IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
INCOME TAX REFERENCE No 81 of 1987
For Approval and Signature:
Hon'ble MR.JUSTICE M.S.SHAH
and
Hon'ble MR.JUSTICE D.A.MEHTA
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1. Whether Reporters of Local Papers may be allowed : YES
to see the judgements?
2. To be referred to the Reporter or not? : YES
3. Whether Their Lordships wish to see the fair copy : NO
of the judgement?
4. Whether this case involves a substantial question : NO
of law as to the interpretation of the Constitution
of India, 1950 of any Order made thereunder?
5. Whether it is to be circulated to the Civil Judge? : NO
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COMMISSIONER OF INCOME TAX
Versus
JYOTI ELECTRIC MOTORS LTD
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Appearance:
1. INCOME TAX REFERENCE No. 81 of 1987
MR BB NAIK with MR MANISH R BHATT for Petitioner No. 1
MR JP SHAH for Respondent No. 1
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CORAM : MR.JUSTICE M.S.SHAH
and
MR.JUSTICE D.A.MEHTADate of decision: 01/11/2001
ORAL JUDGEMENT
(Per : MR.JUSTICE D.A.MEHTA)
The revenue has sought reference on the following
three questions of law under section 256 (1) of the
Income-tax Act, 1961 (hereinafter referred to as `the
Act’):-
(i) “Whether, on the facts and in the circumstances
of the case, the assessee is entitled to
allowance of royalty payment of Rs.12,16,694/- as
revenue expenditure?”
(ii) “Whether on the facts and in the circumstances of
the case, the amount of Rs.3 lakhs being know-how
fees and royalty of Rs.1,03,068/- payable to the
Jyoti Ltd. are allowed as revenue expenses?”
(iii) “Whether in law and on facts, the assessee is
entitled to the deduction of Rs.50,000/- as
technical report fees?”
2.The assessment year is 1981-82 and the relevant
accounting period if financial year ended on 31st March,
1981. The assessee is a limited company. The assessee
claimed deduction on the following items in its return of
income:-
(i) royalty payment of Rs.12,16,694/- paid to Jyoti
Ltd. under agreement dated 1st September, 1972 as
revenue expenditure.
(ii) Rs.3 lacs know-how fees and Rs.1,03,068/- being
royalty paid to Jyoti Ltd. under another
agreement dated 1st January, 1981 as revenue
expenditure, and
(iii) Rs.50,000/- as technical report fees as revenue
expenditure.
3.We have heard Mr BB Naik, learned Standing
Counsel for the revenue-applicant and Mr JP Shah learned
advocate appearing on behalf of the assessee-respondent.
4.In so far as question No.2 is concerned, it is
common ground between the parties that the said question
is concluded in assessee’s favour by decision dated 3rd
November, 1999 rendered by this Court in Income Tax
Application No.269 of 1999 between the same parties.
5.In so far as third question is concerned, the
Assessing Officer disallowed the sum of Rs.50,000/holding
that the technical report fees were paid to Jyoti
Consultants Ltd. for ascertaining feasibility of
manufacturing motors of different kind than the motors
which were already being manufactured by the
assessee-company. In appeal, the Commissioner (Appeals)
held that in principle the payment was allowable as
revenue expenditure because the report had been obtained
for the purpose of expansion of existing business, “that
expansion had actually taken place and the cost of
capital assets had been duly capitalised in the year
under consideration as well as subsequent years”.
However, for the purposes of ascertaining whether the
payment had actually been made or not during the relevant
accounting period, the CIT (Appeals) directed the
Income-tax Officer to examine the various documents and
then grant relief to the assessee.
6.The Tribunal has recorded in para-14 of its order
that the Income-tax Officer examined the relevant papers
and allowed relief to the assessee-company in pursuance
of the directions issued by the Commissioner (Appeals).
In light of the aforestated facts, the Tribunal concurred
with the finding recorded by the CIT (Appeals) that
expansion had actually taken place and that the cost of
capital assets has been capitalised during the relevant
accounting period as well as in subsequent years. The
Tribunal thus upheld the claim of the assessee that the
assessee-company was entitled to deduction of
Rs.50,000/paid for technical report fees as revenue
expenditure.
7.Having heard both the sides, we do not find any
infirmity in the order of the Tribunal as both the CIT
(Appeals) and the Tribunal have taken into consideration
the facts on record and after appreciating the evidence,
arrived at a finding of fact that the expenditure in
question was incurred for the purpose of expansion of
existing business. The third question is therefore
required to be answered in favour of the assessee.
