Asstt. Commissioner of Vs. J.N. Marshall (P.) Ltd. - Court Judgment

Excerpt:
1. to 5. [these paras are not reproduced here as they involve minor issues.] 6. the second ground relates to payment for technical know-how as to whether it is capital expenditure or revenue expenditure. the assessee is a resident company and carries on business of manufacture and sale of steam generating equipments (industrial boilers in the brand name of "jnm boilers"). it entered into an agreement on 5-11-1983 with m/s nei cochran limited of scotland (hereinafter called the "licensor") who is engaged in the business of manufacture and sale of package steam generating equipments and possessed considerable proprietary information, technical knowledge and expertise relating to that business. the licensor granted licence in relation to the examples of package steam generating equipment.....

Judgment:
1. to 5. [These paras are not reproduced here as they involve minor issues.] 6. The second ground relates to payment for technical know-how as to whether it is capital expenditure or revenue expenditure. The assessee is a resident company and carries on business of manufacture and sale of steam generating equipments (industrial boilers in the brand name of "JNM Boilers"). It entered into an agreement on 5-11-1983 with M/s NEI COCHRAN Limited of Scotland (hereinafter called the "Licensor") who is engaged in the business of manufacture and sale of package steam generating equipments and possessed considerable proprietary information, technical knowledge and expertise relating to that business. The Licensor granted licence in relation to the examples of package steam generating equipment specified in the first part of the first schedule of the agreement. Article 1 defined "know-how" to mean the Licensor's special skills and technical knowledge relating to manufacturing, installing, using and maintaining the products and the definition of "the information" included detailed manufacturing drawings, general arrangement drawings, materials and components lists, manufacturing procedures, design standards, material specifications, quality control procedures, water treatment standards, testing and commissioning procedures, operational and after-sales service manuals, maintenance procedures and repair procedures relating to the specific examples of products, specified in the first Schedule. As per Article 2.1 the Licensor granted exclusive licence to manufacture, market and sell the products and spare and replacement parts therefor using the information and know-how in the exclusive territory for installation and use therein only and the non-exclusive licence to market and sell the products and spares and replacement parts therefor within the non-exclusive territories for installation and use therein only.

Article 8 provides for payment of consideration to Licensor according to which Pounds Sterling 10,000 to be paid within 30 days of the effective date and Pounds Sterling 10,000 within 30 days of the date of written notice given by the Licensor to the Licensee of the receipt of the information specified in Clause 3.1 thereof and balance of Pounds Sterling 10,000 on commencement by the Licensee of commercial production or 4 years after the effective date whichever is earlier and royalties of 5 per cent of the net sales price of all products and spares and replacement parts therefore manufactured and for sold by the Licensee. Article 11 provides that the agreement shall commence as from the effective date and shall continue in force for 5 years from the said date or from the date of commencement of commercial production provided production is not delayed beyond three years from the effective date. Article 12 provides that all information communicated to the Licensee by the Licensor shall remain the legal and absolute property of the Licensor and the Licensee undertakes and agrees to cease to use all information on the termination of this agreement for any reason except as provided in para 19.3(a). Article 14 provides that this agreement is personal to the Licensee and shall not be assigned without the express previous consent in writing of the Licensor, which consent shall not be unreasonably withheld.7. Pursuant to the know-how agreement, the assessee debited a sum of Rs 1,51,071 as technical know-how fees paid to M/s ME COCHRAN Ltd. and claimed it as revenue expenditure in terms of the judgment of the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692. The Assessing Officer found that the facts of the agreement entered into by the assessee with M/s NEI COCHRAN Ltd. are similar to the facts in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86' (SC). He pointed out the similarity of salient features between these two cases and concluded that in view of the identical fact that the essential points are identical in both the cases, the ratio of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. (supra) would apply to this case also. Therefore, he concluded that the expenditure was capital in nature and therefore, disallowed the claim.

8. On appeal, the C.I.T(A), following the judgments in the case of CIT v. Venkateswaral Tansmission (P.) Ltd. [1988] 171 ITR 476 (AP), Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 (Pat.). Antifriction Bearings Corpn. Ltd. v. CIT [1978] 114 ITR 335 (Bom.) and CIT v. Steel Plant (P.) Ltd. [1984] 149 ITR 294 (Bom.) held that even the lump sum payment made for technical know-how was revenue in nature and therefore, the claim was to be allowed.

