ORDER
R. Rangayya, Accountant Member
1. All these appeals are filed by the revenue against the orders of the Commissioner of Income-tax (Appeals) for the assessment years 1974-75, 1975-76, 1979-80, 1980-81, 1982-83 and 1983-84 respectively. As the issue involved in all these appeals is common, they are disposed of by a common consolidated order for the sake of convenience.
2. For the assessment years 1974-75 and 1975-76, the assessments originally made were set aside by the Income-tax Appellate Tribunal so that the Income-tax Officer could consider the assessee’s claim regarding deduction of certain amounts paid by it for acquisition of know-how from certain companies as a revenue expenditure. Thereafter, the Income-tax Officer proceeded to make re-assessments accepting the assessee’s claim that these amounts represented revenue expenditure. The Commissioner of Income-tax, however, acting under the provisions of Section 263, considered that these assessments made by the Income-tax Officer accepting the assessee’s claim are erroneous and prejudicial to the interests of the revenue inasmuch as the Income-tax Officer had not considered all aspects of the case in their proper perspective. Therefore, he set aside the assessments once again and remitted the matter back to the file of the Income-tax Officer to re-consider the matter and arrive at a proper conclusion. Ultimately, the Income-tax Officer made re-assessments in this case on 29-1-1987 rejecting the assessee’s claim for deduction of the amounts paid by the assessee for acquisition of know-how as revenue expenditure. Similarly, for the assessment years 1979-80 and 1980-81 also, in the original assessments made by the Income-tax Officer, he accepted the assessee’s claim for deduction of these amounts. However, the Commissioner of Income-tax passed similar orders under Section 263 as was done for the earlier years and remitted the matter back to the file of the Income-tax Officer. Thereupon, the Income-tax Officer once again made the assessments on 29-1-1987 rejecting the assessee’s claim for deduction of the above amounts. For the assessment years 1982-83 and 1983-84, during the course of assessment made for the first time by him, the Income-tax Officer disallowed the assessee’s claim for deduction of the above amounts. Against these orders of the Income-tax Officer, the assessee preferred appeals to the Commissioner of Income-tax (Appeals) who accepted the assessee’s claim for deduction of the amounts paid by it to the foreign collaborators on the ground that these amounts represented revenue payments. It may be of interest to note at this stage that for the assessment years 1973-74, 1976-77, 1977-78 and 1981-82, the Tribunal allowed the appeals of the assessee on the ground that the issue under consideration is covered by the decision of the Full Bench of the Andhra Pradesh High Court in the case of Praga Tools Ltd. v. CIT [1980] 123 ITR 773 and a reference is said to be pending before the Andhra Pradesh High Court for those years. Aggrieved with the above decision of the CIT (Appeals) for the assessment years under consideration, the revenue is in appeal before us.
3. It is contended by the learned departmental representative that the decision of the Andhra Pradesh High Court in the case of Praga Tools Ltd. (supra), is clearly distinguishable. In that case, the High Court was considering the question of allowability of royalty for user of technical know-how for the manufacture of machines, whereas in the case of the assessee the expenditure under consideration was laid out for acquiring the know-how. It is also contended that the deferred revenue expenditure for obtaining technical know-how, design and documentation was capital in nature particularly when the agreement provided for payment of royalty separately for the know-how. It is claimed that the Income-tax Officer himself has accepted that the royalty payment is a revenue expenditure and the present dispute is only regarding payment of lump sum amounts for acquisition of technical know-how, design, documentation etc. Since this payment is made once for all and the assessee had acquired proprietary rights on this knowledge and the user of the know-how which need not be returned back to the foreign company, it is claimed that the amounts paid as lump sum represented capital expenditure and not revenue expenditure.
4. Sri Seetharamayya, learned representative for the assessee, on the other hand, points out that the issue under consideration is squarely covered by the decision of the Andhra Pradesh High Court in the case of Praga Tools Ltd. (supra). It is claimed that the assessee manufactures various types of machines and supplies them to various users. In the course of its business of manufacturing various types of machines, it had acquired the know-how for manufacture of such machines. The assessee (also referred to as BHPV) entered into a collaboration agreement with a French Company called L’ Air Liquide (hereinafter referred to as AL) for manufacture of gas separation plants. The preamble of the agreement clearly stipulates as follows : –
Whereas BHPV has been licensed by the Government of India for the manufacture of Cryogenic Units used in Steel Works, chemical industries and other similar industries:
(a) for the separation of air in order to produce oxygen, nitrogen and/or argon under the gaseous or liquid state,
(b) for the separation of converted or coke oven gas for the production of ammonia synthesis mixture by the liquid nitrogen wash process.
