inspecting Assistant Vs. Mecon (India) Ltd.

Decided On : Feb-18-1988

Court : Income Tax Appellate Tribunal ITAT Patna

Notice (8): Undefined index: topics [APP/View/Case/meta.ctp, line 36]
Code Context


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			'judgement' => ' 1. Both these appeals are departmental appeals. Except for ground of appeal No. 1, for the assessment year 1978-79, the other grounds are common to both the years.</p><p align="justify">2. Ground of appeal No. 1 for the assessment year 1978-79, reads as under : 1. That the learned Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 8,20,347 on account of licence fee paid to the foreign collaborators.</p><p align="justify">It was argued by the Standing Counsel on behalf of the Department that the licence fee was allowed by the ITAT in the preceding year under a misunderstanding that it was allowed by the Income-tax Appellate Tribunal in the case of the assessee for the assessment years 1974-75, 1975-76 and 1976-77. It was stated that actually in the assessment years 1974-75, 1975-76 and 1976-77, the ITAT had not allowed these expenses on licence fee as a revenue expenditure and had held that the same was a capital expenditure. In the assessment year 1977-78, the CIT (Appeals) by mistake held in his order that the ITAT had allowed this expense as a revenue expense in earlier years. The ITAT also for the assessment year 1977-78 took without verifying that the ITAT had allowed the same in the earlier years and thus confirmed the order of the CIT (Appeals). It was thus, argued by the Standing Counsel that according to the earlier history and the orders of the ITAT on the topic, licence fee was held to be a capital expense and according to the said finding, the same should be disallowed and the order of the CIT (Appeals) be reversed on this issue.</p><p align="justify">3. The AR did not dispute the above facts pointed out by the Standing Counsel, but he argued that licence fee was a revenue expense.</p><p align="justify">4. We have considered the facts and the rival contentions. In assessment years 1974-75, 1975-76 and 1976-77, licence fee was held to be a capital expense by the ITAT. In 1977-78, it was allowed by the ITAT, it appears, on a misunderstanding that the same was allowed by the ITAT in earlier years though it was actually now so allowed. The order of the ITAT for the assessment year 1977-78 thus, in our opinion is not a correct guide. Following the order of the ITAT on this topic for the assessment years 1974-75, 1975-76 and 1976-77, the order of the CIT (Appeals) on the issue of licence fee is reversed and" the disallowance of Rs. 8,20,347 as capital expense is restored.</p><p align="justify">5. The next conteiltion, which is relevant to both the years is with regard to the disallowance of payment made to foreign collaborators for Engineering Services which amounted to Rs. 92,42,836 in assessment year 1978-79 and Rs. 50,40,012 in assessment year 1979-80. The CIT (Appeals) has deleted these disallowances.</p><p align="justify">6. It was argued by the Standing Counsel that the ITAT in the orders of the earlier years had confirmed the similar disallowances.</p><p align="justify">7. The representative of the assessee pointed out that these were allowed by the Department itself in the earlier years, as revenue expenses and the issue pertaining to the payments made to the foreign collaborators for Engineering Services was not there before the ITAT in any year. It was argued by the representative of the assessee that these were clearly revenue expenses as have already been held by the Department itself in the earlier years.</p><p align="justify">8. We have considered the facts and the rival arguments. The Standing Counsel could not show that the ITAT had confirmed similar disallowances in the past. It appears to be clear that there was no such disallowance made in the past. In other words, the Department itself had allowed the same. The CIT (Appeals), it appears has incorrectly mentioned in his orders that similar disallowances were deleted in the past by the ITAT. The issue was not there before the ITAT at all. Taking the totality of the facts into account, we are of the opinion that the payments made to foreign collaborators for Engineering Services rendered by them were obviously expenses of revenue nature. There was no correct and valid occasion to disallow the same. This contention of the Department is rejected for both the years.</p><p align="justify">9. The next contention in both the years is with regard to the deletion of the amount of royalty paid to foreign collaborators of Rs. 5,61,431 in assessment year 1978-79 and Rs. 5,36,349 in assessment year 1979-80.</p><p align="justify">10. It was argued by the Standing Counsel that the disallowance made was deleted by the CIT (Appeals) on the ground that similar disallowance was deleted by the ITAT in the immediately preceding year.</p><p align="justify">It was further stated by the Standing Counsel that the ITAT for the assessment year 1977-78 deleted the disallowance of licence fee on the ground that the ITAT in assessment years 1974-75, 1975-76 and 1976-77 had deleted such a disallowance. The correct fact is that there was no such disallowance under consideration of the ITAT for the assessment years 1974-75, 1975-76 and 1976-77. Thus, the ITAT in the order for the assessment year 1977-78 deleted the disallowance under a misunderstanding. It was argued by the Standing Counsel that licence fee was not a revenue expenditure and the same . should have been disallowed. The Standing Counselin this connection, relied upon the following eases : 2. Jonas Woodhead and Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad.) (FB).</p><p align="justify">11. The Authorised Representative of the assessee argued that licence fee was allowed by the Department itself in the earlier years and this issue was not there before the ITAT in the assessment years 1974-75, 1975-76 and 1976-77. In assessment year 1977-78, the ITAT deleted this disallowance, though under a misunderstanding (as mentioned above). He argued that on merits, royalty was clearly a revenue expense as has been held in the following cases : 4. Addl. CIT v. Nippon Electronics (India) (P.) Ltd. [1982] 134 ITR 457 (Kar.).</p><p align="justify">There are several other cases relied upon by the assessee's representative in this connection.</p><p align="justify">12. According to the latest case laws as relied upon by the assessee's representative, royalty is a business expense of revenue nature and has to be allowed. The Lordships of the Patna High Court in the case of CIT v. Tata Yadogawa Ltd. [1983] 142 ITR 30 held that the issue regarding royalty was not referable to the High Court in view of the decision of the Supreme Court in CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20. Here in this case, the issue was whether royalty was a revenue expense and on this issue, the revenue was trying to have a reference to the High Court against the order of ITAT, which allowed the expenses of royalty. The Patna High Court held that referring the said question would be merely academic after the decision of the Supreme Court in Indian Mica Supply Co. (P.) Ltd.'s case (supra). Respectfully following the said decision of Lordships of the Patna High Court and the other latest case laws (supra) relied upon by the representative of the assessee, we are of the opinion that royalty was a revenue expense. The contention of the Department in respect of the expense of royalty is rejected accordingly in both the years.</p><p align="justify">13. The next contention in both the years is with regard to a mistake committed by the CIT (Appeals) in mentioning the figures which we understand has already been rectified by now. The contention so raised is mentioned below : 5. That the learned, Commissioner of Income-tax (Appeals) erred in observing that the IAC had added Rs. 64,360 out of the claim for deduction under the head 'Preliminary Expenses' and in deleting the same. The assessee had actually claimed deduction of Rs. 6,436 and only that amount was disallowed by the IAC. Relief of Rs. 6,436 only should have been allowed by the learned Commissioner of Income-tax (Appeals).</p><p align="justify">14. We have considered the facts. It appears that there was a mistake in the order of the CIT (Appeals). The CIT (Appeals) is directed to rectify the mistake, if it has not been done already.</p><p align="justify">15. The next contention in both the years is that the CIT (Appeals) was not justified in accepting the assessee's claim that deduction under Section 80MM shall be calculated with reference to the cross receipts.</p><p align="justify">16. This contention is covered by the orders of the ITAT in the earlier years. According to the orders of the ITAT in earlier years the contention of the revenue is rejected.</p><p align="justify">17. The next contention is that CIT (Appeals) was not justified in holding that depreciation was admissible on Rs. 30,06,196 representing the cost of documents.</p><p align="justify">18. This issue is covered by the orders of the ITAT in earlier years.</p><p align="justify">Following the same, this contention of the Department is rejected.</p><p align="justify">19. The last contention is that the CIT (Appeals) was not justified in relying on the orders of the ITAT for earlier years, as the same were sub judice before the High Court. In our opinion, so long the orders of the ITAT in the case of the assessee for earlier years stand and have not been overruled, these according to judicial propriety have to be followed in later years facts remaining the same. Moreover, we agree with these orders.</p><p align="justify">20. In the result, the appeal of the Department for the assessment year 1978-79 is allowed in part, while for the assessment year 1979-80 is rejected.</p><p align="justify">1. Although I accept all other findings, I express my disagreement with the finding of the learned Accountant Member to disallow the claim of the assessee for deduction on licence fee of Rs. 8,20,347 and treat it as capital expense. The same was held allowable by the CIT(A) as an item of revenue expenditure on the basis of the order of the ITAT in appeal No. 932 (Pat.) of 1977-78, ITA Nos. 182 and 183 (Pat.) of 1978-79. The Standing Counsel for the department Mr. Rajgarhia had contended that the Appellate Tribunal in the aforesaid appeals for the asst. years 1974-75, 1975-76 and 1976-77 did not delete any such disallowance made by the ITO regarding licence fee. It was on the baasis of his plea that the Appellate Tribunal had in those appeals treated the licence fee as capital expense and not an item of revenue expenditure. The finding of the CIT(A) upheld the claim for deduction on the ground of being an item of revenue expenditure being unsupported by any finding of the Appellate Tribunal was reversed by the learned Accountant Member. To appreciate the controversy one is required to look at the facts in those appeals. The assessee-company was incorporated on 31st March, 1973 when he took over all the assets and liabilities of the Central Engg. &amp; Design Bureau, the consultancy unit of Hindustan Steel Ltd. with effect from 1-4-1973. The Central Engg.</p><p align="justify">and Design Bureau (hereinafter referred to as C.E.D.B.) was giving technical consultancy to other units. The assets and liabilities of C.E.D.B. of Hindustan Steel Ltd. were transferred to the assessee-company by an agreement dated 4th day of June, 1974 by which the assets and liabilities of Rs. 5,14,28,912 and Rs. 6,41,09,072 (page 49 of the paper book) were transferred to the assessee-company. An agreement dated 11-2-1969 was executed between United Engg. &amp; Foundry Co., USA and Hindustan Steel Ltd. Similar agreement was executed between M/s. Hindustan Steel Ltd. and M/s. Tiajomomexport of USSR on 27-11-1969. These two agreements were executed to provide necessary know-how and design. These two agreements were subsequently assigned to the assessee-company on 13-9-1973.</p><p align="justify">2. It took over the assets of Rs. 5.1 crores which included the consultancy wing and united wing as follows : The assessee-company, in addition thereto, incurred the total expenses of Rs. 16,55,980, Rs. 17,40,520 and Rs. 19,99,282 on payment to collaborators, engineering and design fees, postage and training expenses during the assessment years 1974-75 to 1976-77.</p><p align="justify">3. The assessee claimed the revenue expenses of Rs. 1,36,48,796 and capital expenses of Rs. 30,06,193 on which it claimed depreciation for the asst. year 1974-75. In 1975-76 and 1976-77 the expenditure of Rs. 17,40,529 and Rs. 19,99,282 were claimed as revenue expenditure.</p><p align="justify">It would be relevant to give the break up of the claim of the assessee for Rs. 1,36,48,796 and Rs. 30,06,193.</p><p align="justify">Out of the above total of Rs. 1,66,54,990 the assessee claimed Rs. 1,36,48,796 as revenue expenditure and on balance amount of Rs. 30,06,193 it claimed depreciation.</p><p align="justify">The Income-tax Officer stated that since the assessee was maintaining its books of account on mercantile system, the expenditure incurred in earlier year was not eligible for deduction while computing the income of the assessee for the year. He, therefore, concluded that the claim was not entertainable at least to the extent of Rs. 1,49,99,010. On the claim of the assessee for deduction of Rs. 16,55,980 he stated that this expenditure also is directly related to the acquisition of know-how from the foreign collaboration and is, therefore, a part of the deal. It cannot, therefore, be considered in severality.