9. At the time of hearing, the learned departmental representative has reiterated the ground and relied on the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. (supra) and supported the decision of the Assessing Officer. According to him, Clause (b) and Section 1.3 of Article 1 of the agreement would clearly lead to the conclusion that what has been obtained by the assessee is nothing but drawings, designs, plans, processing data etc. which should be treated as plant as held by the Supreme Court in the case of Scientific Engg.

House (P.) Ltd. (supra). He referred to Article 8 of the agreement providing for lump sum payment and therefore, justified the Assessing Officer's order treating the expenditure as capital in nature.

10. The learned Counsel for the assessee, on the other hand, submitted that the company was in existence for the first 15 years and manufactu ring its own industrial boilers under the brand name "JNM Boilers" but in order to improve the efficiency or perfect the boilers already manufactured by the assessee, the technical know-how has been obtained.

According to him, what has been obtained is only Licence as per Article 2 of the agreement which gives both exclusive and nonexclusive territories. Even such licence is subject to the regulations in India and therefore, it is not an outright purchase so as to treat as capital expenditure. He referred to Article 11 providing for the duration of the licence as indicated above. In other words, the licence is only for a period of 5 years and therefore, he pleaded that there was no permanent or enduring benefit accrued to the assessee by acquisition of the technical know-how. Further Article 1.4 prohibits the assessee from assigning the technical know-how without previous consent of the Licensor. According to the learned Counsel of the assessee, this condition would not have been there, had the technical know-how been an outright purchase, so to say. Since the technical know-how is nothing but an agreement for licence, the expenditured incurred even if lumpsum, should be treated as revenue expenditure and relied on the judgment of the Supreme Court in the case of Ciba of India Ltd. (supra). He further referred to the judgment of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. (supra) and pointed out that the assessee itself has capitalised the expenditure in that case and therefore, it is not comparable. This distinction was pointed out by the Andhra Pradesh High Court in the case of Venkateswara Transmission (P.) Ltd. (supra) at page 477 bottom. On the other hand, he relied heavily on the judgment of the Andhra Pradesh High Court in the case of Venkateswara Transmission (P.) Ltd (supra) wherein the assessee engaged in the manufacture of locomotives and wagons obtained technical know-how for manufacture of locomotives and wagons. The Tribunal held that the expenditure was revenue in nature and not capital expenditure and this view was upheld by the High Court.

Reliance was also placed on the judgment of the Supreme Court in the case of Ciba of India Ltd. (supra). He has also relied on the judgment of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v.CIT [1989] 177 ITR 377, wherein, for obtaining licence to manufacture "Pencillin", an agreement was entered into with "Meiji" for which once and for all payment of U.S. $ 50,000 was made. The Tribunal and the High Court held the expenditure as capital, but the Supreme Court held that it is not capital expenditure.

11. The learned departmental representative, in reply, supported the order of the Assessing Officer.

12. We have duly considered the rival submissions. In view of the salient features contained in the agreement extracted above and the assessee is already on the line of manufacturing industrial boilers and only to improve the quality of the product, know-how agreement has been entered into and that too for a short period of 5 years, we hold that the know-how is not an absolute outright purchase, but is subject to various restrictions. In our opinion, the judgments relied upon by the learned Counsel for the assessee are applicable and the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. (supra) is not applicable at all. On the other hand, the judgment of the Supreme Court in the case of Ciba of India Ltd. (Supra) and Alembic Chemical Works Co. Ltd. (supra) are applicable. The Supreme Court in the case of Ciba of India Ltd. (supra) considered the nature of contribution made by the assessee at a certain percentage of net sale price in consideration of scientific and technical licence received from M/s Ciba Ltd. of Basle, Switzerland. While holding that such contribution was not permissible as a deduction under Section 10(2)(xii) of the Income Tax Act, 1922 but it was allowable as a business expenditure under Section 10(2)(xu) of the Income Tax Act, 1922. It was held that under the agreement, the assessee did not become entitled exclusively even for the period of agreement of 5 years to the patents and trade marks of the Swiss company and had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded. The assessee was held to be a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade marks of that company. What the assessee acquired under the agreement was merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period and by making that technical knowledge available the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business.