8.Coming to question No.1, it was the submission of
Mr Naik that the issue has been concluded against the
assessee by decision rendered between the same parties
reported in (1999) 237 ITR 280. As against this, Mr JP
Shah relied upon the decisions of this Court again
between the same parties rendered on the following dates
and in following references.
Sr.Income TaxDate ofAssessment year
No.Referencedecision
No(s).
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(1)389/841-2-20001979-80
(2)374, 374A & 26-12-20001982-83, 1983-84
374B of 1992 & 1984-85
(3)192/9426-12-20001985-86 & 1986-87
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It was contended by Mr Naik that in all the aforesaid
unreported decisions rendered by this Court reliance had
been placed on the decision of CIT vs. Jyoti Ltd.
(1971) 118 ITR 499 (Gujarat) while in case of reported
decision in 237 ITR 280 this Court had subsequently
referred to and upheld the finding of the Tribunal that
the said decision was distinguishable on facts.
According to Mr Naik, therefore, we should adopt the
reasoning which appealed to this Court in the aforesaid
reported decision and an additional factor for doing so,
it was submitted was the fact that the decision of Apex
Court in case of Jonas Woodhead and Sons (India) Ltd.
vs. CIT 224 ITR 342 had been followed.
9.In view of the aforestated position, after
hearing the matter partially it was adjourned so as to
enable the parties to place the original agreement dated
1st September, 1972 on record. By consent of both the
parties, the same has been taken on record.
10.Referring to the terms of the agreement, Mr Naik
contended that the assessee had derived a benefit of
enduring nature resulting in acquisition of the benefit
in the capital field and hence the Income-tax Officer had
rightly held that the expenditure in question was capital
in nature and the deduction claimed was not permissible.
It was contended that the agreement was initially for a
period of ten years but the same was extendable for such
further period as may be agreed in writing between the
parties to the agreement. That even after expiry of the
agreement period or the extended period, the agreement
continued to remain in force until it was terminated by
one of the parties by giving notice in writing of not
less than one year. Mr Naik further submitted that this
condition by itself went to show that this was an
agreement which was not limited in point of time but was
extendable for indefinite period and the assessee-company
was entitled to utilise the technical data like drawing,
specifications etc. for all times to come and hence the
payment in question was not really royalty but capital
expenditure for the purposes of acquisition of advantage
in capital field. It was further submitted that even
after the termination of the agreement, the
assessee-company was not required to stop manufacturing
the said products nor was it stipulated that the
technical knowledge acquired by the assessee-company was
not to be utilized by the assessee -company in
manufacturing the products which it was entitled to
manufacture under the agreement.
11.As against this, our attention was invited by Mr
Shah to the preamble of the agreement as well as various
articles in support of his submission that the assessee
was merely a licensee under the agreement and the rights
to manufacture the specified products which were acquired
under the agreement were only in relation to user of an
asset and were not exclusively assigned to the
assessee-company.
12.The preamble of the agreement dated 1st
September, 1972 as well as Article 1 specifically make it
clear that Jyoti Ltd. with whom the assessee-company has
entered into an agreement has only granted the licence to
manufacture electric motors which were being manufactured
by Jyoti Ltd. and for this purpose Jyoti shall render
technical and other experienced guidance to the licensee
i.e. the assessee. It is pertinent to note that Jyoti
has reserved the right to grant similar licence for
manufacturing the same products covered under the
agreement to any other party and furthermore the
licensee, namely the assessee, is bound by the terms of
agreement and the benefits under the agreement are
nonassignable or nontransferable. The Articles dealing
with the duration of the agreement as well as termination
of agreement read together go to show that the agreement
is liable to be terminated even earlier than the
stipulated date and it is not necessary that the entire
term for which the agreement is entered into, the
assessee would be entitled to the benefits granted under
the agreement. Article 3 which deals with right to sell
motors has specifically provided that the sale of the
defined products covered under the agreement shall be
exclusively done through Jyoti Sales Organisation both
within and outside the territories of India; and further
that the agreement does not preclude Jyoti from
manufacturing and selling the said products within the
same territories i.e. within and outside India. There
is a further stipulation in the same Article that in case
Jyoti is unable to sell the said products manufactured by
the licensee, the licensee shall be free to enter into
direct sales but no other sole selling agent will be
appointed by the licensee, and furthermore in such an
eventuality it would be open to Jyoti, namely licensor,
to withdraw the use of its name on the said products
manufactured by the assessee-company. Article 4 (E)
specifically stipulates that all the technical
documentation supplied by the licensor under the
agreement shall be treated as strictly confidential and
the licensee shall not be in a position to part with such
information in favour of any other party. Similar
provision is found in Article 5(D).