</p><p align="justify">4. Taking this view that both related to the acquisition of technical know-how its principle of assets for running over the business of consultancy, the ITO started to consider whether the assessee could be allowed depreciation. In his view technical know-how wing, an intangible asset, could not be allowed depreciation.</p><p align="justify">5. The assessee feeling aggrieved took this matter in appeal before the AAC. He repeated his two pleas, he had made out before the ITO to treat the expenditure of Rs. 1,36,48,796 as revenue expenditure and to allow depreciation on the capital expenditure of Rs. 30,06,193. The AAC upheld the finding of the ITO and dismissed the appeal of the assessee-company.</p><p align="justify">6. In this background, the Appellate Tribunal was called upon to consider the two pleas of the assessee. This was the first year of the assessment of the assessee-company when the expenditure for acquiring technical know-how both in preceding year under agreement with C.E.D.B.and M/s. Hindustan Steel Ltd. and those incurred in the current year had to be considered. The Appellate Tribunal apportioned the current expenditure into two parts-one relating to the acquisition of the technical know-how and the other relating to postage and training. It treated the former as capital expenses which in its view brought the company tangible asset on which it allowed depreciation. The other portion of the expenditure was treated as revenue expenditure which was allowed to be deducted as business expenditure.</p><p align="justify">7. But in treating the expenditure for technical know-how as capital expenditure, the Tribunal has recorded a further finding in para 11. An extract of this is reproduced as below : The lower authorities have considered the expenses of the asses-see on knowr-how, drawings, patents etc., on the footing that the assessee acquired the technical know-how and utilised the same for its business. But the facts are otherwise. The assessee, no doubt, has utilised the technical know-how, drawings, patents etc. but it has not manufactured any article on the basis of those licences for itself nor the article manufactured on the basis of know-how are subject matter of sale of the assessee. What the assessee has done is that the assessee has taken know-how, drawings, patents etc. from others and have provided them to others by charging fees. All the decisions either cited before the authorities below or cited before the Bench during the hearing by both the parties are related to know-how which was acquired by the assessee for the manufacture of any of the items by it which was ultimately sold. Therefore, in all these cases the object of the assessee was something else and for fulfilling those objects, the assessee acquired know-how to produce the articles. These facts are not in the case of the assessee. The assessee's business is to acquire know-how and to give know-how to others by charging fees. Therefore, on the facts and as admitted by the ITO, the assessee is a dealer in know-how. It purchases know-how from others and it sells know-how to others. Under the circumstances, the cases relied on either by the lower authorities or by the respective parties before the Bench are not applicable on the facts of the present case.</p><p align="justify">8. It is clear that the Appellate Tribunal in treating the expenditure of Rs. 1.49 crores and a part of the current expenditure considered the assessee only as a dealer in technical know-how. It was on the basis of this finding that the Tribunal treated the expenditure as capital expenditure on which it allowed depreciation. The facts of the present case, however, suggest a different setting of facts. The IAC has summarily treated the licence fee of Rs. 8,20,347 as capital having been made to M/s. Wean United for acquiring technical know-how. But the order of the CIT(A) contains a fuller account of reason why payment of licence fee was made by it. I reproduce the relevant part : The appellant had also to pay licence fees for the information and help received from the foreign company. Due to paucity of time, the company sometimes got some of the equipments, to be sold by it, designed by its foreign collaborator to keep to the time schedule for delivery. The company also got some of the designs prepared by it, checked by the foreign collaborator as to their correctness so that the equipment manufactured from such design would not be declared defective due to faulty design at a late date. The company paid licence fees to this foreign collaborator for the various services "received from them as mentioned above as well as towards reimbursement of certain expenditure incurred by the collaborators on behalf of the foreign company.</p><p align="justify">9. This being the finding of the CIT(A) regarding the purpose and object of the expenditure over the licence fee, it is not reasonable to accept the plea of the Standing Counsel that the payment of licence fee was to be considered capital on the basis of the finding of the Tribunal made in earlier years. The finding of the Tribunal made in earlier years' appeal was on altogether different set of facts. The order of the Appellate Tribunal was based on a finding that the assessee was a dealer in know-how but the finding of the CIT(A) in this year does not suggest that but on the other hand highlights that the payment was made in connection with the equipments to be supplied to its constituents as pointed out in the extract from the finding of the CIT(A) reproduced above. As highlighted in the Tribunal's own finding reproduced above, such an expenditure was to be differentiated from the expenditure incurred to supply the technical know-how as a dealer and was to be treated as revenue expenditure. It was this feature which appears to have led the CIT(A) to hold that the Tribunal had already recorded a finding which he faithfully and truthfully followed.</p><p align="justify">Besides, if the payments of royalty and Engineering fees both incurred for acquiring technical know-how are to be treated as revenue expenditure by the learned Accountant Member to which I have agreed, I fail to see any logic in disallowing licence fee as capital expenditure. Engineering fee also was a constituent of the expenditure of Rs. 1,66,54,990 as indicated above which was considered in the asst.</p><p align="justify">year 1974-75 by the Appellate Tribunal as capital expenditure on which it allowed depreciation. But Engineering fee nevertheless is considered by the learned Accountant Member in his order as an item of revenue expenditure duly qualifying for deduction as revenue outgoing to which also I have agreed. After treating the Engg. fee as revenue expenditure on the facts and in the circumstances of the case there is no justification for treating licence fee as capital expenditure, 10. In my view, the expenditure over licence fee should be also considered qualifying for deduction as revenue expenditure of the year.</p><p align="justify">To be fair, however, to both sides and further to ascertain facts with greater charity and point, I would set aside the finding of the CIT(A) and direct him to take back the appeal on this issue for fresh disposal in accordance with law. In disposing of this issue, he shall first ascertain the facts regarding the payment of licence fee and then record his finding whether the amount can be considered as revenue outgoing or otherwise as capital expenditure on which depreciation should be allowed.</p><p align="justify">We, the Members of the Patna Bench having differed on the above issue while deciding the case of Mecon (India) Ltd. [IT Appeal Nos. 430 and 431 (Pat.) of 1981], refer the following question to the President, Income-tax Appellate Tribunal under Section 255(4) : Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for asst. year 1978-79 1. These matters have been referred to me under Section 255(4) by the President of the Income-tax Appellate Tribunal in view of the difference of opinion between the learned Accountant Member and the learned Judicial Member of Patna Bench on the following point: Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for assessment year 1978-79? 2. The dispute is whether the technical know-how fee paid by the assessee in respect of a foreign collaboration agreement is allowable as revenue expenditure or capital expenditure. The assessee is a Government undertaking. Under the agreement the assessee was required to pay 1,00,000 dollars on the execution of agreement and similar amount of 1,00,000 dollars every year for another five years. The IAC held that the expenditure incurred by the assessee is capital expenditure. On appeal, the CIT(A) allowed the assessee's claim as revenue expenditure.</p><p align="justify">3. The revenue preferred the appeals before the Appellate Tribunal. The appeals were heard by the learned Judicial Member Shri U.S. Dhusia and the learned Accountant Member Shri B. Nath of Patna Bench of the Tribunal. The learned Accountant Member held that the expenditure is capital expenditure. The learned Judicial Member differed with this view. He held that it is allowable as revenue expenditure. In view of the above difference of opinion, the matter has been referred to me.</p><p align="justify">4. The learned departmental representative strongly urged that the payment towards licence fee for the technical know-how is a capital expenditure". The CIT(A) was wrong in allowing the same as revenue expenditure. He also pointed out that the Tribunal in the assessee's case in the assessment years 1974-75 to 1976-77 has held that it is capital expenditure and that order should be followed. The learned counsel for the assessee submitted that the agreement itself was for a period of 10 years. The assessee has received only the technical know-how for limited period and the title remained with the foreign collaborator. Thus, it is allowable as revenue expenditure. He relied on several cases.</p><p align="justify">5. We have considered the rival submissions. It is necessary to refer to certain clauses in the agreement with the foreign collaborator, viz., United. Under Clause (e) of Article II of the agreement, title to the know-how shall remain with 'United' and the latter grants a non-exclusive licence to the assessee. Under Clause (g), the assessee shall not without written consent of 'United' sell, reveal, pass on, transfer or grant any rights to the use of the know-how to any other person. Under Clause (h) 'United' reserves the right free of restriction to make independent arrangements with any third party with respect to the manufacture and/or sale of contract articles. Under Article VIII, the duration of the agreement is for a period of ten years.</p><p align="justify">6. The above clauses will clearly show that the assessee obtained only a right to use the technical know-how and it has no title to it as the title vested only in the 'United'. 'United' only granted a non-exclusive licence to the assessee. The period of the agreement itself was for 10 years. Thus, the assessee did not have any title to the asset. The technical know-how fees was paid only for its user within the limited period. Thus it is clearly allowable as a revenue expenditure.</p><p align="justify">7. In Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443, the Full Bench of the Karnataka High Court held that when the foreign company did not part with the asset and when the assessee only acquired the right to draw up the technical knowledge for a limited period, the assessee had not acquired any asset or advantage of an enduring nature and so the payments made were revenue in nature. This decision was followed in Nippon Electronics (India) (P.) Ltd.'s case (supra), wherein it was held that where payment is for the actual user of the technical know-how, data and information supplied by the foreign company, the payment would be allowed as revenue expenditure.</p><p align="justify">8. In Cooper Engg. Ltd. v. CIT [1982] 135 ITR 597, the Bombay High Court held that the technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The payment made for the technical know-how was revenue expenditure. The ratio laid down in the above case would squarely apply to the instant case. In view of the above decisions, it is not necessary for me to refer to the earlier orders of the Tribunal in the assessee's case. In my view the learned Judicial Member was right in holding that the licence fee is allowable as revenue expenditure. Thus, I hold that the sum. of Rs. 8,20,347 is allowable as revenue expenditure. Now the matter will go back before the Bench for passing necessary orders.',
