High Court Of Madras
CIT vs. Carburettors Ltd.
Section 37(1)
Asst. Year 1976-77
Thanikkachalam & Jayarama Chouta, JJ.
Tax Case No. 1340 of 1982
7th December, 1995
Counsel Appeared
C.V. Rajan, for the Revenue : K. Vaitheeswaran, for the Assessee.
BY THE COURT:
At the instance of the Department, the Tribunal referred the following question of law said to arise out of the order of the Tribunal for the asst. yr. 1976-77 for our opinion under s. 256(1) of the IT Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 56,567 paid to Zenith Carburettors Ltd. for obtaining the drawings and the sum of Rs. 15,000 being travelling expenses for procuring the said drawings should be allowed as a revenue expenditure and the ITO was not correct in treating as capital expenditure”.
2. The assessee is a company which manufactures carburettors. While completing the assessment for the asst. yr. 1976-77, the ITO made an addition of Rs. 71,657 consisting of two items as relating to capital expenditure. The first item is with regard to the technical charges of Rs. 56,657 paid to Zenith Carburettors Ltd., U.K., for obtaining drawings for manufacturing carburettors required by the Defence Ministry of the Government of India. The second item is with reference to a sum of Rs. 15,000 being the travelling expenses for procuring the drawings. The assessee claimed these two items of expenditure as revenue expenditure in this assessment year. But, the ITO disallowed the same. On appeal, the CIT(A) pointed out that the assessee had acquired the drawings from the foreign collaborator for the manufacturing of a special type of automobile component on the specific orders of the Defence Department. According to the CIT(A), as there was no possibility of such orders being repeated in future and as in the modern days of day-to-day technological improvements, the designs that are in use at a particular time may not be of use after some years, therefore, according to the CIT(A), the acquisition of the information in the form of drawings would not be of a permanent value to the assessee so as to treat such expenditure as capital expenditure. Accordingly, the CIT(A) deleted the addition of Rs. 71,657. Aggrieved, the Department filed the second appeal before the Tribunal. The Tribunal, on considering the facts arising in this case, confirmed the order passed by the CIT(A).
3. Learned standing counsel appearing for the Department submitted that the drawings were purchased by the assessee by an outright purchase. The drawings were not purchased for a particular time or with a condition to return it back. The aim and object of purchasing the drawings is for the benefit of enduring nature. It is not a licence to manufacture carburettors or the right to use the drawings that was purchased by the assessee. There was no obligation on the part of the assessee to return the drawings after exploiting the drawings. It was, therefore, pleaded that the Tribunal was not correct in holding that the expenditure incurred for the purpose of the purchase of the drawings and the travelling expenditure incurred for procuring the drawings are revenue in nature. Learned standing counsel further submitted that whether the particular expenditure is revenue in nature or capital in nature depends upon the facts of each case. According to standing counsel, in the present case, the facts would warrant to show that the expenditure incurred for purchase of the drawings and the travelling expenditure incurred for procuring the drawings are capital in nature. Therefore, according to learned standing counsel, the Tribunal was not correct in holding that the abovesaid expenditure of Rs. 71,657 is revenue expenditure. In order to support his contention, learned counsel relied upon the decisions reported in the cases of Fenner Woodroffe & Co. Ltd. vs. CIT 1976 CTR (Mad) 155 : (1976) 102 ITR 665 (Mad) : TC 16R.1267 ; Addl. CIT vs. Southern Structurals Ltd. 1978 CTR (Mad) 91 : (1977) 110 ITR 890 (Mad) : TC 16R.1266 ; CIT vs. Southern Switchgear Ltd. (1984) 39 CTR (Mad) 122 : (1984) 148 ITR 272 (Mad) : TC 16R.1294 ; Kirloskar Oil Engines Ltd. vs. CIT (1993) 115 CTR (Bom) 268 : (1994) 206 ITR 13 (Bom) :TC 16R.857 and Scientific Engineering House P. Ltd. vs. CIT (1985) 49 CTR (SC) 386 : (1986) 157 ITR 86 (SC) : TC 29R.512. On the other hand, learned counsel appearing for the assessee submitted that what was purchased by the assessee is only a drawing in order to improve the manufacture of carburettors. It is not a secret formula consisting of technical know-how, supply of technical personnel and for getting training in foreign countries with a collaboration agreement, etc. To meet the exigencies of the business, the assessee purchased the drawings. It is a one time contract for supply of a special variety of carburettors to the Defence Department. The assessee was compelled to purchase the drawings. Thus, in order to meet the one time order given by the Government of India, the assessee required the drawings which were purchased outright. The fact that the documents were purchased outright would not in any way conclude that the expenditure incurred for purchasing the drawings is capital in nature. Learned counsel further pointed out that in order to understand whether a particular expenditure is revenue or capital, the aim and object of purchase should be ascertained. Therefore, according to learned counsel for the assessee, the facts on record would reveal that the expenditure incurred for purchasing the drawings outright would go to show that the expenditure was incurred for the purpose of meeting the requirement of the assessee so as to satisfy the one time purchase. Learned counsel appearing for the assessee submitted that the decisions cited by learned standing counsel would not be applicable to the facts arising in the present case. Learned counsel for the assessee heavily relied upon the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) : TC 16R.1277.
