JONAS WOODHEAD & SONS (INDIA) LTD. VS COMMISSIONER OF INCOME-TAX
1997 P T D 2114
[224 I T R 342]
[Supreme Court of India]
Present: S. C. Agrawal and G. B. Pattanaik, JJ
JONAS WOODHEAD & SONS (INDIA) LTD.
Verses
COMMISSIONER OF INCOME-TAX
Civil Appeals Nos. 1575, 1576 and 1577 to 1582 of 1980, decided on 11/02/1997.
(Civil Appeals Nos. 1575 and 1576 of 1980 were by special leave from the judgment and order, dated November 20, 1978, of the Madras High Court in T. C. No. 117 of 1974).
Income-tax---
----Business expenditure---Capital or revenue expenditure ---Royalty-- Collaboration agreement between assessee and foreign company---Composite payment for supply of technical know-how and services for setting up plant and manufacture of products---No embargo on manufacture even after expiry of agreement---Enduring benefit to assessee---Payment partly capital expenditure and not deductible---Indian Income Tax Act, 1961, S.37.
The question whether a particular payment made by an assessee under the terms of an agreement forms a part of capital expenditure or revenue expenditure, would depend upon several factors; namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made.
The appellant, a limited company incorporated in March, 1963, to carry on the business of manufacture of automobile springs, entered into an agreement with an English company for manufacture of all types of springs and suspension for road and rail vehicles. Under the terms and conditions of the agreement between the parties, it was stipulated that the foreign company would give the appellant the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical know-how relating to the setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blueprints of production and testing equipment and other data and information necessary to manufacture the product- and to set up proper and efficient plants. The agreement between the parties also provided that in consideration of the information to be furnished and services to be rendered to the appellant by the foreign company, the appellant shall pay a royalty at the rates of the licensed products turnover of the appellant to be calculated in accordance with the provisions of the agreement, The production of the appellant commenced on January 1, 1966, and in term of the agreement the appellant made payments of Rs. 24,000 and Rs.47,000, respectively, to the foreign company during the accounting periods relevant to the assessment years 1967-68 and 1968-69, as royalty. In the assessment proceedings, the Income tax Officer disallowed one-fourth of the payments on the ground that such payment represented the considerations for service provided by the foreign company of an enduring nature and was, therefore, capital expenditure. The Appellate Assistant Commissioner and the Tribunal confirmed the disallowance. On a reference, the High Court considered the various clauses of the agreement and held that the payment stipulated in clause 12 of the agreement was not remuneration for user of the rights granted by the foreign company but a composite payment for all the services rendered and information furnished by the said foreign company to the appellant in the setting up of the factory as well as in the manufacture of the licensed products in that factory. The High Court took the view that the appellant acquired a benefit of enduring nature and that the sum paid for the same would constitute capital expenditure. On appeal to the Supreme Court:
Held, affirming the decision of the High Court, that the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign company, what was set up by the appellant was a new business and the foreign company had not only furnished information and technical know-how but rendered valuable services in the setting up of the factory itself and even after the expiry of the agreement there was no embargo on the appellant to continue to manufacture the product in question, the entire payment made could not be held to be revenue expenditure, merely because the payment was required to be made at a certain percentage rate of the gross turnover of the products as royalty. The disallowance of 25 per cent of the sum paid as royalty by the appellant to the English company as capital expenditure, not allowable as revenue expenditure under the provisions of the Income Tax Act, 1961, for the assessment years 1967-68 and 1968-69, was correct.
Jonas Woodhead & Sons (India) Ltd. v. CIT (1979) 117 ITR 55 affirmed.
Agrawal Hardware Works (P.) Ltd. v. CIT (1980) 121 ITR 510 (Cal.); Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC); CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC); CIT v. Lucas TVS Ltd. (No. 1) (1977) 110 ITR 338 (Mad.); CIT v. Sarada Binding Works (1976) 102 ITR 187 (Mad.); CIT v. Tata Engineering and Locomotive Co. (P.) Ltd. (1980) 123 ITR 538 (Bom.) and Empire Jute Co. Ltd. v. CIT (1980) 124 ITR I (SC) ref.