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		'judgement' => ' 1. Both these appeals are departmental appeals. Except for ground of appeal No. 1, for the assessment year 1978-79, the other grounds are common to both the years.</p><p align="justify">2. Ground of appeal No. 1 for the assessment year 1978-79, reads as under : 1. That the learned Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 8,20,347 on account of licence fee paid to the foreign collaborators.</p><p align="justify">It was argued by the Standing Counsel on behalf of the Department that the licence fee was allowed by the ITAT in the preceding year under a misunderstanding that it was allowed by the Income-tax Appellate Tribunal in the case of the assessee for the assessment years 1974-75, 1975-76 and 1976-77. It was stated that actually in the assessment years 1974-75, 1975-76 and 1976-77, the ITAT had not allowed these expenses on licence fee as a revenue expenditure and had held that the same was a capital expenditure. In the assessment year 1977-78, the CIT (Appeals) by mistake held in his order that the ITAT had allowed this expense as a revenue expense in earlier years. The ITAT also for the assessment year 1977-78 took without verifying that the ITAT had allowed the same in the earlier years and thus confirmed the order of the CIT (Appeals). It was thus, argued by the Standing Counsel that according to the earlier history and the orders of the ITAT on the topic, licence fee was held to be a capital expense and according to the said finding, the same should be disallowed and the order of the CIT (Appeals) be reversed on this issue.</p><p align="justify">3. The AR did not dispute the above facts pointed out by the Standing Counsel, but he argued that licence fee was a revenue expense.</p><p align="justify">4. We have considered the facts and the rival contentions. In assessment years 1974-75, 1975-76 and 1976-77, licence fee was held to be a capital expense by the ITAT. In 1977-78, it was allowed by the ITAT, it appears, on a misunderstanding that the same was allowed by the ITAT in earlier years though it was actually now so allowed. The order of the ITAT for the assessment year 1977-78 thus, in our opinion is not a correct guide. Following the order of the ITAT on this topic for the assessment years 1974-75, 1975-76 and 1976-77, the order of the CIT (Appeals) on the issue of licence fee is reversed and" the disallowance of Rs. 8,20,347 as capital expense is restored.</p><p align="justify">5. The next conteiltion, which is relevant to both the years is with regard to the disallowance of payment made to foreign collaborators for Engineering Services which amounted to Rs. 92,42,836 in assessment year 1978-79 and Rs. 50,40,012 in assessment year 1979-80. The CIT (Appeals) has deleted these disallowances.</p><p align="justify">6. It was argued by the Standing Counsel that the ITAT in the orders of the earlier years had confirmed the similar disallowances.</p><p align="justify">7. The representative of the assessee pointed out that these were allowed by the Department itself in the earlier years, as revenue expenses and the issue pertaining to the payments made to the foreign collaborators for Engineering Services was not there before the ITAT in any year. It was argued by the representative of the assessee that these were clearly revenue expenses as have already been held by the Department itself in the earlier years.</p><p align="justify">8. We have considered the facts and the rival arguments. The Standing Counsel could not show that the ITAT had confirmed similar disallowances in the past. It appears to be clear that there was no such disallowance made in the past. In other words, the Department itself had allowed the same. The CIT (Appeals), it appears has incorrectly mentioned in his orders that similar disallowances were deleted in the past by the ITAT. The issue was not there before the ITAT at all. Taking the totality of the facts into account, we are of the opinion that the payments made to foreign collaborators for Engineering Services rendered by them were obviously expenses of revenue nature. There was no correct and valid occasion to disallow the same. This contention of the Department is rejected for both the years.</p><p align="justify">9. The next contention in both the years is with regard to the deletion of the amount of royalty paid to foreign collaborators of Rs. 5,61,431 in assessment year 1978-79 and Rs. 5,36,349 in assessment year 1979-80.</p><p align="justify">10. It was argued by the Standing Counsel that the disallowance made was deleted by the CIT (Appeals) on the ground that similar disallowance was deleted by the ITAT in the immediately preceding year.</p><p align="justify">It was further stated by the Standing Counsel that the ITAT for the assessment year 1977-78 deleted the disallowance of licence fee on the ground that the ITAT in assessment years 1974-75, 1975-76 and 1976-77 had deleted such a disallowance. The correct fact is that there was no such disallowance under consideration of the ITAT for the assessment years 1974-75, 1975-76 and 1976-77. Thus, the ITAT in the order for the assessment year 1977-78 deleted the disallowance under a misunderstanding. It was argued by the Standing Counsel that licence fee was not a revenue expenditure and the same . should have been disallowed. The Standing Counselin this connection, relied upon the following eases : 2. Jonas Woodhead and Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad.) (FB).</p><p align="justify">11. The Authorised Representative of the assessee argued that licence fee was allowed by the Department itself in the earlier years and this issue was not there before the ITAT in the assessment years 1974-75, 1975-76 and 1976-77. In assessment year 1977-78, the ITAT deleted this disallowance, though under a misunderstanding (as mentioned above). He argued that on merits, royalty was clearly a revenue expense as has been held in the following cases : 4. Addl. CIT v. Nippon Electronics (India) (P.) Ltd. [1982] 134 ITR 457 (Kar.).</p><p align="justify">There are several other cases relied upon by the assessee's representative in this connection.</p><p align="justify">12. According to the latest case laws as relied upon by the assessee's representative, royalty is a business expense of revenue nature and has to be allowed. The Lordships of the Patna High Court in the case of CIT v. Tata Yadogawa Ltd. [1983] 142 ITR 30 held that the issue regarding royalty was not referable to the High Court in view of the decision of the Supreme Court in CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20. Here in this case, the issue was whether royalty was a revenue expense and on this issue, the revenue was trying to have a reference to the High Court against the order of ITAT, which allowed the expenses of royalty. The Patna High Court held that referring the said question would be merely academic after the decision of the Supreme Court in Indian Mica Supply Co. (P.) Ltd.'s case (supra). Respectfully following the said decision of Lordships of the Patna High Court and the other latest case laws (supra) relied upon by the representative of the assessee, we are of the opinion that royalty was a revenue expense. The contention of the Department in respect of the expense of royalty is rejected accordingly in both the years.</p><p align="justify">13. The next contention in both the years is with regard to a mistake committed by the CIT (Appeals) in mentioning the figures which we understand has already been rectified by now. The contention so raised is mentioned below : 5. That the learned, Commissioner of Income-tax (Appeals) erred in observing that the IAC had added Rs. 64,360 out of the claim for deduction under the head 'Preliminary Expenses' and in deleting the same. The assessee had actually claimed deduction of Rs. 6,436 and only that amount was disallowed by the IAC. Relief of Rs. 6,436 only should have been allowed by the learned Commissioner of Income-tax (Appeals).</p><p align="justify">14. We have considered the facts. It appears that there was a mistake in the order of the CIT (Appeals). The CIT (Appeals) is directed to rectify the mistake, if it has not been done already.</p><p align="justify">15. The next contention in both the years is that the CIT (Appeals) was not justified in accepting the assessee's claim that deduction under Section 80MM shall be calculated with reference to the cross receipts.</p><p align="justify">16. This contention is covered by the orders of the ITAT in the earlier years. According to the orders of the ITAT in earlier years the contention of the revenue is rejected.</p><p align="justify">17. The next contention is that CIT (Appeals) was not justified in holding that depreciation was admissible on Rs. 30,06,196 representing the cost of documents.</p><p align="justify">18. This issue is covered by the orders of the ITAT in earlier years.</p><p align="justify">Following the same, this contention of the Department is rejected.</p><p align="justify">19. The last contention is that the CIT (Appeals) was not justified in relying on the orders of the ITAT for earlier years, as the same were sub judice before the High Court. In our opinion, so long the orders of the ITAT in the case of the assessee for earlier years stand and have not been overruled, these according to judicial propriety have to be followed in later years facts remaining the same. Moreover, we agree with these orders.</p><p align="justify">20. In the result, the appeal of the Department for the assessment year 1978-79 is allowed in part, while for the assessment year 1979-80 is rejected.</p><p align="justify">1. Although I accept all other findings, I express my disagreement with the finding of the learned Accountant Member to disallow the claim of the assessee for deduction on licence fee of Rs. 8,20,347 and treat it as capital expense. The same was held allowable by the CIT(A) as an item of revenue expenditure on the basis of the order of the ITAT in appeal No. 932 (Pat.) of 1977-78, ITA Nos. 182 and 183 (Pat.) of 1978-79. The Standing Counsel for the department Mr. Rajgarhia had contended that the Appellate Tribunal in the aforesaid appeals for the asst. years 1974-75, 1975-76 and 1976-77 did not delete any such disallowance made by the ITO regarding licence fee. It was on the baasis of his plea that the Appellate Tribunal had in those appeals treated the licence fee as capital expense and not an item of revenue expenditure. The finding of the CIT(A) upheld the claim for deduction on the ground of being an item of revenue expenditure being unsupported by any finding of the Appellate Tribunal was reversed by the learned Accountant Member. To appreciate the controversy one is required to look at the facts in those appeals. The assessee-company was incorporated on 31st March, 1973 when he took over all the assets and liabilities of the Central Engg. &amp; Design Bureau, the consultancy unit of Hindustan Steel Ltd. with effect from 1-4-1973. The Central Engg.</p><p align="justify">and Design Bureau (hereinafter referred to as C.E.D.B.) was giving technical consultancy to other units. The assets and liabilities of C.E.D.B. of Hindustan Steel Ltd. were transferred to the assessee-company by an agreement dated 4th day of June, 1974 by which the assets and liabilities of Rs. 5,14,28,912 and Rs. 6,41,09,072 (page 49 of the paper book) were transferred to the assessee-company. An agreement dated 11-2-1969 was executed between United Engg. &amp; Foundry Co., USA and Hindustan Steel Ltd. Similar agreement was executed between M/s. Hindustan Steel Ltd. and M/s. Tiajomomexport of USSR on 27-11-1969. These two agreements were executed to provide necessary know-how and design. These two agreements were subsequently assigned to the assessee-company on 13-9-1973.</p><p align="justify">2. It took over the assets of Rs. 5.1 crores which included the consultancy wing and united wing as follows : The assessee-company, in addition thereto, incurred the total expenses of Rs. 16,55,980, Rs. 17,40,520 and Rs. 19,99,282 on payment to collaborators, engineering and design fees, postage and training expenses during the assessment years 1974-75 to 1976-77.</p><p align="justify">3. The assessee claimed the revenue expenses of Rs. 1,36,48,796 and capital expenses of Rs. 30,06,193 on which it claimed depreciation for the asst. year 1974-75. In 1975-76 and 1976-77 the expenditure of Rs. 17,40,529 and Rs. 19,99,282 were claimed as revenue expenditure.</p><p align="justify">It would be relevant to give the break up of the claim of the assessee for Rs. 1,36,48,796 and Rs. 30,06,193.</p><p align="justify">Out of the above total of Rs. 1,66,54,990 the assessee claimed Rs. 1,36,48,796 as revenue expenditure and on balance amount of Rs. 30,06,193 it claimed depreciation.</p><p align="justify">The Income-tax Officer stated that since the assessee was maintaining its books of account on mercantile system, the expenditure incurred in earlier year was not eligible for deduction while computing the income of the assessee for the year. He, therefore, concluded that the claim was not entertainable at least to the extent of Rs. 1,49,99,010. On the claim of the assessee for deduction of Rs. 16,55,980 he stated that this expenditure also is directly related to the acquisition of know-how from the foreign collaboration and is, therefore, a part of the deal. It cannot, therefore, be considered in severality.</p><p align="justify">4. Taking this view that both related to the acquisition of technical know-how its principle of assets for running over the business of consultancy, the ITO started to consider whether the assessee could be allowed depreciation. In his view technical know-how wing, an intangible asset, could not be allowed depreciation.</p><p align="justify">5. The assessee feeling aggrieved took this matter in appeal before the AAC. He repeated his two pleas, he had made out before the ITO to treat the expenditure of Rs. 1,36,48,796 as revenue expenditure and to allow depreciation on the capital expenditure of Rs. 30,06,193. The AAC upheld the finding of the ITO and dismissed the appeal of the assessee-company.