13.Over and above the aforestated terms and
conditions stipulated in the agreement it is pertinent to
note that the payment of royalty and fixation of price
had been laid down in Article 8(A) of the agreement. The
licensee is required to pay royalty at the rate of 7% on
the net sale price of products manufactured in terms of
the agreement to Jyoti and it is further provided as to
what would be the net sale price in such circumstances.
Therefore, the measure of payment of royalty is the sales
made by the assessee-company.
14.Having considered the terms of the agreement in
light of the law laid down by various decisions cited by
both the sides, we feel that the assessee-company did not
acquire any enduring advantage in the capital field in
view of the terms and conditions stipulated in the
agreement. The assessee-company has been merely granted
a nonexclusive licence for the use of an asset and under
the agreement, there is no acquisition of any asset which
would render the payment in question to be treated as
capital in nature. The royalty is payable on the basis
of the sales which the licensee would make solely through
the sole selling agent appointed by the licensor and thus
the payment is strictly linked with the quantum of sales
and would vary with the quantum of sales.
15.The decision rendered in Jyoti Electric Motors
Ltd. vs. CIT, 237 ITR 280 was rendered in context of
the following question which was there before the Court:-
“Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding
that the Commissioner was justified in passing
the order under section 263 of the Act in setting
aside the assessment order?”
16.The Tribunal had upheld that assumption of
jurisdiction under sec. 263 of the Act by the
Commissioner and the assessee in reference challenged
that order of the Tribunal. The Court was called upon to
opine as to whether prima-facie the Commissioner had
correctly assumed the jurisdiction as held by the
Tribunal, and the Court was not called upon to render any
opinion as regards the merits of the claim of the
assessee. The observations made in the said judgment,
therefore, shall have to be read as having limited
application in the context of the controversy which was
there before the Court.
17.As regards the contention of Mr Naik that the
assessee company was entitled to continue to manufacture
the motors under the agreement even after the expiry of
the period of the agreement, it can be seen that such
user was subject to the licensee company making payment
of royalty on the basis of sales made on manufactured
products after the termination of the agreement. What is
more important, however, is that the licensee company is
required to return to Jyoti Ltd. all the technical
documentation within one month in the event of
termination or lapse of the agreement. In this
connection it is pertinent to note that, in the case of
Commissioner of Income-tax vs. Power Build Ltd. (2000)
244 ITR 19, this Court has held that even in a case where
the assessee was entitled to retain all the technical
data, design, documentation etc. and there was also no
restriction on manufacture, even then the payment of
royalty was allowable as revenue expenditure in view of
the fact that the assessee was not a new unit engaged in
manufacturing and the benefit was acquired only for
running the existing business. In the present case,
admittedly the agreement was entered into on 1st
September, 1972 and the assessment year in consideration
is 1981-82. The Assessing Officer has disallowed the
claim only on the basis of his orders for the earlier
assessment years. Therefore, though a faint attempt was
made by Mr Naik to contend that the assessee had not set
up the business, the facts on record go to show otherwise
and applying the ratio of the aforesaid decision in the
case of Power Build Ltd. (supra) it is not possible to
find any fault with the order of the Tribunal.
18.We have taken into consideration the following
decisions cited by Mr Naik and Mr Shah respectively and
have borne in mind the ratio of the said decisions while
arriving at the aforesaid opinion.
Mr Naik:
(i)237 ITR 280 (Guj) Jyoti Electric Motors
Ltd. vs. CIT.
(ii)224 ITR 342 (SC) Jonas Woodhead and Sons
(India) Ltd. vs. CIT
Mr JP Shah:
(i)87 ITR 400 (SC) Mewar Sugar Mills Ltd.
vs. CIT
(ii)59 ITR 718 (SC) Gotan Lime Syndicate vs.
CIT.
(iii)68 ITR 493 (SC) M A Jabbar vs. CIT
(iv) 236 ITR 314 (SC) CIT vs. Wavin (India)
Ltd.
(v)232 ITR 316 (SC) CIT vs. I.A.E.C.
(Pumps) Ltd.
19.In light of what is stated hereinbefore, we hold
that the Tribunal was right in law in holding that the
assessee was entitled to allowance of royalty payment of
Rs.12,16,694/- as revenue expenditure.
20.All the three questions are, therefore, answered
in the affirmative i.e. in favour of the assessee and
against the revenue.
21.The Reference stands disposed of accordingly with
no order as to costs.
(M.S. Shah,J)
(D.A. Mehta,J)
zgs/-