Mrs. Janaki Ramachandran, Advocate for Appellant.
P. A. Choudary, Senior Advocate (Ranbir Chandra, C. Radhakrishnan and B. K. Prasad, Advocates with him) for Respondent.
JUDGMENT
G. B. PATTANAIK, J.---These two appeals by special leave at the instance of the assessee are directed against the order of the Madras High Court (see (1979) 117 ITR 55 (FB) answering the question posed in favour of the Revenue and against the assessee. The Income-tax Appellate Tribunal, Madras Bench, referred the following question to the Madras High Court for its opinion (at page 56):
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 25 per cent of the amount paid by the assessee as royalty to Jonas Wood head & Sons, was capital expenditure and, therefore, not allowable as a revenue expenditure under the provisions of the Income-tax Act, 1961, for the assessment years 1967-68 and 1968-69?"
'The aforesaid question of law arose out of the order of the Appellate Tribunal arising out of the assessment proceedings for the assessment years 1967-68 and 1968-69. The assessee, a limited company incorporated in March, 1963, to carry at the business of manufacture of automobiles springs, entered into an agreement with Jonas Woodhead & Sons Ltd. (hereinafter referred to as "the foreign company"), of the. United Kingdom for manufacture of all types of springs and suspensions for road and rail vehicles. Under the terms and conditions of the agreement between the parties it was stipulated that the foreign firm will give the assessee the technical information and know-how relating to the setting tip of a plant suitable for manufacture of the products as well as the technical know-how relating to the setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other data and information necessary to manufacture the product and to set up proper and efficient plants. The said agreement between the parties also provided that in consideration of the information to be furnished and services to be rendered to the assessee by the forcing firm the assessee shall pay a royalty at the rates of the licensed products turnover of the assessee to be calculated in accordance with the provisions of the agreement. The production of the assessee commenced on January 1, 1966, and in terms of the agreement the assessee made payments of Rs.24,000 and Ks.47,000, respectively, to the foreign firm for the assessment years 1967-68 and 1968-69 as royalty. In the assessment proceedings, the Income-tax Officer disallowed one-fourth of the aforesaid payments on the ground that such payment represented the consideration for services provided by the foreign company of an enduring narrate and is, therefore, a capital receipt. The assessee preferred appeals before the Appellate Assistant Commissioner and being unsuccessful therein preferred Secom appeal to the Income-tax Appellate Tribunal. The Tribunal having dismissed the second appeal, an application war n ed by the assessee wider section 256(t) of the Income-tax Act for referring the question of law as already indicated to the High Court of Madras for being answered. The High Court by the impugned judgment answered the question in favour of the Revenue and against the assessee. The assessee thereafter moved this Court and on leave being granted, these appeals have been registered. In answering the question posed in favour of the Revenue, the High Court considered the different clauses of the agreement between the parties and is of the opinion that the assessee acquired a benefit of enduring nature which will constitute "acquisition of an asset and the amount paid for the same would constitute capital expenditure". The High Court also came to the conclusion that the payment stipulated under clause 12 of the agreement by the assessee to the foreign firm was not remuneration for user of the rights granted by the foreign firm but a composite payment for all the services rendered and information furnished by the said foreign firm to the assessee in the setting up of the factory as well as in the manufacture of the licensed products in that factory. The judgment of the High Court has since been in Jonas Woodhead & Sons (India) Ltd. v. CIT (1979) 117 ITR 55 (Mad) (FB). Mrs. lanaki Ramachandran, learned counsel appearing for the appellant, contended that the High Court was in error in answering the question in favour of the Revenue on a finding that the payment was made to the foreign company for obtaining advantage of enduring benefit inasmuch as it does not offer any advantage of enduring nature acquired by the assessee which could be held to be capital expenditure. According to learned counsel, the payments made by the assessee to the foreign firm for the technical know-how and assistance rendered by the said foreign firm enabled the assessee to carry on its business more efficiently and more profitably leaving fixed capital untouched and, therefore, the said payment or any part of it cannot be held to be- a capital expenditure. In support of this contention, reliance was placed on the decision of this Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1. According to learned counsel for the appellant, technical know-how or technical advice received from a foreign firm cannot be' held to be a tangible asset and any payment made to the foreign firm for such know-how is nothing but revenue expenditure. Learned counsel places reliance on the decision of the Bombay High Court in CIT v. Tata Engineering and Locomotive Co. (P.) Ltd. (1980) 123 ITR 538. Learned counsel also urged that the payment required to be made by the assessee to the foreign firm was merely for the better conduct and improvement of the existing business and as such was revenue in nature and cannot held to be capital expenditure.