</p><p align="justify">6. In this background, the Appellate Tribunal was called upon to consider the two pleas of the assessee. This was the first year of the assessment of the assessee-company when the expenditure for acquiring technical know-how both in preceding year under agreement with C.E.D.B.and M/s. Hindustan Steel Ltd. and those incurred in the current year had to be considered. The Appellate Tribunal apportioned the current expenditure into two parts-one relating to the acquisition of the technical know-how and the other relating to postage and training. It treated the former as capital expenses which in its view brought the company tangible asset on which it allowed depreciation. The other portion of the expenditure was treated as revenue expenditure which was allowed to be deducted as business expenditure.</p><p align="justify">7. But in treating the expenditure for technical know-how as capital expenditure, the Tribunal has recorded a further finding in para 11. An extract of this is reproduced as below : The lower authorities have considered the expenses of the asses-see on knowr-how, drawings, patents etc., on the footing that the assessee acquired the technical know-how and utilised the same for its business. But the facts are otherwise. The assessee, no doubt, has utilised the technical know-how, drawings, patents etc. but it has not manufactured any article on the basis of those licences for itself nor the article manufactured on the basis of know-how are subject matter of sale of the assessee. What the assessee has done is that the assessee has taken know-how, drawings, patents etc. from others and have provided them to others by charging fees. All the decisions either cited before the authorities below or cited before the Bench during the hearing by both the parties are related to know-how which was acquired by the assessee for the manufacture of any of the items by it which was ultimately sold. Therefore, in all these cases the object of the assessee was something else and for fulfilling those objects, the assessee acquired know-how to produce the articles. These facts are not in the case of the assessee. The assessee's business is to acquire know-how and to give know-how to others by charging fees. Therefore, on the facts and as admitted by the ITO, the assessee is a dealer in know-how. It purchases know-how from others and it sells know-how to others. Under the circumstances, the cases relied on either by the lower authorities or by the respective parties before the Bench are not applicable on the facts of the present case.</p><p align="justify">8. It is clear that the Appellate Tribunal in treating the expenditure of Rs. 1.49 crores and a part of the current expenditure considered the assessee only as a dealer in technical know-how. It was on the basis of this finding that the Tribunal treated the expenditure as capital expenditure on which it allowed depreciation. The facts of the present case, however, suggest a different setting of facts. The IAC has summarily treated the licence fee of Rs. 8,20,347 as capital having been made to M/s. Wean United for acquiring technical know-how. But the order of the CIT(A) contains a fuller account of reason why payment of licence fee was made by it. I reproduce the relevant part : The appellant had also to pay licence fees for the information and help received from the foreign company. Due to paucity of time, the company sometimes got some of the equipments, to be sold by it, designed by its foreign collaborator to keep to the time schedule for delivery. The company also got some of the designs prepared by it, checked by the foreign collaborator as to their correctness so that the equipment manufactured from such design would not be declared defective due to faulty design at a late date. The company paid licence fees to this foreign collaborator for the various services "received from them as mentioned above as well as towards reimbursement of certain expenditure incurred by the collaborators on behalf of the foreign company.</p><p align="justify">9. This being the finding of the CIT(A) regarding the purpose and object of the expenditure over the licence fee, it is not reasonable to accept the plea of the Standing Counsel that the payment of licence fee was to be considered capital on the basis of the finding of the Tribunal made in earlier years. The finding of the Tribunal made in earlier years' appeal was on altogether different set of facts. The order of the Appellate Tribunal was based on a finding that the assessee was a dealer in know-how but the finding of the CIT(A) in this year does not suggest that but on the other hand highlights that the payment was made in connection with the equipments to be supplied to its constituents as pointed out in the extract from the finding of the CIT(A) reproduced above. As highlighted in the Tribunal's own finding reproduced above, such an expenditure was to be differentiated from the expenditure incurred to supply the technical know-how as a dealer and was to be treated as revenue expenditure. It was this feature which appears to have led the CIT(A) to hold that the Tribunal had already recorded a finding which he faithfully and truthfully followed.</p><p align="justify">Besides, if the payments of royalty and Engineering fees both incurred for acquiring technical know-how are to be treated as revenue expenditure by the learned Accountant Member to which I have agreed, I fail to see any logic in disallowing licence fee as capital expenditure. Engineering fee also was a constituent of the expenditure of Rs. 1,66,54,990 as indicated above which was considered in the asst.</p><p align="justify">year 1974-75 by the Appellate Tribunal as capital expenditure on which it allowed depreciation. But Engineering fee nevertheless is considered by the learned Accountant Member in his order as an item of revenue expenditure duly qualifying for deduction as revenue outgoing to which also I have agreed. After treating the Engg. fee as revenue expenditure on the facts and in the circumstances of the case there is no justification for treating licence fee as capital expenditure, 10. In my view, the expenditure over licence fee should be also considered qualifying for deduction as revenue expenditure of the year.</p><p align="justify">To be fair, however, to both sides and further to ascertain facts with greater charity and point, I would set aside the finding of the CIT(A) and direct him to take back the appeal on this issue for fresh disposal in accordance with law. In disposing of this issue, he shall first ascertain the facts regarding the payment of licence fee and then record his finding whether the amount can be considered as revenue outgoing or otherwise as capital expenditure on which depreciation should be allowed.</p><p align="justify">We, the Members of the Patna Bench having differed on the above issue while deciding the case of Mecon (India) Ltd. [IT Appeal Nos. 430 and 431 (Pat.) of 1981], refer the following question to the President, Income-tax Appellate Tribunal under Section 255(4) : Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for asst. year 1978-79 1. These matters have been referred to me under Section 255(4) by the President of the Income-tax Appellate Tribunal in view of the difference of opinion between the learned Accountant Member and the learned Judicial Member of Patna Bench on the following point: Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for assessment year 1978-79? 2. The dispute is whether the technical know-how fee paid by the assessee in respect of a foreign collaboration agreement is allowable as revenue expenditure or capital expenditure. The assessee is a Government undertaking. Under the agreement the assessee was required to pay 1,00,000 dollars on the execution of agreement and similar amount of 1,00,000 dollars every year for another five years. The IAC held that the expenditure incurred by the assessee is capital expenditure. On appeal, the CIT(A) allowed the assessee's claim as revenue expenditure.</p><p align="justify">3. The revenue preferred the appeals before the Appellate Tribunal. The appeals were heard by the learned Judicial Member Shri U.S. Dhusia and the learned Accountant Member Shri B. Nath of Patna Bench of the Tribunal. The learned Accountant Member held that the expenditure is capital expenditure. The learned Judicial Member differed with this view. He held that it is allowable as revenue expenditure. In view of the above difference of opinion, the matter has been referred to me.</p><p align="justify">4. The learned departmental representative strongly urged that the payment towards licence fee for the technical know-how is a capital expenditure". The CIT(A) was wrong in allowing the same as revenue expenditure. He also pointed out that the Tribunal in the assessee's case in the assessment years 1974-75 to 1976-77 has held that it is capital expenditure and that order should be followed. The learned counsel for the assessee submitted that the agreement itself was for a period of 10 years. The assessee has received only the technical know-how for limited period and the title remained with the foreign collaborator. Thus, it is allowable as revenue expenditure. He relied on several cases.</p><p align="justify">5. We have considered the rival submissions. It is necessary to refer to certain clauses in the agreement with the foreign collaborator, viz., United. Under Clause (e) of Article II of the agreement, title to the know-how shall remain with 'United' and the latter grants a non-exclusive licence to the assessee. Under Clause (g), the assessee shall not without written consent of 'United' sell, reveal, pass on, transfer or grant any rights to the use of the know-how to any other person. Under Clause (h) 'United' reserves the right free of restriction to make independent arrangements with any third party with respect to the manufacture and/or sale of contract articles. Under Article VIII, the duration of the agreement is for a period of ten years.</p><p align="justify">6. The above clauses will clearly show that the assessee obtained only a right to use the technical know-how and it has no title to it as the title vested only in the 'United'. 'United' only granted a non-exclusive licence to the assessee. The period of the agreement itself was for 10 years. Thus, the assessee did not have any title to the asset. The technical know-how fees was paid only for its user within the limited period. Thus it is clearly allowable as a revenue expenditure.</p><p align="justify">7. In Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443, the Full Bench of the Karnataka High Court held that when the foreign company did not part with the asset and when the assessee only acquired the right to draw up the technical knowledge for a limited period, the assessee had not acquired any asset or advantage of an enduring nature and so the payments made were revenue in nature. This decision was followed in Nippon Electronics (India) (P.) Ltd.'s case (supra), wherein it was held that where payment is for the actual user of the technical know-how, data and information supplied by the foreign company, the payment would be allowed as revenue expenditure.</p><p align="justify">8. In Cooper Engg. Ltd. v. CIT [1982] 135 ITR 597, the Bombay High Court held that the technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The payment made for the technical know-how was revenue expenditure. The ratio laid down in the above case would squarely apply to the instant case. In view of the above decisions, it is not necessary for me to refer to the earlier orders of the Tribunal in the assessee's case. In my view the learned Judicial Member was right in holding that the licence fee is allowable as revenue expenditure. Thus, I hold that the sum. of Rs. 8,20,347 is allowable as revenue expenditure. Now the matter will go back before the Bench for passing necessary orders.',
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			'judge' => 'T Venkatappa, Vice, U Dhusia, B Nath',