We have heard the rival submissions. The fact remains that the assessee is a company which manufactures carburettors. The assessee received an order from the Defence Department for supply of certain special types of carburettors. In order to fulfil this contract, the assessee purchased drawings from Zenith Carburettors Ltd., U.K. The point for consideration is whether the expenditure incurred by the assessee for the purpose of purchasing the drawings outright and the expenditure incurred by way of travelling expenditure for procuring the said drawings would amount to capital in nature as contended by learned standing counsel appearing for the Department. It is significant to note that a particular expenditure is revenue or capital depends upon various facts arising in a particular case. It does not depend upon any one of the decisions enumerated for the purpose of ascertaining the nature of the expenditure. The cumulative effect of all the decisions enumerated for this purpose has got to be applied before deciding whether a particular expenditure is capital in nature or revenue in nature. A similar question came up for consideration before the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (supra). According to the facts arising in that case, under cl. 6 (a) of an agreement, the assessee was to make a lump sum payment of Rs. 80,000 for giving the documentation service. There were also provisions in the agreement enjoining the foreign collaborator to render training and imparting of knowledge of the know-how techniques of manufacturing these instruments. The agreement was to remain in force for five years. Pursuant to the agreement, the assessee made full payment of Rs. 1,60,000 which includes Rs. 80,000 debiting the amount in its account book under the head “Library”, and the foreign collaborator rendered “documentation service” by supplying complete sets of all the documents including designs, drawings, charts, plans and other literature in accordance with cl.
3. According to the assessee, the expenditure incurred for the outright purchase of documentation would be revenue in nature. While deciding this question, the Supreme Court held under: “(ii) that the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the appellant and for acquiring such technical know- how through these documents, a lump sum payment was made. This expenditure was incurred by the appellant as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in ‘documentation service’ and was of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature was acquired by the appellant”. Thus, the facts arising in the abovesaid decision would go to show that apart from purchasing the documentation outright the assessee also received training and imparting knowledge of technical know-how under a collaboration agreement. Thus, under a package deal, the assessee obtained the benefit of documentation and imparting knowledge on technical know-how from the foreign collaborator. This agreement was for a period of five years. It is under these circumstances, the Supreme Court held in the abovesaid case that the assessee derived enduring benefit of entering into the abovesaid contract. Thus, this conclusion was arrived at by the Supreme Court on an appraisal of the facts arising in that case.