Whereas A.L. has conducted research and development work for over fifty years and has developed processes, methods of manufacture, know-how and techniques relating to the design, construction and operation of low temperature gas separation plants.
Whereas BHPV is a company fully owned by the Government of India and has the necessary equipment and shops for the construction of such plants.
Whereas BHPV wishes to undertake in India the design and construction of low temperature gas separation plants by using the processes, methods of manufacture, know-how and techniques developed by A.L. and benefit from the technical assistance of AL therefor.
The above clearly shows that the activity of the assessee is manufacture of various units of machinery for supplying them to various other industries. The payments made the foreign company are nothing but an expenditure incurred for the purpose of acquiring a knowledge in order to turn out its stock-in-trade, namely various machines it fabricates for supplying to others. Thus, it is stated that the payments are made for the purpose of carrying on of business and not for the purpose of acquiring any capital asset. The fact that the assessee had treated this amount as capital expenditure or sought to write off this amount in a particular manner in the books of account does not decide the issue whether the payment is in the nature of capital or revenue. He also points out that what the assessee obtained was only a licence from the collaborator under its patents to manufacture and sell in India the equipment comprising the plants. Article 3 of the agreement stipulates that after signing the agreement and after receipt of an enquiry from a customer by the assessee, the foreign collaborator shall supply the details required for preparing the proposal from the assessee to its customer. On the acceptance by the assessee of a firm order for a plant AL shall supply to the assessee the basic engineering, the basic design and fabrication details, the details necessary to enable experienced engineers to prepare detailed engineering drawings to be used for the manufacture, assembly etc. and detailed engineering designs in the case of the first unit of each type of capacity, if BHPV require it. AL was also prepared to train BHPV’s personnel in this matter and also assist BHPV in procurement, progressing and inspection of equipment that may have to be purchased outside India. Should any services of its employees be necessary, AL was also prepared to send them. Article 4 states that BHPV agreed that during the terms of this agreement, they shall not conclude directly or indirectly a similar collaboration agreement with any other party in the same field as covered by Article 1, without the written consent of AL. This clearly shows that BHPV is not the owner of the information obtained from AL. BHPV is also supposed to ensure secrecy of the technical data and know-how obtained and it shall not pass on to other parties except inasmuch as is necessary to procure sub-deliveries and to enable the customers to operate and maintain the plant supplied. Transfer of technical data and know-how obtained by BHPV from AL to another Indian party is permitted subject to written approval by AL on such transfer and on mutually acceptable terms and conditions. In lieu of the above services rendered, AL was to be paid a lump sum of 750,000 French Francs in different instalments. In addition, fees for services rendered by AL by way of engineering fees and technical documentation fees were also to be paid. Royalty was also payable at the rate of 4% on the net ex-works sale value. On the basis of these terms of agreement, Sri Seetharamayya argues that the payments made by the assessee to AL were for the purpose of carrying on of its business viz., manufacture of plant and machinery which are to be used by its customers and not for the purpose of acquiring any capital asset. Reliance in this connection was sought to be placed on the decisions of the Andhra Pradesh High Court in Praga Tools Ltd.’s case (supra) and Veljan Hydrair (P.) Ltd. v. CIT [1989] 177 ITR 552 (AP), the Bombay High Court in CIT v. Tata Engg. & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538, the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, the Patna High Court in Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 and the Calcutta High Court in CIT v. B.N. Elias & Co. (P.) Ltd. [1987] 168 ITR 190.