			'judgement' => ' 1. Both these appeals are departmental appeals. Except for ground of appeal No. 1, for the assessment year 1978-79, the other grounds are common to both the years.</p><p align="justify">2. Ground of appeal No. 1 for the assessment year 1978-79, reads as under : 1. That the learned Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 8,20,347 on account of licence fee paid to the foreign collaborators.</p><p align="justify">It was argued by the Standing Counsel on behalf of the Department that the licence fee was allowed by the ITAT in the preceding year under a misunderstanding that it was allowed by the Income-tax Appellate Tribunal in the case of the assessee for the assessment years 1974-75, 1975-76 and 1976-77. It was stated that actually in the assessment years 1974-75, 1975-76 and 1976-77, the ITAT had not allowed these expenses on licence fee as a revenue expenditure and had held that the same was a capital expenditure. In the assessment year 1977-78, the CIT (Appeals) by mistake held in his order that the ITAT had allowed this expense as a revenue expense in earlier years. The ITAT also for the assessment year 1977-78 took without verifying that the ITAT had allowed the same in the earlier years and thus confirmed the order of the CIT (Appeals). It was thus, argued by the Standing Counsel that according to the earlier history and the orders of the ITAT on the topic, licence fee was held to be a capital expense and according to the said finding, the same should be disallowed and the order of the CIT (Appeals) be reversed on this issue.</p><p align="justify">3. The AR did not dispute the above facts pointed out by the Standing Counsel, but he argued that licence fee was a revenue expense.</p><p align="justify">4. We have considered the facts and the rival contentions. In assessment years 1974-75, 1975-76 and 1976-77, licence fee was held to be a capital expense by the ITAT. In 1977-78, it was allowed by the ITAT, it appears, on a misunderstanding that the same was allowed by the ITAT in earlier years though it was actually now so allowed. The order of the ITAT for the assessment year 1977-78 thus, in our opinion is not a correct guide. Following the order of the ITAT on this topic for the assessment years 1974-75, 1975-76 and 1976-77, the order of the CIT (Appeals) on the issue of licence fee is reversed and" the disallowance of Rs. 8,20,347 as capital expense is restored.</p><p align="justify">5. The next conteiltion, which is relevant to both the years is with regard to the disallowance of payment made to foreign collaborators for Engineering Services which amounted to Rs. 92,42,836 in assessment year 1978-79 and Rs. 50,40,012 in assessment year 1979-80. The CIT (Appeals) has deleted these disallowances.</p><p align="justify">6. It was argued by the Standing Counsel that the ITAT in the orders of the earlier years had confirmed the similar disallowances.</p><p align="justify">7. The representative of the assessee pointed out that these were allowed by the Department itself in the earlier years, as revenue expenses and the issue pertaining to the payments made to the foreign collaborators for Engineering Services was not there before the ITAT in any year. It was argued by the representative of the assessee that these were clearly revenue expenses as have already been held by the Department itself in the earlier years.</p><p align="justify">8. We have considered the facts and the rival arguments. The Standing Counsel could not show that the ITAT had confirmed similar disallowances in the past. It appears to be clear that there was no such disallowance made in the past. In other words, the Department itself had allowed the same. The CIT (Appeals), it appears has incorrectly mentioned in his orders that similar disallowances were deleted in the past by the ITAT. The issue was not there before the ITAT at all. Taking the totality of the facts into account, we are of the opinion that the payments made to foreign collaborators for Engineering Services rendered by them were obviously expenses of revenue nature. There was no correct and valid occasion to disallow the same. This contention of the Department is rejected for both the years.</p><p align="justify">9. The next contention in both the years is with regard to the deletion of the amount of royalty paid to foreign collaborators of Rs. 5,61,431 in assessment year 1978-79 and Rs. 5,36,349 in assessment year 1979-80.</p><p align="justify">10. It was argued by the Standing Counsel that the disallowance made was deleted by the CIT (Appeals) on the ground that similar disallowance was deleted by the ITAT in the immediately preceding year.</p><p align="justify">It was further stated by the Standing Counsel that the ITAT for the assessment year 1977-78 deleted the disallowance of licence fee on the ground that the ITAT in assessment years 1974-75, 1975-76 and 1976-77 had deleted such a disallowance. The correct fact is that there was no such disallowance under consideration of the ITAT for the assessment years 1974-75, 1975-76 and 1976-77. Thus, the ITAT in the order for the assessment year 1977-78 deleted the disallowance under a misunderstanding. It was argued by the Standing Counsel that licence fee was not a revenue expenditure and the same . should have been disallowed. The Standing Counselin this connection, relied upon the following eases : 2. Jonas Woodhead and Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad.) (FB).</p><p align="justify">11. The Authorised Representative of the assessee argued that licence fee was allowed by the Department itself in the earlier years and this issue was not there before the ITAT in the assessment years 1974-75, 1975-76 and 1976-77. In assessment year 1977-78, the ITAT deleted this disallowance, though under a misunderstanding (as mentioned above). He argued that on merits, royalty was clearly a revenue expense as has been held in the following cases : 4. Addl. CIT v. Nippon Electronics (India) (P.) Ltd. [1982] 134 ITR 457 (Kar.).</p><p align="justify">There are several other cases relied upon by the assessee's representative in this connection.</p><p align="justify">12. According to the latest case laws as relied upon by the assessee's representative, royalty is a business expense of revenue nature and has to be allowed. The Lordships of the Patna High Court in the case of CIT v. Tata Yadogawa Ltd. [1983] 142 ITR 30 held that the issue regarding royalty was not referable to the High Court in view of the decision of the Supreme Court in CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20. Here in this case, the issue was whether royalty was a revenue expense and on this issue, the revenue was trying to have a reference to the High Court against the order of ITAT, which allowed the expenses of royalty. The Patna High Court held that referring the said question would be merely academic after the decision of the Supreme Court in Indian Mica Supply Co. (P.) Ltd.'s case (supra). Respectfully following the said decision of Lordships of the Patna High Court and the other latest case laws (supra) relied upon by the representative of the assessee, we are of the opinion that royalty was a revenue expense. The contention of the Department in respect of the expense of royalty is rejected accordingly in both the years.</p><p align="justify">13. The next contention in both the years is with regard to a mistake committed by the CIT (Appeals) in mentioning the figures which we understand has already been rectified by now. The contention so raised is mentioned below : 5. That the learned, Commissioner of Income-tax (Appeals) erred in observing that the IAC had added Rs. 64,360 out of the claim for deduction under the head 'Preliminary Expenses' and in deleting the same. The assessee had actually claimed deduction of Rs. 6,436 and only that amount was disallowed by the IAC. Relief of Rs. 6,436 only should have been allowed by the learned Commissioner of Income-tax (Appeals).</p><p align="justify">14. We have considered the facts. It appears that there was a mistake in the order of the CIT (Appeals). The CIT (Appeals) is directed to rectify the mistake, if it has not been done already.</p><p align="justify">15. The next contention in both the years is that the CIT (Appeals) was not justified in accepting the assessee's claim that deduction under Section 80MM shall be calculated with reference to the cross receipts.</p><p align="justify">16. This contention is covered by the orders of the ITAT in the earlier years. According to the orders of the ITAT in earlier years the contention of the revenue is rejected.</p><p align="justify">17. The next contention is that CIT (Appeals) was not justified in holding that depreciation was admissible on Rs. 30,06,196 representing the cost of documents.</p><p align="justify">18. This issue is covered by the orders of the ITAT in earlier years.</p><p align="justify">Following the same, this contention of the Department is rejected.</p><p align="justify">19. The last contention is that the CIT (Appeals) was not justified in relying on the orders of the ITAT for earlier years, as the same were sub judice before the High Court. In our opinion, so long the orders of the ITAT in the case of the assessee for earlier years stand and have not been overruled, these according to judicial propriety have to be followed in later years facts remaining the same. Moreover, we agree with these orders.</p><p align="justify">20. In the result, the appeal of the Department for the assessment year 1978-79 is allowed in part, while for the assessment year 1979-80 is rejected.</p><p align="justify">1. Although I accept all other findings, I express my disagreement with the finding of the learned Accountant Member to disallow the claim of the assessee for deduction on licence fee of Rs. 8,20,347 and treat it as capital expense. The same was held allowable by the CIT(A) as an item of revenue expenditure on the basis of the order of the ITAT in appeal No. 932 (Pat.) of 1977-78, ITA Nos. 182 and 183 (Pat.) of 1978-79. The Standing Counsel for the department Mr. Rajgarhia had contended that the Appellate Tribunal in the aforesaid appeals for the asst. years 1974-75, 1975-76 and 1976-77 did not delete any such disallowance made by the ITO regarding licence fee. It was on the baasis of his plea that the Appellate Tribunal had in those appeals treated the licence fee as capital expense and not an item of revenue expenditure. The finding of the CIT(A) upheld the claim for deduction on the ground of being an item of revenue expenditure being unsupported by any finding of the Appellate Tribunal was reversed by the learned Accountant Member. To appreciate the controversy one is required to look at the facts in those appeals. The assessee-company was incorporated on 31st March, 1973 when he took over all the assets and liabilities of the Central Engg. &amp; Design Bureau, the consultancy unit of Hindustan Steel Ltd. with effect from 1-4-1973. The Central Engg.</p><p align="justify">and Design Bureau (hereinafter referred to as C.E.D.B.) was giving technical consultancy to other units. The assets and liabilities of C.E.D.B. of Hindustan Steel Ltd. were transferred to the assessee-company by an agreement dated 4th day of June, 1974 by which the assets and liabilities of Rs. 5,14,28,912 and Rs. 6,41,09,072 (page 49 of the paper book) were transferred to the assessee-company. An agreement dated 11-2-1969 was executed between United Engg. &amp; Foundry Co., USA and Hindustan Steel Ltd. Similar agreement was executed between M/s. Hindustan Steel Ltd. and M/s. Tiajomomexport of USSR on 27-11-1969. These two agreements were executed to provide necessary know-how and design. These two agreements were subsequently assigned to the assessee-company on 13-9-1973.</p><p align="justify">2. It took over the assets of Rs. 5.1 crores which included the consultancy wing and united wing as follows : The assessee-company, in addition thereto, incurred the total expenses of Rs. 16,55,980, Rs. 17,40,520 and Rs. 19,99,282 on payment to collaborators, engineering and design fees, postage and training expenses during the assessment years 1974-75 to 1976-77.</p><p align="justify">3. The assessee claimed the revenue expenses of Rs. 1,36,48,796 and capital expenses of Rs. 30,06,193 on which it claimed depreciation for the asst. year 1974-75. In 1975-76 and 1976-77 the expenditure of Rs. 17,40,529 and Rs. 19,99,282 were claimed as revenue expenditure.</p><p align="justify">It would be relevant to give the break up of the claim of the assessee for Rs. 1,36,48,796 and Rs. 30,06,193.</p><p align="justify">Out of the above total of Rs. 1,66,54,990 the assessee claimed Rs. 1,36,48,796 as revenue expenditure and on balance amount of Rs. 30,06,193 it claimed depreciation.</p><p align="justify">The Income-tax Officer stated that since the assessee was maintaining its books of account on mercantile system, the expenditure incurred in earlier year was not eligible for deduction while computing the income of the assessee for the year. He, therefore, concluded that the claim was not entertainable at least to the extent of Rs. 1,49,99,010. On the claim of the assessee for deduction of Rs. 16,55,980 he stated that this expenditure also is directly related to the acquisition of know-how from the foreign collaboration and is, therefore, a part of the deal. It cannot, therefore, be considered in severality.</p><p align="justify">4. Taking this view that both related to the acquisition of technical know-how its principle of assets for running over the business of consultancy, the ITO started to consider whether the assessee could be allowed depreciation. In his view technical know-how wing, an intangible asset, could not be allowed depreciation.</p><p align="justify">5. The assessee feeling aggrieved took this matter in appeal before the AAC. He repeated his two pleas, he had made out before the ITO to treat the expenditure of Rs. 1,36,48,796 as revenue expenditure and to allow depreciation on the capital expenditure of Rs. 30,06,193. The AAC upheld the finding of the ITO and dismissed the appeal of the assessee-company.</p><p align="justify">6. In this background, the Appellate Tribunal was called upon to consider the two pleas of the assessee. This was the first year of the assessment of the assessee-company when the expenditure for acquiring technical know-how both in preceding year under agreement with C.E.D.B.and M/s. Hindustan Steel Ltd. and those incurred in the current year had to be considered. The Appellate Tribunal apportioned the current expenditure into two parts-one relating to the acquisition of the technical know-how and the other relating to postage and training. It treated the former as capital expenses which in its view brought the company tangible asset on which it allowed depreciation. The other portion of the expenditure was treated as revenue expenditure which was allowed to be deducted as business expenditure.