COMMISSIONER OF INCOME-TAX VS SOUTHERN PRESSINGS (PVT.) LTD
2002 P T D 1324
[242 I T R 67]
[Madras High Court (India)]
Before N. V. Balasubramanian and Mrs. A. Subbulakshmi, JJ
COMMISSIONER OF INCOME-TAX
Versus
SOUTHERN PRESSINGS (PVT.) LTD
Tax Cases Nos.982, 983. 1465 and 1536 of 1986 (References Nos.659, 660, 944 and 1015 of 1986), decided on 09/01/1998.
Income-tax---
----Capital or revenue expenditure---Royalty---Five-year agreement for provisions of technical know-how for manufacture of air-cleaners---Royalty paid per air-cleaner manufactured---Not a payment for acquisition of capital asset---Deductible as Revenue expenditure.
The assessee during the assessment year 1977-78 claimed a deduction of a sum of Rs.21,490 paid as royalty to I for providing technical know-how for the manufacture of automobile air-cleaners. The agreement was for a period of five years. The assessee under the agreement was obliged to pay a royalty of Rs.2 per air-cleaner manufactured with the assistance received from I. The claim of the assessee was that the sum paid was revenue expenditure and allowable in the computation of business income. The Tribunal allowed it. On a reference:
Held, that the agreement was only for five years. Clauses 22 and 23 of the agreement which were relied upon by the Tribunal showed that the assessee had no proprietary interest over the drawings or the know how obtained under the collaboration agreement, The purpose of the outlay was the use of the technical know-how Turing the period of the agreement, and the object of the agreement was the better production of the produce. When the business realities and rapid technological changes in the automobile field were taken into account, the payment made by the assessee could not be regarded as capital expenditure as it could not to be said that the assessee had acquired capital assets by virtue of the payment under the agreement. The payment made under the collaboration agreement should be allowed as a Revenue expenditure.
Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC): CIT v. Aquapump Industries (1996) 218 ITR 427 (Mad.) and Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342 (SC) applied.
C.V. Rajan for the Commissioner.
P.B. Sampath Kumar for the Assessee.
JUDGMENT
N.V. BALASUBRAMANIAN, J.---In the batch of tax cases, the common question involved is with regard to the allowability of certain sums paid by the assessee under the collaboration agreement, dated December 10, 1975, as Revenue expenditure. The assessment years with which we are concerned in the above tax cases are 1977-78, 1978-79, 1980-81 and 1981-82. Since there is no dispute with regard to the facts and the facts are common, we refer to the facts in T.C. No. 1465 of 1986, and it is unnecessary to repeat the facts in all other tax cases.
The assessee during the assessment year 1977-78 claimed a deduction of a sum of Rs.21,490 paid as royalty to India Radiators Ltd., for providing technical know-how for the manufacture of automobile air cleaners. The agreement was for a period of five years. The assessee under the agreement was obliged to pay a royalty of Rs.2 per air-cleaner manufactured with the assistance received from India Radiators Ltd. The claim of the assessee was that the sum paid was Revenue expenditure and allowable in the computation of business income. The Income-tax Officer, however, rejected the claim of the assessee on the ground that the assessee obtained an enduring benefit and, hence, the amount paid by way of royalty cannot be regarded as Revenue expenditure.
The assessee went on appeal before the Commissioner of Income-tax (Appeals) against the view of the Income-tax Officer that the amount should be treated as capital expenditure. The Commissioner (Appeals) held that the period of five years cannot be regard as a long one to confer an enduring benefit on the assessee and that the designs and drawings furnished by India Radiators Ltd. may not be of much use after the period of five years and in this view of the matter, he held that the amount paid as royalty should be regarded as Revenue expenditure.
The Revenue carried the matter on appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal perused the terms of the agreement and came to the conclusion that the payment made by the assessee was towards the licence to use the technical information received by the assessee from India Radiators Ltd. and there was no outright purchase of the drawings and, as such, the amount paid should be regarded as Revenue expenditure and dismissed the appeal preferred by the Revenue.
The Revenue has challenged the order of the Appellate Tribunal and on the basis of the directions of this Court, the Appellate Tribunal has referred the following questions of law in T.C. No. 1465 of 1986 and T.C. No. 1536 of 1986 for our consideration:
Tax Case No. 1465 of 1986:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.21,490 paid to India Radiators Ltd. under the collaboration agreement, dated December 10, 1975, should be allowed as a Revenue expenditure?"
Tax Case No. 1536 of 1986:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the technical know how fees paid to India Radiators Ltd. is an admissible deduction while computing the income of the assessee?"
In Tax Cases Nos.982 and 983 of 1986, the Tribunal has referred the following common question of law under section 256(1) of the Income Tax Act, 1961, for our consideration:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the technical know-how fees paid to India Radiators Ltd. is an admissible deduction while computing the income of the assessee?"
Mr. C.V. Rajan, learned counsel for the Revenue, forcibly submitted that the Tribunal was not correct in holding that the amount, paid to India Radiators Ltd. should be allowed as Revenue expenditure as the assessee had obtained an enduring benefit by virtue of the technical collaboration agreement. He submitted that the knowledge obtained by the assessee would enure even after the period of the agreement and, therefore, the amount was rightly disallowed by the Income-tax Officer as capital expenditure.