5. We have considered the rival submissions. In our opinion, these appeals filed by the revenue have no substance and deserve to be dismissed. The nature of the assessee’s business is that of manufacturing or fabricating machines for use in other industrial undertakings. After getting firm orders from various customers, the assessee fabricates the machines required by them according to their orders and delivers them after completely manufacturing them. In order to enable it to fabricate these machines, it has to use its own expertise either developed by itself or by borrowing the knowledge from others. The machines manufactured by it for supply to others are in the nature of stock-in-trade of the assessee. Any expenses incurred to bring out this stock-in-trade are in the nature of manufacturing expenses which are always revenue in nature. Manufacturing expenses also include expenses incurred for procurement of expertise to enable it to manufacture the machines which it is selling. In order to equip itself properly to manufacture certain special items of machinery used in steel and chemical industries, the assessee had been licenced by Government of India for manufacture of cryogenic units by which Oxygen, Nitrogen and Argon are separated from air. The equipment is also used for separation of converted or coke oven gas for the production of ammonia synthesis mixture by liquid nitrogen wash process. The assessee found that the foreign collaborator AL, has the expertise for manufacture of these machines and entered into an agreement to procure this knowledge. As pointed out by Sri Seetharamayya, the preamble of the agreement clearly states that the knowledge has been sought to be acquired in order to enable the assessee to carry on its business of manufacture of machines. The scope of the agreement as given in Article 1 shows that the assessee intended to design, fabricate, erect and commission plants for separation of various gases and also to produce ammonia synthesis mixture. For this purpose, it obtained a licence from AL. The collaborator is supposed to grant the assessee a licence and its patents, know-how and technical data to manufacture and sell in India the equipment comprised in the plants mentioned in Article 1. The assessee is not entitled to export the machines manufactured by it to certain countries stipulated in Article 2.2 whereas it is permitted to export them to other countries. Article 3 stipulates that on signing the agreement, AL will remit to the assessee the general data and standard norms as per Schedule 2. On receiving an enquiry from a customer by BHPV, the collaborator shall supply the details required for preparing the proposal from BHPV to its customer, on acceptance by BHPV of a firm order for a plant, AL will supply to BHPV the basic design and fabrication details, details necessary to enable experienced engineers to prepare detailed engineering drawings to be used in the manufacture, assembly etc. Detailed engineering designs will be supplied in the first unit of each type of capacity if so required by BHPV. AL had also agreed to train the personnel of BHPV technically in the matter of manufacture of the above machines and to assist BHPV in procuring the necessary machinery for use in its factory for production of the above machines. If considered necessary by BHPV, AL was also willing to make available to BHPV services of their experts to work in India and to help the assessee in the manufacture of the machines. Article 4 stipulates that BHPV agrees that during the term of the agreement, BHPV shall not conclude directly or indirectly a similar collaboration agreement with any other party in the same field. Article 5 states that BHPV will ensure that the technical data and know-how received by it will not be passed on to any other party excepting to the extent as necessary to procure sub-deliveries. Article 6 stipulates that BHPV will be permitted to transfer the technical data and know-how obtained from AL to other Indian parties subject to written approval by AL and on such mutually acceptable terms and conditions. Any improvement made in the manufacturing methods and processes by either party will be informed to the other party from time to time. For these services rendered by AL, the assessee is supposed to pay an amount of 750,000 French Francs in various instalments in lump sum. In addition, certain lump sum payments were also to be made as engineering fees, technical documentation fees etc. Royalty was also payable on the ex-works sale value of the plant when the machines are sold.
6. The Andhra Pradesh High Court in the case ofPraga Tools Ltd. (supra) held that any expenditure incurred which has a direct nexus or relation to the carrying on or conduct of the business of the assessee has to be treated as an integral part of the profit-making process. While the object of the payment which is based on the sale of produce manufactured by the assessee and the assessee by making the payment obtains manufacturing licence and all the necessary technical know-how including designs, drawings, specifications and other technical information to enable it to make and sell the products indicated in the agreements, merely because the agreements provided that the assessee shall be entitled to retain technical know-how, designs, drawings etc. Even after the expiry of the agreement, it did not alter the nature of the transaction. There was no property right transferable in the technical know-how. It was held that the totality or the cumulative effect of all the material facts evidenced by the documents and the surrounding circumstances in that case showed that the payment made by the assessee in that case for procurement of know-how, drawings and designs was in the nature of a revenue expenditure.
7. Again, the Andhra Pradesh High Court in the case of Veljan Hydrair (P.) Ltd. (supra), held that where technical know-how is obtained merely for improving the product by an industry which is already established, the payment would only be in the nature of revenue and not a capital payment. In that case, the assessee was engaged in the manufacture of Valves even prior to its agreement with the foreign company. The collaboration agreement had been entered into only with a view to improve the product. It was held that the amount paid under the collaboration agreement was revenue expenditure. It may be noticed that in the present case also the assessee is already a manufacturer of various types of machines. In the course of its carrying on the business, it wanted to manufacture other types of machines for its various customers and for that purpose it acquired the know-how and technical designs by means of which it fabricated and manufactured the machines. As held by the Andhra Pradesh High Court in the Praga Tools Ltd., this expenditure had a direct nexus or relation to the carrying on or conduct of the business of the assessee and has therefore to be treated as an integral part of the profit-making process. The object of the assessee in making the payments, be it royalty or lump sum payments, is to enable it to manufacture the product and sell it and thereby earn income.
8. The Calcutta High Court in the case of B.N. Elias & Co. (P.) Ltd. (supra), held that the assessee had obtained user of the know-how only during the continuance of the agreement. The Tribunal in that case found that the assessee had not acquired or started a new line of business. The assessee was already manufacturing machines and under the agreement, it would utilise its existing business unit for the purpose of manufacturing new items. There was no outright transfer of know-how to the assessee and the know-how supplied remained the property of the foreign company. The fact that the assessee had to pay a lump sum amount in addition to royalty was not of much consequence. It was accordingly held that the payment made in that particular case represented revenue expenditure.
