HIGH COURT OF DELHI
Where the assessee-company had only acquired “access” to technical information under the agreement i.e. know-how which related to the process of manufacture, which was not, related to any secret process or patent rights or even the right to use a trademark or trade name under the agreement, the payments, can only be categorized as one made on revenue account
J. K. Synthetics Ltd.
ITR NO. 139/1988 and ITR No. 202/1989
December 17, 2008
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38. An overall view of the judgments of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case:-
(i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure;
(ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment;
(iii) the test of ?once and for all? payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in ‘lump sum’ or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business, as against, an expense undertaken for the benefit of the business as a whole;
(iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down;
(v) expenditure incurred for grant of License which accords ‘access’ to technical knowledge, as against, ‘absolute’ transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:-
(a) the tenure of the Licence.
(b) the right, if any, in the licensee to create further rights in favour of third parties,
(c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor,
(d) whether the Licence transfers the ‘fruits of research ‘of the licensor, ‘once for all’
(e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which ‘access’ to knowledge was obtained during the subsistence of the Licence.
(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;
(vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete;
(vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue.
39. In the context of the present case what has emerged is as follows:
a. The agreement was in three parts. One part related to purchase of basic design, engineering and for provision of technical assistance by the collaborator to the assessee. For this purpose a sum of 250 Million Liras were paid by the assessee to the collaborator. This expenditure was capitalized by the assessee, on his own.
b. The balance amount expended by the assessee being; 3.73 million Liras, for grant of process and know-how Licence and for supply of technical assistance and continuous know-how, which included, training to its employees, in Italy; was treated as revenue expenditure by the assessee.
39.1 The important finding returned by the authorities below, on consideration of the facts obtaining in the case and on interpretation of the terms of the agreement, was that; First of all, what the assessee acquired was ‘access’ to the technical information; Secondly, there was no transfer of ownership with respect to the process and the know-how under the agreement, in favour of the assessee; Lastly, the ‘access’ to technical know-how did not relate to any secret process or patent rights or use of trade mark or trade name. As recorded by the authorities below the technical know-how was owned by one M/s Montefibre, the successor to another concern known as, M/s Chatillon. M/s Monte Fibre granted to M/s Tecnimont a non-exclusive, and an irrevocable and permanent License in favour of M/s Tecnimont. This was, as found by the authorities below, done to enable M/s Technimont to exercise its rights under the License by granting a sub-License to third parties, in this case the assessee. The submission of the learned counsel for the Revenue, based on Article 2.12 of the Agreement, to the effect that, what the assessee had obtained was a permanent right by virtue of the Agreement is incorrect; in view of the fact that, M/s Tecnimont could not have granted that, which it did not itself possess. In any event, grant of Licence by itself does not result in transfer of property, in a limited sense as, in the case of, patent rights. It is not the case of the Revenue that any patent rights were transferred in favour of the assessee.
39.2 In our opinion, in view of the aforementioned findings, in particular, that under the Agreement the assessee had only acquired ‘access’ to technical information, that is, know-how which related to the process of manufacture, which was not; related to any secret process or patent rights or even the right to use a trademark or trade name under the Agreement, the payments in issue, made for such a purpose, can only be categorized as one made on revenue account.
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