</p><p align="justify">7. But in treating the expenditure for technical know-how as capital expenditure, the Tribunal has recorded a further finding in para 11. An extract of this is reproduced as below : The lower authorities have considered the expenses of the asses-see on knowr-how, drawings, patents etc., on the footing that the assessee acquired the technical know-how and utilised the same for its business. But the facts are otherwise. The assessee, no doubt, has utilised the technical know-how, drawings, patents etc. but it has not manufactured any article on the basis of those licences for itself nor the article manufactured on the basis of know-how are subject matter of sale of the assessee. What the assessee has done is that the assessee has taken know-how, drawings, patents etc. from others and have provided them to others by charging fees. All the decisions either cited before the authorities below or cited before the Bench during the hearing by both the parties are related to know-how which was acquired by the assessee for the manufacture of any of the items by it which was ultimately sold. Therefore, in all these cases the object of the assessee was something else and for fulfilling those objects, the assessee acquired know-how to produce the articles. These facts are not in the case of the assessee. The assessee's business is to acquire know-how and to give know-how to others by charging fees. Therefore, on the facts and as admitted by the ITO, the assessee is a dealer in know-how. It purchases know-how from others and it sells know-how to others. Under the circumstances, the cases relied on either by the lower authorities or by the respective parties before the Bench are not applicable on the facts of the present case.</p><p align="justify">8. It is clear that the Appellate Tribunal in treating the expenditure of Rs. 1.49 crores and a part of the current expenditure considered the assessee only as a dealer in technical know-how. It was on the basis of this finding that the Tribunal treated the expenditure as capital expenditure on which it allowed depreciation. The facts of the present case, however, suggest a different setting of facts. The IAC has summarily treated the licence fee of Rs. 8,20,347 as capital having been made to M/s. Wean United for acquiring technical know-how. But the order of the CIT(A) contains a fuller account of reason why payment of licence fee was made by it. I reproduce the relevant part : The appellant had also to pay licence fees for the information and help received from the foreign company. Due to paucity of time, the company sometimes got some of the equipments, to be sold by it, designed by its foreign collaborator to keep to the time schedule for delivery. The company also got some of the designs prepared by it, checked by the foreign collaborator as to their correctness so that the equipment manufactured from such design would not be declared defective due to faulty design at a late date. The company paid licence fees to this foreign collaborator for the various services "received from them as mentioned above as well as towards reimbursement of certain expenditure incurred by the collaborators on behalf of the foreign company.</p><p align="justify">9. This being the finding of the CIT(A) regarding the purpose and object of the expenditure over the licence fee, it is not reasonable to accept the plea of the Standing Counsel that the payment of licence fee was to be considered capital on the basis of the finding of the Tribunal made in earlier years. The finding of the Tribunal made in earlier years' appeal was on altogether different set of facts. The order of the Appellate Tribunal was based on a finding that the assessee was a dealer in know-how but the finding of the CIT(A) in this year does not suggest that but on the other hand highlights that the payment was made in connection with the equipments to be supplied to its constituents as pointed out in the extract from the finding of the CIT(A) reproduced above. As highlighted in the Tribunal's own finding reproduced above, such an expenditure was to be differentiated from the expenditure incurred to supply the technical know-how as a dealer and was to be treated as revenue expenditure. It was this feature which appears to have led the CIT(A) to hold that the Tribunal had already recorded a finding which he faithfully and truthfully followed.</p><p align="justify">Besides, if the payments of royalty and Engineering fees both incurred for acquiring technical know-how are to be treated as revenue expenditure by the learned Accountant Member to which I have agreed, I fail to see any logic in disallowing licence fee as capital expenditure. Engineering fee also was a constituent of the expenditure of Rs. 1,66,54,990 as indicated above which was considered in the asst.</p><p align="justify">year 1974-75 by the Appellate Tribunal as capital expenditure on which it allowed depreciation. But Engineering fee nevertheless is considered by the learned Accountant Member in his order as an item of revenue expenditure duly qualifying for deduction as revenue outgoing to which also I have agreed. After treating the Engg. fee as revenue expenditure on the facts and in the circumstances of the case there is no justification for treating licence fee as capital expenditure, 10. In my view, the expenditure over licence fee should be also considered qualifying for deduction as revenue expenditure of the year.</p><p align="justify">To be fair, however, to both sides and further to ascertain facts with greater charity and point, I would set aside the finding of the CIT(A) and direct him to take back the appeal on this issue for fresh disposal in accordance with law. In disposing of this issue, he shall first ascertain the facts regarding the payment of licence fee and then record his finding whether the amount can be considered as revenue outgoing or otherwise as capital expenditure on which depreciation should be allowed.</p><p align="justify">We, the Members of the Patna Bench having differed on the above issue while deciding the case of Mecon (India) Ltd. [IT Appeal Nos. 430 and 431 (Pat.) of 1981], refer the following question to the President, Income-tax Appellate Tribunal under Section 255(4) : Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for asst. year 1978-79 1. These matters have been referred to me under Section 255(4) by the President of the Income-tax Appellate Tribunal in view of the difference of opinion between the learned Accountant Member and the learned Judicial Member of Patna Bench on the following point: Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for assessment year 1978-79? 2. The dispute is whether the technical know-how fee paid by the assessee in respect of a foreign collaboration agreement is allowable as revenue expenditure or capital expenditure. The assessee is a Government undertaking. Under the agreement the assessee was required to pay 1,00,000 dollars on the execution of agreement and similar amount of 1,00,000 dollars every year for another five years. The IAC held that the expenditure incurred by the assessee is capital expenditure. On appeal, the CIT(A) allowed the assessee's claim as revenue expenditure.</p><p align="justify">3. The revenue preferred the appeals before the Appellate Tribunal. The appeals were heard by the learned Judicial Member Shri U.S. Dhusia and the learned Accountant Member Shri B. Nath of Patna Bench of the Tribunal. The learned Accountant Member held that the expenditure is capital expenditure. The learned Judicial Member differed with this view. He held that it is allowable as revenue expenditure. In view of the above difference of opinion, the matter has been referred to me.</p><p align="justify">4. The learned departmental representative strongly urged that the payment towards licence fee for the technical know-how is a capital expenditure". The CIT(A) was wrong in allowing the same as revenue expenditure. He also pointed out that the Tribunal in the assessee's case in the assessment years 1974-75 to 1976-77 has held that it is capital expenditure and that order should be followed. The learned counsel for the assessee submitted that the agreement itself was for a period of 10 years. The assessee has received only the technical know-how for limited period and the title remained with the foreign collaborator. Thus, it is allowable as revenue expenditure. He relied on several cases.</p><p align="justify">5. We have considered the rival submissions. It is necessary to refer to certain clauses in the agreement with the foreign collaborator, viz., United. Under Clause (e) of Article II of the agreement, title to the know-how shall remain with 'United' and the latter grants a non-exclusive licence to the assessee. Under Clause (g), the assessee shall not without written consent of 'United' sell, reveal, pass on, transfer or grant any rights to the use of the know-how to any other person. Under Clause (h) 'United' reserves the right free of restriction to make independent arrangements with any third party with respect to the manufacture and/or sale of contract articles. Under Article VIII, the duration of the agreement is for a period of ten years.</p><p align="justify">6. The above clauses will clearly show that the assessee obtained only a right to use the technical know-how and it has no title to it as the title vested only in the 'United'. 'United' only granted a non-exclusive licence to the assessee. The period of the agreement itself was for 10 years. Thus, the assessee did not have any title to the asset. The technical know-how fees was paid only for its user within the limited period. Thus it is clearly allowable as a revenue expenditure.</p><p align="justify">7. In Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443, the Full Bench of the Karnataka High Court held that when the foreign company did not part with the asset and when the assessee only acquired the right to draw up the technical knowledge for a limited period, the assessee had not acquired any asset or advantage of an enduring nature and so the payments made were revenue in nature. This decision was followed in Nippon Electronics (India) (P.) Ltd.'s case (supra), wherein it was held that where payment is for the actual user of the technical know-how, data and information supplied by the foreign company, the payment would be allowed as revenue expenditure.</p><p align="justify">8. In Cooper Engg. Ltd. v. CIT [1982] 135 ITR 597, the Bombay High Court held that the technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The payment made for the technical know-how was revenue expenditure. The ratio laid down in the above case would squarely apply to the instant case. In view of the above decisions, it is not necessary for me to refer to the earlier orders of the Tribunal in the assessee's case. In my view the learned Judicial Member was right in holding that the licence fee is allowable as revenue expenditure. Thus, I hold that the sum. of Rs. 8,20,347 is allowable as revenue expenditure. Now the matter will go back before the Bench for passing necessary orders.',
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		'judgement' => ' 1. Both these appeals are departmental appeals. Except for ground of appeal No. 1, for the assessment year 1978-79, the other grounds are common to both the years.</p><p align="justify">2. Ground of appeal No. 1 for the assessment year 1978-79, reads as under : 1. That the learned Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 8,20,347 on account of licence fee paid to the foreign collaborators.</p><p align="justify">It was argued by the Standing Counsel on behalf of the Department that the licence fee was allowed by the ITAT in the preceding year under a misunderstanding that it was allowed by the Income-tax Appellate Tribunal in the case of the assessee for the assessment years 1974-75, 1975-76 and 1976-77. It was stated that actually in the assessment years 1974-75, 1975-76 and 1976-77, the ITAT had not allowed these expenses on licence fee as a revenue expenditure and had held that the same was a capital expenditure. In the assessment year 1977-78, the CIT (Appeals) by mistake held in his order that the ITAT had allowed this expense as a revenue expense in earlier years. The ITAT also for the assessment year 1977-78 took without verifying that the ITAT had allowed the same in the earlier years and thus confirmed the order of the CIT (Appeals). It was thus, argued by the Standing Counsel that according to the earlier history and the orders of the ITAT on the topic, licence fee was held to be a capital expense and according to the said finding, the same should be disallowed and the order of the CIT (Appeals) be reversed on this issue.</p><p align="justify">3. The AR did not dispute the above facts pointed out by the Standing Counsel, but he argued that licence fee was a revenue expense.</p><p align="justify">4. We have considered the facts and the rival contentions. In assessment years 1974-75, 1975-76 and 1976-77, licence fee was held to be a capital expense by the ITAT. In 1977-78, it was allowed by the ITAT, it appears, on a misunderstanding that the same was allowed by the ITAT in earlier years though it was actually now so allowed. The order of the ITAT for the assessment year 1977-78 thus, in our opinion is not a correct guide. Following the order of the ITAT on this topic for the assessment years 1974-75, 1975-76 and 1976-77, the order of the CIT (Appeals) on the issue of licence fee is reversed and" the disallowance of Rs. 8,20,347 as capital expense is restored.</p><p align="justify">5. The next conteiltion, which is relevant to both the years is with regard to the disallowance of payment made to foreign collaborators for Engineering Services which amounted to Rs. 92,42,836 in assessment year 1978-79 and Rs. 50,40,012 in assessment year 1979-80. The CIT (Appeals) has deleted these disallowances.</p><p align="justify">6. It was argued by the Standing Counsel that the ITAT in the orders of the earlier years had confirmed the similar disallowances.