6. Reliance was placed upon a decision in the case of Fenner Woodroffe & Co. Ltd. vs. CIT (supra). According to the facts arising in that case, the assessee-company entered into an agreement for a period of ten years with a foreign company incorporated in England under which the foreign company agreed to make available the technical data relating to the manufacture of leather belting and also to permit the use of such technical data for purpose of manufacture of the product. The agreement also provided that the foreign company would provide foreign technicians to attend at the assessee-company’s factory in India and also provide training facilities at the foreign company’s works in England to technicians of the assessee-company. The assessee-company had, under the agreement, to pay to the foreign company a remuneration at the rate of one-half of one per cent of the amount of the ex-factory invoice prices of the Indian company in respect of the quantities of the product sold by the assessee-company. In pursuance of the agreement, the assessee-company paid varying amounts during the accounting years relevant to the asst. yrs. 1962-63, 1963-64 and 1964-65 to the foreign company and claimed these payments as allowable deductions in its income-tax assessments for the respective years. While considering these aspects, the Madras High Court held: “That it is the aim and object of the expenditure that would determine the character of the sum whether it is a capital or revenue expenditure and neither the source nor the manner of payment may be of any consequence. The fact that the agreement did not fix any lump sum consideration but referred to a periodical payment limited to the production or sale of the articles will not take it out of the category of capital expenditure. As, in this case, there was no limitation in the agreement as to its endurability and the assessee could use the technical data and knowledge acquired even after the period of ten years and could deal with it as if it were their own asset, and amounts paid are not admissible as business expenditure under the IT Act”. Thus, according to the facts in the abovesaid decision also, the assessee incurred expenditure under a collaboration agreement as a package deal the technical know-how and imparting the technical training from the foreigners in the foreign country. The expenditure was incurred which was linked with the ex-factory invoice price of the Indian company. The aim and object of the assessee-company in incurring the abovesaid expenditure was said to be for obtaining enduring benefit. It is on the basis of these facts this Court held that the expenditure incurred by the assessee-company is capital in nature.
In order to support the contention that the expenditure incurred by the assessee in the present case is capital in nature, reliance was placed on a decision of this Court rendered in the case of CIT vs. Southern Switchgear Ltd. (supra). According to the facts arising in this case, the assesseecompany entered into a collaboration agreement with a foreign company under the terms of which the foreign company agreed to provide the assessee-company technical aid and information in the manufacture of switchgears and the right to sell such products. The foreign company also agreed to keep the Indian company posted with the latest and modern developments in the field of manufacture of switchgears and transformers and to train the necessary personnel at its U.K. factory. Under the terms of the agreement, the assessee-company agreed to pay to the foreign company as consideration for the services rendered by it a lump sum payable in five equal instalments, the payment to be spread over a period of time. For the asst. yr. 1966-67, the assessee claimed deduction of the payment made to the foreign company as a revenue expenditure. While considering these facts, this Court held that a perusal of the various clauses of the agreement clearly indicated that the technical knowledge that the assessee obtained through the agreement with the foreign company secured to the assessee an enduring advantage and benefit in that the same was available to the assessee for its manufacturing and industrial process even after the termination of the agreement. The foreign company had also agreed not to manufacture in India any of the products in question or grant or make available to any other person any information relating to manufacture, licence or rights, for any of the products in question in India thereby conferring on the assessee exclusive right of manufacture and the sale of the products. Thus on an appraisal of the facts arising in this case this Court held that 25 per cent. of the expenditure incurred by the assessee would be capital in nature since the assessee derived enduring benefit by the acquisition of the right under the agreement. Learned standing counsel appearing for the Department also relied upon the decision reported in the case of Addl. CIT vs. Southern Structurals Ltd. (supra). On an appraisal of the facts arising in this case following the decision reported in Fenner Woodroffe & Co. Ltd. vs. CIT (supra), this Court held “that the assessee had acquired an enduring benefit under the agreement and to that extent the amount paid was clearly capital in nature. Though under cl. 2 of the agreement there was a certain amount of limitation on the assessee not being in a position to assign the benefit it obtained under the agreement, that would not take the case out of the ratio of the decision in Fenner Woodroffe & Co. Ltd. vs. CIT (supra). This conclusion was arrived at by this Court in view of the fact that under cl. 4 of the agreement after the expiration of the agreement, the assessee would be free from any further obligation to pay any amount to the foreign company while the assesseecompany would have the continued use, free of charge, of all information made available by the foreign company during the period of the validity of the agreement. Lastly, learned standing counsel relied upon a decision of the Bombay High Court rendered in the case of Kirloskar Oil Engines Ltd. vs. CIT (supra). According to the facts arising in that case, the assessee entered into an