Mr. Sampathkumar, learned counsel for the assessee, on the other hand, submitted that the Tribunal has come to the correct conclusion in holding that the amount was allowable as Revenue expenditure. He submitted that the Tribunal, on a perusal of the terms of the agreement, came to the conclusion that there was no proprietary interest over the know-how supplied by India Radiators Ltd. and the assessee was given only a licence to use the knowledge during the period of the agreement and, therefore, there is no case to interfere with the order of the Appellate Tribunal.
We have carefully considered the submissions of learned counsel for the parties. It is clear that the agreement was only for a period of five years and it cannot be said that the assessee had obtained an enduring benefit by virtue of the agreement and the period of five years cannot be regarded as a long period to confer an enduring benefit on the assessee. Further, the assessee obtained the technical knowledge for the manufacture of air-cleaners in the automobile field and it is a common knowledge that fast changes are taking place in the automobile field and the rapid technological change in the field of automobile is evident from the new types of vehicles coming to the market. The Appellate Tribunal also perused the terms of the agreement and gave its finding that the assessee was given a licence to use the technical assistance received from India Radiators Ltd. Though the Appellate Tribunal found that under the collaboration agreement there is no specific prohibition against the use of the knowledge obtained by virtue of the agreement even after the termination of the agreement, clauses 22 and 23 of the agreement which were relied upon the Tribunal show that the assessee has no proprietary interest over the drawings or the know-how obtained under the collaboration agreement. We are of the view that the payment made by the assessee was for the production of the articles manufactured by the assessee and it cannot be regarded as a payment for acquisition of capital assets. The view of the Appellate Tribunal that the payment was made for the use of the capital assets during the period of five years appears to be reasonable and there is no warrant to differ from the finding of the Appellate Tribunal that the payment was made for the use of the knowledge during the period of the agreement.
In Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377, the Supreme Court has held that it would be unrealistic to ignore the rapid advances in the medical field 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. We are of 'the view that the view expressed by the Supreme Court with reference to the medical field would equally apply to the automobile field and it is not possible to attribute a degree of endurability and permanence to the technical knowledge obtained by the assessee in the automobile field. The Supreme Court further held that there is no single definitive criterion which by itself is determinative whether a particular outlay is capital or Revenue anti the "once for all" payment test is also inconclusive and what is relevant is the purpose of the outlay and its .intended object and effect considered in a common sense way, having regard to the business realities. In the light of the tests laid down by the Supreme Court, we are of the view that the purpose of the outlay in the instant case was for the use of the technical know-how during the period of the agreement, and the object of the agreement vas the better production of the product and when the business reality in the automobile field is taken into account, the payment made by the assessee cannot be regarded as capital expenditure as it cannot be said that the assessee had acquired capital assets by virtue of the payment under the agreement. The agreement as found by the Tribunal, clearly shoves that the assessee had the licence benefit to use the technical knowledge during the period of the agreement and, therefore, it is not possible to say that the assessee had obtained an enduring benefit by virtue of the payment made to the collaborator.
This Court in the case of CIT v. Aquapump Industries (1996) 218 ITR 427, in a more or less similar factual situation, held that what is relevant is the purpose of the expenditure and its intended object and effect, considered in a common sense way having regard to business realities. This Court also held that where the expenditure although enduring in character has its impact on the running of the business, there can be no doubt that it is Revenue expenditure. We have seen that the assessee entered into the agreement for the better production of the product and, therefore, the impact of the technical knowledge was to run the business more profitably and it cannot be said that the assessee had entered into the agreement with the object of setting up a new plant or setting up a new business. The decision of this Court in Aquapump Industries' case (1996) 218 ITR 427, would also apply to the facts of the case.
In Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342, the Supreme Court has considered the question and laid down the test when the expenditure can be regarded as capital expenditure or Revenue expenditure in the case of payment made for supply of technical know-how. The test laid down by the Supreme Court reads as under (headnote):
"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 completely new plant 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. "
Applying the test laid down by the Supreme Court, it is clear that the assessee had entered into the agreement with the object of improving its business and it is not a case of a new business. Viewing the matter from any angle, we are of the view that the Appellate Tribunal has come to the correct conclusion in holding that the payment made by the assessee under the collaboration agreement should be regarded as Revenue expenditure. Following the decisions of the Supreme Court in Alembic Chemical Works Co. Ltd.'s case (1989) 177 ITR 377 and Jonas Woodhead & Sons' case (1997) 224 ITR 342 and the decision of this Court in Aquapump Industries' case (1996) 218 ITR 427, all cited supra, we hold that the Tribunal was correct in holding that the payment made under the collaboration agreement should be allowed as Revenue expenditure.
In this view of the matter, we answer the questions of law referred to us in the various tax cases in the affirmative and against the Revenue. However, in the circumstances of the case, there will be no, order as to costs,
M.B.A./668/FCReference answered.