</p><p align="justify">7. The representative of the assessee pointed out that these were allowed by the Department itself in the earlier years, as revenue expenses and the issue pertaining to the payments made to the foreign collaborators for Engineering Services was not there before the ITAT in any year. It was argued by the representative of the assessee that these were clearly revenue expenses as have already been held by the Department itself in the earlier years.</p><p align="justify">8. We have considered the facts and the rival arguments. The Standing Counsel could not show that the ITAT had confirmed similar disallowances in the past. It appears to be clear that there was no such disallowance made in the past. In other words, the Department itself had allowed the same. The CIT (Appeals), it appears has incorrectly mentioned in his orders that similar disallowances were deleted in the past by the ITAT. The issue was not there before the ITAT at all. Taking the totality of the facts into account, we are of the opinion that the payments made to foreign collaborators for Engineering Services rendered by them were obviously expenses of revenue nature. There was no correct and valid occasion to disallow the same. This contention of the Department is rejected for both the years.</p><p align="justify">9. The next contention in both the years is with regard to the deletion of the amount of royalty paid to foreign collaborators of Rs. 5,61,431 in assessment year 1978-79 and Rs. 5,36,349 in assessment year 1979-80.</p><p align="justify">10. It was argued by the Standing Counsel that the disallowance made was deleted by the CIT (Appeals) on the ground that similar disallowance was deleted by the ITAT in the immediately preceding year.</p><p align="justify">It was further stated by the Standing Counsel that the ITAT for the assessment year 1977-78 deleted the disallowance of licence fee on the ground that the ITAT in assessment years 1974-75, 1975-76 and 1976-77 had deleted such a disallowance. The correct fact is that there was no such disallowance under consideration of the ITAT for the assessment years 1974-75, 1975-76 and 1976-77. Thus, the ITAT in the order for the assessment year 1977-78 deleted the disallowance under a misunderstanding. It was argued by the Standing Counsel that licence fee was not a revenue expenditure and the same . should have been disallowed. The Standing Counselin this connection, relied upon the following eases : 2. Jonas Woodhead and Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad.) (FB).</p><p align="justify">11. The Authorised Representative of the assessee argued that licence fee was allowed by the Department itself in the earlier years and this issue was not there before the ITAT in the assessment years 1974-75, 1975-76 and 1976-77. In assessment year 1977-78, the ITAT deleted this disallowance, though under a misunderstanding (as mentioned above). He argued that on merits, royalty was clearly a revenue expense as has been held in the following cases : 4. Addl. CIT v. Nippon Electronics (India) (P.) Ltd. [1982] 134 ITR 457 (Kar.).</p><p align="justify">There are several other cases relied upon by the assessee's representative in this connection.</p><p align="justify">12. According to the latest case laws as relied upon by the assessee's representative, royalty is a business expense of revenue nature and has to be allowed. The Lordships of the Patna High Court in the case of CIT v. Tata Yadogawa Ltd. [1983] 142 ITR 30 held that the issue regarding royalty was not referable to the High Court in view of the decision of the Supreme Court in CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20. Here in this case, the issue was whether royalty was a revenue expense and on this issue, the revenue was trying to have a reference to the High Court against the order of ITAT, which allowed the expenses of royalty. The Patna High Court held that referring the said question would be merely academic after the decision of the Supreme Court in Indian Mica Supply Co. (P.) Ltd.'s case (supra). Respectfully following the said decision of Lordships of the Patna High Court and the other latest case laws (supra) relied upon by the representative of the assessee, we are of the opinion that royalty was a revenue expense. The contention of the Department in respect of the expense of royalty is rejected accordingly in both the years.</p><p align="justify">13. The next contention in both the years is with regard to a mistake committed by the CIT (Appeals) in mentioning the figures which we understand has already been rectified by now. The contention so raised is mentioned below : 5. That the learned, Commissioner of Income-tax (Appeals) erred in observing that the IAC had added Rs. 64,360 out of the claim for deduction under the head 'Preliminary Expenses' and in deleting the same. The assessee had actually claimed deduction of Rs. 6,436 and only that amount was disallowed by the IAC. Relief of Rs. 6,436 only should have been allowed by the learned Commissioner of Income-tax (Appeals).</p><p align="justify">14. We have considered the facts. It appears that there was a mistake in the order of the CIT (Appeals). The CIT (Appeals) is directed to rectify the mistake, if it has not been done already.</p><p align="justify">15. The next contention in both the years is that the CIT (Appeals) was not justified in accepting the assessee's claim that deduction under Section 80MM shall be calculated with reference to the cross receipts.</p><p align="justify">16. This contention is covered by the orders of the ITAT in the earlier years. According to the orders of the ITAT in earlier years the contention of the revenue is rejected.</p><p align="justify">17. The next contention is that CIT (Appeals) was not justified in holding that depreciation was admissible on Rs. 30,06,196 representing the cost of documents.</p><p align="justify">18. This issue is covered by the orders of the ITAT in earlier years.</p><p align="justify">Following the same, this contention of the Department is rejected.</p><p align="justify">19. The last contention is that the CIT (Appeals) was not justified in relying on the orders of the ITAT for earlier years, as the same were sub judice before the High Court. In our opinion, so long the orders of the ITAT in the case of the assessee for earlier years stand and have not been overruled, these according to judicial propriety have to be followed in later years facts remaining the same. Moreover, we agree with these orders.</p><p align="justify">20. In the result, the appeal of the Department for the assessment year 1978-79 is allowed in part, while for the assessment year 1979-80 is rejected.</p><p align="justify">1. Although I accept all other findings, I express my disagreement with the finding of the learned Accountant Member to disallow the claim of the assessee for deduction on licence fee of Rs. 8,20,347 and treat it as capital expense. The same was held allowable by the CIT(A) as an item of revenue expenditure on the basis of the order of the ITAT in appeal No. 932 (Pat.) of 1977-78, ITA Nos. 182 and 183 (Pat.) of 1978-79. The Standing Counsel for the department Mr. Rajgarhia had contended that the Appellate Tribunal in the aforesaid appeals for the asst. years 1974-75, 1975-76 and 1976-77 did not delete any such disallowance made by the ITO regarding licence fee. It was on the baasis of his plea that the Appellate Tribunal had in those appeals treated the licence fee as capital expense and not an item of revenue expenditure. The finding of the CIT(A) upheld the claim for deduction on the ground of being an item of revenue expenditure being unsupported by any finding of the Appellate Tribunal was reversed by the learned Accountant Member. To appreciate the controversy one is required to look at the facts in those appeals. The assessee-company was incorporated on 31st March, 1973 when he took over all the assets and liabilities of the Central Engg. &amp; Design Bureau, the consultancy unit of Hindustan Steel Ltd. with effect from 1-4-1973. The Central Engg.</p><p align="justify">and Design Bureau (hereinafter referred to as C.E.D.B.) was giving technical consultancy to other units. The assets and liabilities of C.E.D.B. of Hindustan Steel Ltd. were transferred to the assessee-company by an agreement dated 4th day of June, 1974 by which the assets and liabilities of Rs. 5,14,28,912 and Rs. 6,41,09,072 (page 49 of the paper book) were transferred to the assessee-company. An agreement dated 11-2-1969 was executed between United Engg. &amp; Foundry Co., USA and Hindustan Steel Ltd. Similar agreement was executed between M/s. Hindustan Steel Ltd. and M/s. Tiajomomexport of USSR on 27-11-1969. These two agreements were executed to provide necessary know-how and design. These two agreements were subsequently assigned to the assessee-company on 13-9-1973.</p><p align="justify">2. It took over the assets of Rs. 5.1 crores which included the consultancy wing and united wing as follows : The assessee-company, in addition thereto, incurred the total expenses of Rs. 16,55,980, Rs. 17,40,520 and Rs. 19,99,282 on payment to collaborators, engineering and design fees, postage and training expenses during the assessment years 1974-75 to 1976-77.</p><p align="justify">3. The assessee claimed the revenue expenses of Rs. 1,36,48,796 and capital expenses of Rs. 30,06,193 on which it claimed depreciation for the asst. year 1974-75. In 1975-76 and 1976-77 the expenditure of Rs. 17,40,529 and Rs. 19,99,282 were claimed as revenue expenditure.</p><p align="justify">It would be relevant to give the break up of the claim of the assessee for Rs. 1,36,48,796 and Rs. 30,06,193.</p><p align="justify">Out of the above total of Rs. 1,66,54,990 the assessee claimed Rs. 1,36,48,796 as revenue expenditure and on balance amount of Rs. 30,06,193 it claimed depreciation.</p><p align="justify">The Income-tax Officer stated that since the assessee was maintaining its books of account on mercantile system, the expenditure incurred in earlier year was not eligible for deduction while computing the income of the assessee for the year. He, therefore, concluded that the claim was not entertainable at least to the extent of Rs. 1,49,99,010. On the claim of the assessee for deduction of Rs. 16,55,980 he stated that this expenditure also is directly related to the acquisition of know-how from the foreign collaboration and is, therefore, a part of the deal. It cannot, therefore, be considered in severality.</p><p align="justify">4. Taking this view that both related to the acquisition of technical know-how its principle of assets for running over the business of consultancy, the ITO started to consider whether the assessee could be allowed depreciation. In his view technical know-how wing, an intangible asset, could not be allowed depreciation.</p><p align="justify">5. The assessee feeling aggrieved took this matter in appeal before the AAC. He repeated his two pleas, he had made out before the ITO to treat the expenditure of Rs. 1,36,48,796 as revenue expenditure and to allow depreciation on the capital expenditure of Rs. 30,06,193. The AAC upheld the finding of the ITO and dismissed the appeal of the assessee-company.</p><p align="justify">6. In this background, the Appellate Tribunal was called upon to consider the two pleas of the assessee. This was the first year of the assessment of the assessee-company when the expenditure for acquiring technical know-how both in preceding year under agreement with C.E.D.B.and M/s. Hindustan Steel Ltd. and those incurred in the current year had to be considered. The Appellate Tribunal apportioned the current expenditure into two parts-one relating to the acquisition of the technical know-how and the other relating to postage and training. It treated the former as capital expenses which in its view brought the company tangible asset on which it allowed depreciation. The other portion of the expenditure was treated as revenue expenditure which was allowed to be deducted as business expenditure.</p><p align="justify">7. But in treating the expenditure for technical know-how as capital expenditure, the Tribunal has recorded a further finding in para 11. An extract of this is reproduced as below : The lower authorities have considered the expenses of the asses-see on knowr-how, drawings, patents etc., on the footing that the assessee acquired the technical know-how and utilised the same for its business. But the facts are otherwise. The assessee, no doubt, has utilised the technical know-how, drawings, patents etc. but it has not manufactured any article on the basis of those licences for itself nor the article manufactured on the basis of know-how are subject matter of sale of the assessee. What the assessee has done is that the assessee has taken know-how, drawings, patents etc. from others and have provided them to others by charging fees. All the decisions either cited before the authorities below or cited before the Bench during the hearing by both the parties are related to know-how which was acquired by the assessee for the manufacture of any of the items by it which was ultimately sold. Therefore, in all these cases the object of the assessee was something else and for fulfilling those objects, the assessee acquired know-how to produce the articles. These facts are not in the case of the assessee. The assessee's business is to acquire know-how and to give know-how to others by charging fees. Therefore, on the facts and as admitted by the ITO, the assessee is a dealer in know-how. It purchases know-how from others and it sells know-how to others. Under the circumstances, the cases relied on either by the lower authorities or by the respective parties before the Bench are not applicable on the facts of the present case.