9. The Bombay High Court in the case of Tata Engg. & Locomotive Co. (P.) Ltd. (supra), held that technical know-how cannot be called a tangible asset. Technical know-how and technical advice for the time being cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. Merely because an assessee who has entered into a contract with regard to know-how is entitled to use the know-how even after the agreement has expired, it does not mean that he has acquired a benefit of an enduring nature. An agreement of foreign collaboration where foreign know-how 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. Instead of employing persons having knowledge of techniques and utilising their knowledge, technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. In that case, the assessee, Telco, entered into two agreements, one with Daimler Benz and another with Henricot. The first party was to provide drawings and designs and full technical information required for the manufacture of automotive products. It was also to provide training facilities for Indian personnel in their German plants. Under the second agreement, Henricot agreed to give technical advice, information and assistance to Telco Steel Foundry and to provide facilities for training Indian personnel in their Belgian plant. On these facts, the court held that in essence the agreements were for acquiring technical knowledge regarding methods of production and in the case of Daimler Benz for use of the trade name. The assessee had not acquired any asset or advantage of an enduring nature for the benefit of its business. The amounts paid for provision of know-how and licence to use the trade name were revenue expenditure.
10. In the case of Tata Robins FrazerLtd. (supra), the assessee was a company whose object was to establish a plant for the purpose of manufacturing and selling certain material handling and processing equipment and components. The assessee entered into agreements with foreign companies in order to establish its plant. In respect of the payment made for establishing its own plant, there was no dispute that it was a capital expenditure. In respect of the other agreement, the foreign company agreed to give the assessee technical services and technical assistance as well as the benefit of their research in order to enable the assessee to sell and provide in India the specified equipment and services. They were prepared to supply drawings of projects to be undertaken by the assessee. It was held by the court that the agreements were intended to enable the assessee to manufacture and sell specified equipment and services. It provided for an activity which could be regarded as profit-earning activity. The agreements did not provide for return of the documents and knowledge supplied by the foreign companies. This, however, would not result in the assessee acquiring an enduring benefit because knowledge that had once been acquired could not in its very nature be returned, secondly, the know-how would pile into obsolescence with the passage of time. In the circumstances, it was held that the sum paid for acquiring the knowledge for carrying on the business is in the nature of revenue expenditure.
11. The Supreme Court in the case of Empire Jute Co. Ltd. (supra) 124 ITR 1, held that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the test of enduring benefit. What is material to be considered 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 through the advantage may endure for an indefinite future. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.
12. The Supreme Court, once again, in the case of Alembic Chemical Works Co. Ltd. (supra) held, “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. 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 verities but must needs 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 emphasise 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”. (From head-notes)
13. As pointed out earlier, the assessee in this case is a manufacturer and fabricator of machines and supplies them to various customers for their use in their respective industries. The expenditure incurred by the assessee for the purpose of acquiring the know-how is closely related to acquisition of knowledge for manufacture of the merchandise in which it is dealing. As held by the Bombay High Court in the case of Tata Engg. & Locomotive Co. (P.) Ltd. (supra), an agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction for acquiring necessary technical information with regard to the technique of production. The assessee, instead of employing persons having knowledge of techniques and utilising their knowledge, in this case acquired technical know-how. As held by the Andhra Pradesh High Court in the case of Praga Tools Ltd. (supra), the expenditure incurred by the assessee in procurement of technical know-how by making lump sum payments, had direct nexus in relation to the carrying on or conduct of the assessee’s business of manufacturing machines and thus it is an integral part of the profit-making process. It is not material whether the payment is made by way of royalty or lump sum amount. What is required to be seen is the purpose for which the amounts are paid. The fact that in addition to the lump sum payment there is a stipulation for payment of royalty does not alter the nature of the payment of lump sum amount. As pointed out by the Calcutta High Court in B.N. Elias & Co. (P.) Ltd.’s case (supra), the fact that the assessee need not return the knowledge at a later date does not alter the issue inasmuch as the knowledge becomes obsolete and is of no use with passage of time. Once knowledge is acquired, by its very nature it cannot be returned. In view of the above discussion and in view of the above authoritative pronouncements of various courts, in our opinion, the first appellate authority is right in holding that the payments made by the assessee for acquisition of the technical know-now in respect of these years is in the nature of revenue expenditure. The orders of the first appellate authority are accordingly confirmed and the appeals of the revenue are dismissed.