Mr. Chaudhary, learned counsel appearing for the Revenue on the other hand, contended that the question whether a particular payment made by the assessee would form a part of revenue expenditure or capital expenditure, would depend upon the relevant facts and the terms and conditions of the agreement between the parties under which the payment is made. According to learned counsel, the various clauses of the agreement having been analysed and the Tribunal having found that the foreign firm not merely provided the technical know-how for manufacturing the product but also gave plans and designs and established the factory for manufacture of the products and the business concerned being a totally new business and even after the conclusion of the agreement period, the assessee was required merely to return the plans and designs, but there was no embargo on the assessee to manufacture the products in question and the payments under the agreement being of a composite nature, the Tribunal was fully justified in holding that part of the payments made by the assessee did form capital expenditure and the High Court was wholly justified in answering the reference in favour of the Revenue.
The question whether a particular payment made by an assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made, is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement 'he assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made. This Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 has indicated that "in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to form any general rule even to the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation" This Court further held that there is no single definitive criterion which, by itself, is democratise, whether a particular outlay is capital or revenue and, therefore, the "once for all" test as well as the test of "enduring benefit" may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantage derived by an assessee under the agreement, the payment made by the assessee under the agreement, are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is capital expenditure or revenue expenditure.
In the case of CIT v. CIBA of India Ltd. (1968) 69 ITR 692 (SC), the question for consideration was whether the contribution payable by the assessee at the rate of six per cent of the net selling price of pharmaceuticals which the assessee produced on getting the formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered and developed in the Swiss company's laboratory can be held to be business expenditure or is capital expenditure. This Court held on a consideration of the agreement between the parties that the assessee did not become entitled exclusively even for the period of the agreement, to the patents and trademarks of the Swiss Company; it had merely access to technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded. The assessee on that account was a mere licensee for a limited period of the technical knowledge of the Swiss Company with the right to use the patents and trademarks of that company. The assessee acquired under the agreement merely the right to draw for the purpose of carrying on its business as a manufacturer or dealer upon the technical knowledge of the Swiss company for a limited period. By making that technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business and, therefore, the said contribution was merely revenue expenditure or business expenditure.
In the case of CIT v. Lucas- T.V.S. Limited (No. 1) (1977) 110 ITR 338 (Mad.), the question for consideration before the Madras High Court was whether the payment made under the collaboration agreement with the foreign firm by the assessee for the exclusive right and licence to make various items of electrical equipment for vehicles by the foreign firm is capital expenditure or revenue expenditure. The Madras High Court came to the conclusion that since under the agreement the assessee had no right to manufacture fresh articles on the basis of the know-how which it had obtained from the foreign firm after the expiry of the period of the licence, the payments made by the assessee to the foreign farm for the technical know-how will be in the nature of a licence fee and will constitute an expenditure in the computation of profits and gains and cannot be held to be a capital expenditure.
In the case of CIT v. Sarada Binding Works (1976) 102 ITR 187 (Mad), the question for consideration was whether the consideration for a transaction which consists of partly a fixed annual sum and partly a periodical payment at a certain percentage of the profits earned by the assessee from the said business would be treated in its entirety as capital expenditure or revenue expenditure. The Madras High Court came to the Conclusion that the fixed sum paid towards part of the consideration will be capital payment, while the periodical payments of sums which are definite and which depend upon the future profits cannot be treated as capital expenditure. In other words, the Court answered the question that since the payment in question to be made by the assessee was not related to any specified sum but a percentage of the profits to be earned which were indefinite in nature, such payment could be treated only as revenue expenditure.