</p><p align="justify">8. It is clear that the Appellate Tribunal in treating the expenditure of Rs. 1.49 crores and a part of the current expenditure considered the assessee only as a dealer in technical know-how. It was on the basis of this finding that the Tribunal treated the expenditure as capital expenditure on which it allowed depreciation. The facts of the present case, however, suggest a different setting of facts. The IAC has summarily treated the licence fee of Rs. 8,20,347 as capital having been made to M/s. Wean United for acquiring technical know-how. But the order of the CIT(A) contains a fuller account of reason why payment of licence fee was made by it. I reproduce the relevant part : The appellant had also to pay licence fees for the information and help received from the foreign company. Due to paucity of time, the company sometimes got some of the equipments, to be sold by it, designed by its foreign collaborator to keep to the time schedule for delivery. The company also got some of the designs prepared by it, checked by the foreign collaborator as to their correctness so that the equipment manufactured from such design would not be declared defective due to faulty design at a late date. The company paid licence fees to this foreign collaborator for the various services "received from them as mentioned above as well as towards reimbursement of certain expenditure incurred by the collaborators on behalf of the foreign company.</p><p align="justify">9. This being the finding of the CIT(A) regarding the purpose and object of the expenditure over the licence fee, it is not reasonable to accept the plea of the Standing Counsel that the payment of licence fee was to be considered capital on the basis of the finding of the Tribunal made in earlier years. The finding of the Tribunal made in earlier years' appeal was on altogether different set of facts. The order of the Appellate Tribunal was based on a finding that the assessee was a dealer in know-how but the finding of the CIT(A) in this year does not suggest that but on the other hand highlights that the payment was made in connection with the equipments to be supplied to its constituents as pointed out in the extract from the finding of the CIT(A) reproduced above. As highlighted in the Tribunal's own finding reproduced above, such an expenditure was to be differentiated from the expenditure incurred to supply the technical know-how as a dealer and was to be treated as revenue expenditure. It was this feature which appears to have led the CIT(A) to hold that the Tribunal had already recorded a finding which he faithfully and truthfully followed.</p><p align="justify">Besides, if the payments of royalty and Engineering fees both incurred for acquiring technical know-how are to be treated as revenue expenditure by the learned Accountant Member to which I have agreed, I fail to see any logic in disallowing licence fee as capital expenditure. Engineering fee also was a constituent of the expenditure of Rs. 1,66,54,990 as indicated above which was considered in the asst.</p><p align="justify">year 1974-75 by the Appellate Tribunal as capital expenditure on which it allowed depreciation. But Engineering fee nevertheless is considered by the learned Accountant Member in his order as an item of revenue expenditure duly qualifying for deduction as revenue outgoing to which also I have agreed. After treating the Engg. fee as revenue expenditure on the facts and in the circumstances of the case there is no justification for treating licence fee as capital expenditure, 10. In my view, the expenditure over licence fee should be also considered qualifying for deduction as revenue expenditure of the year.</p><p align="justify">To be fair, however, to both sides and further to ascertain facts with greater charity and point, I would set aside the finding of the CIT(A) and direct him to take back the appeal on this issue for fresh disposal in accordance with law. In disposing of this issue, he shall first ascertain the facts regarding the payment of licence fee and then record his finding whether the amount can be considered as revenue outgoing or otherwise as capital expenditure on which depreciation should be allowed.</p><p align="justify">We, the Members of the Patna Bench having differed on the above issue while deciding the case of Mecon (India) Ltd. [IT Appeal Nos. 430 and 431 (Pat.) of 1981], refer the following question to the President, Income-tax Appellate Tribunal under Section 255(4) : Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for asst. year 1978-79 1. These matters have been referred to me under Section 255(4) by the President of the Income-tax Appellate Tribunal in view of the difference of opinion between the learned Accountant Member and the learned Judicial Member of Patna Bench on the following point: Whether, on the facts and in the circumstances of the case, the payment of licence fee of Rs. 8,20,347 could be considered as an item of capital expenditure and not as that of revenue expenditure liable to be deducted as a business outgoing for assessment year 1978-79? 2. The dispute is whether the technical know-how fee paid by the assessee in respect of a foreign collaboration agreement is allowable as revenue expenditure or capital expenditure. The assessee is a Government undertaking. Under the agreement the assessee was required to pay 1,00,000 dollars on the execution of agreement and similar amount of 1,00,000 dollars every year for another five years. The IAC held that the expenditure incurred by the assessee is capital expenditure. On appeal, the CIT(A) allowed the assessee's claim as revenue expenditure.</p><p align="justify">3. The revenue preferred the appeals before the Appellate Tribunal. The appeals were heard by the learned Judicial Member Shri U.S. Dhusia and the learned Accountant Member Shri B. Nath of Patna Bench of the Tribunal. The learned Accountant Member held that the expenditure is capital expenditure. The learned Judicial Member differed with this view. He held that it is allowable as revenue expenditure. In view of the above difference of opinion, the matter has been referred to me.</p><p align="justify">4. The learned departmental representative strongly urged that the payment towards licence fee for the technical know-how is a capital expenditure". The CIT(A) was wrong in allowing the same as revenue expenditure. He also pointed out that the Tribunal in the assessee's case in the assessment years 1974-75 to 1976-77 has held that it is capital expenditure and that order should be followed. The learned counsel for the assessee submitted that the agreement itself was for a period of 10 years. The assessee has received only the technical know-how for limited period and the title remained with the foreign collaborator. Thus, it is allowable as revenue expenditure. He relied on several cases.</p><p align="justify">5. We have considered the rival submissions. It is necessary to refer to certain clauses in the agreement with the foreign collaborator, viz., United. Under Clause (e) of Article II of the agreement, title to the know-how shall remain with 'United' and the latter grants a non-exclusive licence to the assessee. Under Clause (g), the assessee shall not without written consent of 'United' sell, reveal, pass on, transfer or grant any rights to the use of the know-how to any other person. Under Clause (h) 'United' reserves the right free of restriction to make independent arrangements with any third party with respect to the manufacture and/or sale of contract articles. Under Article VIII, the duration of the agreement is for a period of ten years.</p><p align="justify">6. The above clauses will clearly show that the assessee obtained only a right to use the technical know-how and it has no title to it as the title vested only in the 'United'. 'United' only granted a non-exclusive licence to the assessee. The period of the agreement itself was for 10 years. Thus, the assessee did not have any title to the asset. The technical know-how fees was paid only for its user within the limited period. Thus it is clearly allowable as a revenue expenditure.</p><p align="justify">7. In Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443, the Full Bench of the Karnataka High Court held that when the foreign company did not part with the asset and when the assessee only acquired the right to draw up the technical knowledge for a limited period, the assessee had not acquired any asset or advantage of an enduring nature and so the payments made were revenue in nature. This decision was followed in Nippon Electronics (India) (P.) Ltd.'s case (supra), wherein it was held that where payment is for the actual user of the technical know-how, data and information supplied by the foreign company, the payment would be allowed as revenue expenditure.</p><p align="justify">8. In Cooper Engg. Ltd. v. CIT [1982] 135 ITR 597, the Bombay High Court held that the technical know-how and technical advice cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The payment made for the technical know-how was revenue expenditure. The ratio laid down in the above case would squarely apply to the instant case. In view of the above decisions, it is not necessary for me to refer to the earlier orders of the Tribunal in the assessee's case. In my view the learned Judicial Member was right in holding that the licence fee is allowable as revenue expenditure. Thus, I hold that the sum. of Rs. 8,20,347 is allowable as revenue expenditure. Now the matter will go back before the Bench for passing necessary orders.',
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LAW: Section 80MM, 30,06,196, Section 255(4, Article II

CARDINAL: 1, 1, 1, 1, 8,20,347, 50,40,012, 5,61,431, 2, 117, 4, 134, 142, 30, 77, 20, 5, 64,360, 6,436, 6,436, 8,20,347, 932, 182, 183, 1-4-1973, 6,41,09,072, 49, 11-2-1969, two, two, 13, 5.1, 19,99,282, 30,06,193.Out, 16,55,980, two, two, two, 1.49, 10, 430, 431, 2, ten, 1978, 114, 443, 135, 8,20,347

DATE: the assessment year 1978-79, the assessment year 1978-79, the preceding year, years 1974-75, 1975-76, 1976-77, years 1974-75, 1975-76, 1976-77, the assessment year 1977-78, earlier years, the assessment year 1977-78, the earlier years, years 1974-75, 1975-76, 1976-77, 1977-78, earlier years, 1977-78, years 1974-75, 1975-76, 1976-77, the years, year 1978-79, year 1979-80, the earlier years, the earlier years, any year, the years, year 1978-79, year 1979-80.10, preceding year, 1977-78, years 1974-75, 1975-76, 1976-77, years 1974-75, 1975-76, 1976-77, the assessment year 1977-78, 1979, the earlier years, years 1974-75, 1975-76, 1976-77, year 1977-78, 1982, 1983, 1970, the years, the years, the earlier years, earlier years, earlier years, earlier years, earlier years, later years, the assessment year 1979-80, 1977-78, 1978-79, years 1974-75, 1975-76, 1976-77, 31st March, 1973, 4th day of June, 1974, 27-11-1969, 16,55,980, years 1974-75 to 1976-77.3, year 1974-75, 1975-76, 1976-77, earlier year, the year, the first year, preceding year, the current year, para 11, earlier years, earlier years', this year, 1,66,54,990, the year, 1981, year 1978-79 1, year 1978-79, another five years, years 1974-75 to 1976-77, a period of, 10 years, 10 years, 1982, these days

ORG: the Standing Counsel, Department, the CIT (Appeals, the CIT (Appeals, the Standing Counsel, the CIT (Appeals, the Standing Counsel, the CIT (Appeals, Engineering Services, the Standing Counsel, Department, Engineering Services, Department, The Standing Counsel, Department, The CIT (Appeals, Engineering Services, Department, the Standing Counsel, the CIT (Appeals, the Standing Counsel, the Standing Counsel, The Standing Counselin, CIT, Department, CIT, Nippon Electronics, ITR, the Patna High Court, CIT, Tata Yadogawa Ltd., the High Court, the Supreme Court, CIT, Indian Mica Supply Co., the High Court, The Patna High Court, the Supreme Court, Indian Mica Supply Co., P.) Ltd.'s, Lordships of the Patna High Court, Department, the CIT (Appeals, IAC, Preliminary Expenses', IAC, the CIT (Appeals, the CIT (Appeals, CIT (Appeals, Department, the CIT (Appeals, the High Court, The Standing Counsel, the Appellate Tribunal, ITO, the Appellate Tribunal, the Appellate Tribunal, Design Bureau, Hindustan Steel Ltd., The Central Engg.and Design Bureau, Hindustan Steel Ltd., Foundry Co., Hindustan Steel Ltd., M/s. Tiajomomexport, ITO, depreciation.5, AAC, ITO, AAC, ITO, the Appellate Tribunal, C.E.D.B.and M/s. Hindustan Steel Ltd., The Appellate Tribunal, Tribunal, Bench, ITO, Bench, the Appellate Tribunal, Tribunal, IAC, the Standing Counsel, Tribunal, Tribunal, the Appellate Tribunal, Tribunal, Tribunal, the Appellate Tribunal, Engg, Judicial, Patna Bench, IAC, the Appellate Tribunal, Judicial, Tribunal, Judicial, United, United, United, Mysore Kirloskar Ltd., CIT, Nippon Electronics, P.) Ltd.'s, CIT, the Bombay High Court, Judicial, Bench

NORP: ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, ITAT, C.E.D.B.

PERSON: AR, Jonas Woodhead, Pat, ITA Nos, Pat, Rajgarhia, Rs, Pat, Shri U.S. Dhusia, Shri B. Nath, United, Cooper Engg

ORDINAL: 5,36,349, first, third

GPE: India, C.E.D.B., United Engg, USA, USSR, Mecon, asst, me.4, India

LOC: the Central Engg

PRODUCT: Accountant, Accountant, the Full Bench

MONEY: 1,00,000 dollars, 1,00,000 dollars