for which purpose H.S.L. had entered into the aforesaid agreement with the foreign company. On the formation of Metallurgical and Engineering Consultants (India) Limited (in short, "the assessee"), H.S.L. assigned all its rights and benefits under the agreement dated February 11, 1969, with the foreign company for an outright consideration of Rs.1.49 crore under an agreement dated September 13, 1973 (relating to the assessment year 1974-75). For the year 1974-75, the assessee paid a sum of Rs.16,55,980 as licence fee, royalty, etc. to the foreign company after the agreement was assigned to it by the H.S.L. for the use of the technical know-how. Initially, the assessee claimed the entire amount of Rs.1.49 crore and Rs.16,55,980 as the revenue expenditure. Subsequently, however, it revised its return claiming Rs.136 lakhs as revenue expenditure and Rs.30 lakhs was capitalised and depreciation was claimed at the rate of ten per cent. The Assessing Officer treated the entire payment as capital expenditure but he declined to allow any depreciation on the plea that no such depreciation was admissible as the assets acquired were intangible assets on which no depreciation was admissible. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Assessing Officer and held that payment of Rs.1.49 crore to H.S.L. was capital expenditure and not a revenue expenditure. He further held that the payment of Rs.16.66 lakhs during the current year to the foreign company was also capital expenditure and not revenue expenditure. On further appeal to the Tribunal, the Tribunal concluded that as far as the amount of Rs.1.49 crore was concerned, the same was payable in terms of the assigning agreement, dated September 13, 1973, entered into with the H.S.L. for which a capital asset was acquired by the assessee and, hence, it was a capital expenditure. As regards the balance payment of Rs.16.56 lakhs, the Tribunal concluded that it was in the nature of revenue expenditure because the assessee was a dealer of technical know-how services. The Tribunal was of the view that the depreciation was allowable on payment of Rs.1.49 crore and in support of its finding that depreciation was admissible on such capital asset, the Tribunal relied on the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672.
In Scientific Engineering House P. Ltd. v. CIT (1986) 157 ITR 86 (SC), the Supreme Court was considering the question "Whether, on the facts and in the circumstances of the case and on a true interpretation of the collaboration agreements between the assessee and Metripex Hungarian Trading Company, Budapest, the payment of Rs.1,60,000 by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of depreciable asset". In that case, the assessee-company had entered into two separate collaborations with the foreign company for undertaking the manufacture of microscopes and theodolites, under which the foreign collaborator, in consideration of payment of Rs.1,60,000 under both the agreements agreed to supply to the assessee all the technical know-how required for the manufacture of those instruments. To enable the assessee to manufacture the instruments in India in terms of the agreement, the foreign collaborator agreed to render "documentation service" by supplying to the assessee an uptodate and correct complete set of each of the five types of documents like manufacturing drawings, processing documents, designs, charts, plans, etc. The foreign collaborators was also required to render training and imparting of knowledge of the know-how technique of manufacturing instruments. The assessee debited the amount of Rs.1,60,000 under the head "Library". It claimed a sum of Rs.12,000 by way of depreciation on library. This was claimed on the ground that the payment of Rs.1,60,000 had been made for the outright purchase of designs, drawings charts' and other literature which constituted the pages of a book and the assessee had claimed depreciation at the appropriate rate. The Assessing Officer was of the view that the amount of Rs.1,60,000 did not represent the value of books purchased by the assessee but, in fact, represented the price paid for acquiring the technical know-how which amounted to a capital expenditure but since no tangible or depreciable asset was brought into existence, no depreciation could be allowed. On appeal by the assessee, the Appellate Assistant Commissioner held that what the assessee had done was to make an outright purchase of certain specimen drawings, charts, plans, etc. on special papers and those documents when collected together constituted a book on which depreciation, as in the case of plant and machinery, would be allowable at the appropriate rate. He directed the income-tax Officer to allow the depreciation claimed. The Revenue appealed to the Appellate Tribunal which was of the view after examining the relevant terms of the agreement that the payment of Rs.1,60,000 was partly on capital account and partly revenue account. The Tribunal however, confirmed the deduction of Rs.12,000 as revenue expenditure and not as depreciation allowance and in that way it, in effect; confirmed the order of the Appellate Assistant Commissioner. At the instance of both the assessee and the Revenue the question of law, as noted above, was referred to the High Court for its opinion. The High Court was of the view that the payment of Rs.1,60,000 did not mainly represent the purchase price of the designs, drawings, charts, etc. as contended by the assessee; that the rendering of "documentation service" was incidental; and that no part of the expenditure was on revenue account but the whole of its was of a capital nature bringing into existence an asset of enduring benefit to the assessee but what was brought into existence was a non-depreciable asset and, therefore, the assessee was not entitled to any relief. The-High Court held that the assessee was not entitled to any relief either by way of depreciation or revenue expenditure. On appeal to the Supreme Court, the Court accepted the claim of the assessee and answered the question in favour of the assessee to tile effect that payment made by the assessee to the foreign collaborator was attributable wholly towards acquisition of a depreciable asset. In this connection, the Supreme Court approved the decision of the Gujarat High Court in Elecon Engineering Co.'s case (1974) 96 ITR 672 where the High Court had held that drawings and patterns which constituted know-how and are fundamental to the assessee's manufacturing business were "plant". The, Supreme Court thus held that drawings, designs, charts, plans, processing data and other literature comprised in the 'documentation service" specified in clause 3 of the agreement constituted a "book" and fell within the definition of "plant" in section 43(3) of the Act. "Plant' under section 43(3) includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock. After the decision of the Supreme Court in Scientific Engineering House (P.) Ltd.'s case (1986) 157 ITR 86, the appeal of the Commissioner of Income-tax Gujarat, in Elecon Engineering Co.'s case (1974) 96 ITR 672 (Guj.) also came before the Supreme Court. It is reported in CIT Elecon Engineering Co. Ltd. (1987) 166 ITR 66. The Supreme Court affirmed the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 and the appeal of the Revenue was dismissed. In view of the aforesaid decisions of the Supreme Court, it has to be held that acquisition of technical know-how is entitled to depreciation and thus the amount of Rs.1.49 crore paid by the assessee to H.S.L. would not be treated as revenue expenditure. The question thus sought by the assessee has to be answered in favour of the Revenue and the decision of the Tribunal is upheld. This answer also takes care of the second part of the question referred at the instance of the Revenue for the assessment year 1974-75 and it is answered in the affirmative in favour of the assessee and against the Revenue by holding that the Tribunal was correct in holding that the assessee was entitled to depreciation on the said amount of Rs.1.49.