agreement with a foreign company, for the exclusive right of manufacture in India of a particular type of diesel engine. The designs, drawings and specifications were to be given by the foreign company to the assessee-company and under the agreement, the assessee-company was entitled to manufacture the abovesaid engines in India and to sell the same in India. The drawings and other information received by the assessee-company, under the terms and conditions of the agreement, became entirely the property of the assessee. Under the agreement, the assessee was required to pay a sum of DM 70,000 for purchase of manufacturing rights and drawings, designs and specifications. In addition the assessee was also required to pay a sum of DM 2,20,000 for the purchase of export rights. The amount was payable in five-yearly instalments. During the accounting year relevant to the assessment year under consideration, the assessee paid the first instalment which the assessee claimed as revenue expenditure. On considering these facts, the Bombay High Court held that from a careful reading of the agreement, more particularly cl. 4 thereof, it was clear that what the assessee had purchased was the manufacturing right, drawings, designs, specifications and export rights. For all other items except the export rights, the payment was made in one instalment. The payment in respect of the export right was allowed to be made in five instalments spread over a period of five years. The payment of instalments by the assessee was held to be capital in nature. While deciding this issue, the Bombay High Court has also pointed out that the question whether an expenditure is on account of revenue or capital has always to be decided by looking to the facts and circumstances of each case. While doing so, the authorities should always examine the controversy from the point of view of a practical and prudent businessman rather than from the view point of a tax-gatherer upon strict juristic classification of the legal right, if any, secured in process. Thus, in the present decision also there was a package deal of purchasing the documentation and right to sell the goods in India. The benefit obtained by the assessee was allowed to be used as entirely as its own property. Therefore, on the facts the Bombay High Court came to the conclusion that the expenditure incurred by the assessee was of enduring nature and, therefore, it is capital expenditure.
10. On the other hand, learned counsel for the assessee relied upon a decision of the Supreme Court in Alembic Chemical Works Co. Ltd. vs. CIT (supra) in order to support his contention that on the facts available on record, the expenditure incurred by the assessee should be determined as revenue in nature. According to the facts arising in the abovesaid decision, the assessee-company engaged in manufacturing of antibiotics and pharmaceuticals, was granted a licence for the manufacture of penicillin. By the year 1963, it had already made an outlay of more than Rs. 66 lakhs for setting up a plant for the production of penicillin. In the initial years, the assessee was able to achieve only moderate yields of penicillin. With a view to increasing the yield, the assessee started negotiations in
1963, with Meiji, a reputed Japanese enterprise engaged in the manufacture of antibiotics, which culminated in an agreement dt. 9th Oct., 1963, whereunder Meiji, in consideration of a “once for all payment” of U.S. $50,000 agreed to supply to the assessee the “sub- cultures of Meiji’s most suitable penicillin producing strains”, “in a pilot plant the technical information, know-how and written description of Meiji’s process for fermentation of penicillin along with a flow-sheet of the process in the pilot plant, and the design and specifications of the main equipment in such pilot plant, and to arrange for the training of the assessee’s representatives in Meiji’s plant in Japan at the assessee’s expense and advise the assessee in large-scale manufacture of penicillin for a period of two years. For the asst. yr. 1964-65, the assessee claimed deduction of the sum of Rs. 2,39,625 as a revenue expenditure. While deciding the issue arising in this case, the Supreme Court held as under: “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 businessrealities. In a given case, the test of ‘enduring benefit’ might break down”. Further, in the abovesaid decision the Supreme Court on an appraisal of the facts arising in that case also came to the following conclusions: “By the Court : (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 be said to bear the element of the requisite degree of durability and non ephemerality 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 pigeon-holing 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”.
11. According to the facts arising in the present case, the assessee purchased drawings from the foreign company for the purpose of manufacture of a special type of carburettors in order to meet the order placed by the Defence Department. The order was only for a particular period. It is not under a package deal the expenditure was incurred in the present case. Though it is outright purchase, the plan would be useful only up to the period of fulfilling the order placed by the Defence Department. In order to meet the exigencies of the business, the assessee purchased the drawings. On facts both the first appellate authority and the Tribunal came to the conclusion that the expenditure incurred by the assessee for the purchase of the drawings would not be for the purpose of obtaining any enduring benefit. All the decisions on this aspect unanimously say that the decision whether a particular type of expenditure is revenue in nature depends upon the facts arising in that particular case. Thus applying the ratio of the decision rendered by the Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (supra) to the facts arising in this case we hold that there is no infirmity in the order passed by the Tribunal in holding that the expenditure incurred by the assessee for the purpose of purchasing the drawings is revenue in nature. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.
[Citation : 221 ITR 680]