In the case of the assessee, Article 19 provides for termination of the agreement by the licensor by giving six months' notice to the licensee.

Article 11 provides for that the agreement would be for a period of 5 years from the effective date, while Article 12 provides that the information communicated to the assessee licensee shall remain the legal and absolute property of the licensor and licensee shall undertake and agree to cease to use all information on the termination of this agreement. Article 14 contains a provision that the agreement is personal to the licensee only and it shall not be assigned to outsiders without the express previous consent in writing of the licensor. It is pertinent to observe that Clause (a) of the preamble of the agreement shows that the foreign company as the licensor while Clause (b) shows the assessee as the licensee and these words are significant to emphasise the fact that the assessee has only obtained licence to use the information for a period of 5 years and shall not use the information thereafter. It is also significant to point out that the consideration paid by the assessee consists of not only three instalments of lump sum payments, but also royalties of 5 per cent net sale price of all products and spares and replacement parts therefore manufactured and sold by the assessee. Therefore, the terms and conditions aforesaid clearly show that there was no outright purchase of the technical know-how but the assessee has only obtained licence to make use of the information and therefore, the case fits in with the ratio of the Supreme Court in the case of Ciba of India Ltd. (supra).

In the case of Alembic Chemical Works Co. Ltd. (supra) licence to manufacture Pencillin was obtained by way of acquisition of technical know-how to produce higher yield and sub-culture of high yielding strain of Pencillin for which lump sum payment was made once and for all. Regarding the nature of the payment as to whether it is capital or revenue, the Supreme Court held that it was a case of use of the know-how than to its exclusive acquisition. At page 379 of the Head Notes, it was observed: 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 pigeonholing an outlay, such as this, as capital.

Consequently, we uphold the order of the CIT(A) and reject the ground taken by the revenue.

14. and 15. [These paras are not reproduced here as they involve minor issues.] 16. The second ground relates to disallowance of sales-tax liability under Section 43B. The Assessing Officer noticed certain outstanding liabilities, and disallowed Rs. 7,06,263 holding that as and when the assessee actually pays the sums, it will be given the necessary deduction.

17. On appeal, the CIT(A) upheld the disallowance made by the Assessing Officer.

18. After hearing the parties, we hold that if the outstanding liabilities of sales-tax and other statutory liabilities were paid within the specified time under Section 139(1) for filing the return of income, it would be sufficient compliance with the provisions of law and no disallowance is required to be made therefor. In case payments were effected beyond specified time under Section 139(1) disallowance is called for. We take support for this conclusion from the judgment of the Patna High Court in Jamshedpur Motor Accessories Stores v. Union Of India [1991] 189 ITR 70 and Calcutta High Court in C1T v. Sri Jagannaih Steel Corpn. [19911 191 ITR 676, wherein it has been held that the intendtnent of proviso to Section 43B was to clarify the main provisions of Section 43B and therefore it relates back to the date on which the main provisions of Section 43B were inserted, namely, 1-4-1984. The Courts also held that Explanation 2 inserted by the Finance Act, 1989 with retrospective effect from 1-4-1984 is subject to the first proviso. The Calcutta High Court in Sri Jagannath Steel Corpn's case (supra) gave a harmonious construction of the entire provisions and adopting textual and contextual interpretations came to the conclusion that the payment for last quarter of tax paid before the due date for filing the return of income under Section 139(1) would be sufficient compliance with the provisions of law. It also pointed out that any other interpretation was not possible, because in the next year deduction would be denied to the assessee because liability did not arise in that year by virtue of Explanation 2 inserted by the Finance Act, 1989 with effect from 1 -4-1984. Following respectfully the aforesaid judgments, we reverse the order of the CIT(A) and direct the Assessing Officer to verify the claim and allow it in accordance with the directions given above.

19. to 26. [These paras are not reproduced here as they involve minor issues.]