In CIT v. Indian Oxygen Ltd. (1996) 21,8 ITR 337(}(SC) answering the question, "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs.2,97,480 paid by the assessee to the British Oxygen Co. Ltd., London, in pursuance of the agreement dated October 1, 1959, was a permissible deduction under section 37(1) of the Income-tax Act, 1961 ", the Court held that it was nothing but revenue expenditure. The Court noted that the High Court after examining the various clauses in the agreement between the assessee and the British Oxygen Co. Ltd. found as follows (page 338):
"The English company did not sell any information, processes and inventions to the Indian Company. Under clause 22 of the agreement, the Indian company is not entitled to use them after the termination of this agreement. The Indian Company is prohibited from disclosing these information, processes and inventions during the currency and also after the determination of this agreement in view of its clause 11. Though this agreement is for a period of ten years, it can be terminated earlier as provided in clause 23. Therefore, it cannot be said that the Indian company has incurred the expenditure for the purposes of bringing into existence any asset or advantage of an enduring nature. It must also be held that this expenditure is not a capital but a revenue expenditure, for it was incurred by the Indian Company for running its business or working it with a view to produce profits "
The Court said that the understanding of the agreement by the High Court was correct and dismissed the appeal.,
As regards the other questions referred at the instance of the assessee as well as of the Revenue to the effect that payments of Rs.16,55,980, Rs.11,50,981 and Rs.11,52,709, respectively, for the assessment years 1974-75, 1975-76 and 1976-77 to the foreign company on account of licence fees, engineering services, and foreign technicians' services were not deductible as revenue expenditure and that it was entitled to depreciation have to be answered in favour of the assessee by holding that the Tribunal was not right in bolding that the said payments were not deductible as revenue expenditure. This would be so in view of the judgment the Supreme Court in Indian Oxygen's case (1996) 218 ITR 337. As a corollary the question raised at the instance of the Revenue in this respect has to be answered in the affirmative, i.e. in favour of the Revenue and against the assessee by holding that the Tribunal was not correct in coming to the conclusion, that the assessee was entitled to depreciation on these payments.
In CIT v. Patel Brothers and Co. Ltd. (1995) 215 ITR 165 (SC), the court was considering the term. "entertainment expenditure" prior to Explanation 2 to section 37(2-A) of the Act which was applicable with effect from April 1, 1976: The Court referred to the provisions of subsection (2-A) section 37 of the Act which was inserted with effect form October 1, 1967 and to Explanation 2 inserted by the Finance Act, 1983, retrospectively with effect from April 1, 1976. We do not think it is necessary to set out these provisions as the Supreme Court has held that the provision of ordinary, calls to outstation customers according to established business practices did not be entertainment expenditure. The Court said that ordinarily entertainment" connotes something which might be beneficial for mental or physical well-being but is not essential or indispensable for human existence and a bare necessity, like an ordinary meal, was essential or indispensable therefore, was not entertainment. The Court said that where such a bare necessity was offered, it was hospitality not entertainment and that the definition of entertainment did not include hospitality. The Court in thisapproved the decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. (1995) 211 ITR 400. The Court also firmed an earlier decision of the Gujarat High Court-in CIT v. Patel Brothers and Co. Ltd. (1977) 106 ITR 424 from which the present appeal before the Supreme Court in CIT v. Patel Bros. and Co. Ltd. (1995) E 5 ITR 165 had arisen, but it said that the decision of the Gujarat High Court contained certain wide observations which the Court did not affirm.
In view of the aforesaid decision of the Supreme 'Court, the only other question referred at the instance of the Revenue relating to the assessment years 1975-76 and 1976-77 as to whether the Tribunal was correct in law in holding that the assessee Was entitled to deduction of 1,184,834 and Rs.1,51,033, respectively, incurred on giving tea to its isomers has also to be answered in the affirmative in favour of the assessee against the Revenue. There shall be no order as to costs.
S.J. MUKHOPADHAYA, J.-- I agree.
M.B.A./1223/FCOrder accordingly.