In the case of Agarwal Hardware Woks (p.) Ltd. v. CIT (1980) 121 ITR 510 (Cal), the question for consideration before the Calcutta High Court was whether the payment's made by the assessee to a foreign firm for use of certain patents would be capital expenditure or revenue expenditure. The Calcutta High Court on a consideration of the agreement between the parties came to the conclusion that since the patents are not usable after the termination of the agreement and the payments are indefinite in, nature based on production of goods, the assessee does not acquire any capital asset and, therefore, such payments made under the agreement are for the purpose of business and are business expenditure.
In the case of CIT v. Tata Engineering and Locomotive Co. (Pvt.) Ltd. (1980) 123 ITR 538 (Bom), the question for consideration before the Bombay High Court was whether the payments made by the assessee to the foreign firm for the technical know-how and the technical advice would be capital expenditure or revenue expenditure: The Court answered the question that since under the agreement the assessee did not acquire a benefit of enduring nature and the so-called foreign know-how which is availed of, in lieu of payment is in substance a transaction of acquiring the necessary technical information with regard to the technique of production and as such it cannot be held to be capital expenditure and is revenue expenditure.
In the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC), the question for consideration before this Court was whether the payment made by the assessee for purchase of "loom hours" was in the nature of capital expenditure or revenue In the said case the assessee company was carrying on the of manufacture of iota and was a member of the Indian Juts Mills Association. An agreement had been entered into between the members associations restricting the number of working hours per week for which the mills were entitled to work their looms. The assessee-company purchased "loom hours" from four other mills for a sum of Rs.2,03,255 during the assessment year 1960-61 and claimed deduction treating the same as revenue expenditure. The Tribunal accepted the assessee's contention and had allowed deduction but on a reference being made, the High Court had held that the amount paid by the assessee for purchase of "loom hours" was in the nature of capital expenditure and as such no deduction could be claimed. This Court reversed the decision of the High Court and held that the acquisition of additional "loom hours" did not add to the fixed capital of the assessee; the permanent structure of which the income was obtained remained the same. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as a part of the process of profit-earning. It was an outlay of business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on; it was a part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. The Court further observed as under (head note):
"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is-in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. "
Thus, the so-called test of obtaining enduring benefit was held not to be a conclusive test and could dot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
In the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), the question for consideration was whether the lump sum payment made by the assessee for obtaining the know-how to produce higher yields and sub-cultures of high-yielding strains of penicillin would be capital expenditure or revenue expenditure. The Tribunal had rejected the claim of the assessee holding the expenditure to be capital expenditure. On appeal to this Court it was held (headnote):
"(i)It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not tie said to bear the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in -the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.
(ii)In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants but as masters they tend to be over exacting.
(iii)The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.
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 varities but must need 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 emphasis the element of a sufficient degree of durability appropriate to the context.
There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. 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. In a given case, the test of 'enduring benefit' might break down."
It would thus appear that the Courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one or dependant upon certain contingencies, the right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical information s received from a foreign firm payment whether made "once for all" or in different instalments co-relatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the Court comes to the conclusion that it does so, ,then it has to be held to be a capital expenditure. As has been held by this Court and already indicated in Alembic Chemical Works' case (1989) 177 ITR 377 no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined. But in the case in hand, the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, and circumstances of the case on the facts the High Court was fully justified in answering the reference in favour of the Revenue and against the assessee. These appeals are accordingly dismissed but in the circumstances without any order as to costs.
G. B. PATTANAIK, J.---The question referred to the High Court by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act and answered by the High Court in favour of the Revenue and against the assessee relates to the assessment years 1969-70, 1970-71 and 1971-72 and the identical matter was the subject-matter of Civil Appeals Nos.1575 1576 of 1980 in relation to two earlier assessment years 1968-69 and 1969-70. In view of our decision in Civil Appeals Nos. 1575 and 1576 of 1980 these appeals are dismissed but in the circumstances without any order as to costs.
M.B.A./1355/FC Appeal dismissed.