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High Court Of Calcutta
S. C. Deb, Sudhindra Mohan Guha
AGARWAL HARDWARE WORKS (P.) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 452 Of 1974
Decided On : 07/18/1978
INCOME TAX - Expenditure - Whether payment of royalty and technical fee under collaboration agreement is capital or revenue expenditure - Held, revenue expenditure.
Fact of the Case:
The assessee, a private limited company, entered into an agreement with a foreign company for the use of patents, technical knowledge, and a trade mark for the manufacture and sale of mild steel rods. The assessee paid a royalty and technical fee to the foreign company under the agreement. The ITO disallowed the assessee's claim that this expenditure was allowable as a revenue expenditure. The AAC allowed the claim, but the Tribunal rejected it.
Finding of the Court:
The Tribunal held that the assessee had acquired an asset or an advantage of an enduring nature in the sense that it enabled the assessee to start a new line of business and, therefore, the aforesaid payment was not a revenue but a capital expenditure and was not an admissible deduction.
Issues: Whether the payment of royalty and technical fee under the collaboration agreement is capital or revenue expenditure.
Ratio Decidendi: 1. The assessee did not acquire any capital asset under the agreement. 2. The foreign company granted a mere license to the assessee to use the patents and the trade mark. 3. The technical information, etc., to be supplied to the assessee under the agreement is like a manual or a guidebook for using these patents. 4. The assessee acquired a mere non-exclusive license to use these assets belonging to the foreign company during the period of the agreement. 5. The agreement does not provide that the assessee shall be entitled to use the patents, technical knowledge, and the trade mark after the termination of the agreement and, therefore, the assessee has no right to use them after the termination of the agreement. 6. The assessee is not to pay anything for the patents after they cease to be in force in India as stated in Article 11 of the agreement. 7. The payment under Article 6(a) is related solely to the use of the patents, the trade mark, and the technical knowledge, services, and assistance to be received by the assessee from the foreign company. 8. The expenditure under Article 6(a) is not a lump sum amount. 9. The expenditure under this article is not to be made "once and for all". 10. It is also not an initial or a predetermined amount. 11. This article does not also provide for payment of any maximum or minimum amount. 12. The amount payable under this article is not only an indefinite amount but is also of a recurring nature and is solely related to and based on the annual production of the goods. 13. The aim and object of this expenditure is not to bring into existence any asset or enduring advantage or benefit for the assessee's business but to produce profits in the conduct of its business. 14. The assessee has acquired a mere non-exclusive license to use these assets belonging to the foreign company and that too is terminable at any moment on a reasonable notice by either party or by the foreign company in terms of the article already mentioned. 15. An expenditure incurred for acquiring a mere benefit is not a capital expenditure.
Final Decision: The question is answered in the negative and in favor of the assessee.
( 1 ) THIS reference under Section 256 (1) of the I. T. Act, 1961, arises out of the assessment proceedings for the assessment year 1968-69.
( 2 ) THE assessee is a private limited company. It carries on business of manufacture and sale, inter alia, of mild steel rods and bars used in reinforced concrete constructions or structures.
( 3 ) THE assessee and M/s. Tor-Isteg Steel Corporation of Luxembourg (hereinafter referred to as "the foreign company") entered into an agreement dated February 15, 1967, In this agreement, the assessee has been described as the "licensee" and the foreign company as "tor-Isteg".
( 4 ) IT reads, inter alia, as follows :" Article 1 Tor-Isteg grants to the licensee a full licence to use the following patents registered in Luxembourg relating to high tensile steel wires and/ or bars known as ' Ribbed Tor-steel' for reinforced concrete constructions : Article 2 During the period of this agreement: (a) Tor-Isteg and the licensee shall make available to each other all information in their respective possession relating to the working of and improvements to each of the patents. (b) Should the licensee or any of his employees, or any one else acting under any sub-licence granted by him with the written consent of Tor-Isteg make any improvement or addition to or discovery in respect of any of the patents, then the licensee will make a complete disclosure thereof, immediately that fact which comes to the notice of the licensee, to Tor-Isteg who will enjoy the full benefit thereof without any consideration therefor and utilise the improvement in any manner deemed fit by Tor-Isteg. Article 3 (1) Tor-Isteg shall supply and disclose all technical, engineering and manufacturing information, including specifications, drawings, etc. (which may be in its possession) to the licensee as may be reasonably required by the licensee in order to use the patents to the best advantage. (2) Tor-Isteg to this end will make available to the licensee the services of one or more European experts to assist in the production stage (rolling twisting, etc. ). (3) Tor-Isteg shall at its own cost do everything necessary to keep each of the patents in force and to obtain such extensions thereof from time to time as it can legally obtain. Article 5 The licensee will use his best endeavours to exploit the patents to the maximum advantage. In this connection : (d) the licensee shall fully endeavour to its utmost to promote the utilisation of ribbed tor-steel. Article 6 (a) In consideration of the rights granted and technical assistance offered to the licensee in terms of this agreement the licensee shall pay Tor-Isteg a royalty and technical fee calculated as follows on an annual basis of production:--1. Rupees nine per ton for the first 50,000 tons of ribbed tor-steel under the terms of this agreement. 2. Rupees seven per ton for quantities over 50,000 tons. Article 8 (a) This agreement shall. . . continue for as long as any of the patents or any renewals thereof remain in force, and/or the licensee uses the trade mark RIBBED TOR-STEEL or any other registered trade mark of Tor-Isteg. (b) Tor-Isteg shall have the right to terminate this agreement if from 1st January, 1968, the licensee has not produced at least 5,000 tons of ribbed tor-steel during any calendar year except for reasons beyond their control. Article 9 This agreement shall automatically be terminated if any of the parties commits a breach of its obligations under this agreement and shall not have remedied that breach within one month after receipt of notice from the other party requiring it to remedy that breach. Article 10 All steel produced under the terms of this agreement shall be sold under the trade mark "ribbed TOR-STEEL". Tor-Isteg covenants that the licensee shall be entitled to use the said trade mark. Article 11 If the patents cease to be in force in the Union of India, the licensee will continue the use of the registered trade mark mentioned in Article
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