DIVAN C.J. -
(1.) IN this case, at the instance of the Revenue, the following two questions have been referred to us for our opinion :
"1. Asst. yrs. 1962-63, 1963-64, 1965-66 and 1966- 67.--Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the payments made to M/s Calor-Emag, Germany, are of a revenue nature ?
(2.) ASST. yrs. 1964-65, 1965-66 and 1966-67.--Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing depreciation as well as development rebate to the assessee in respect of capital expenditure incurred for acquiring drawings, designs, etc., from M/s Gilbert, Gilkes and Gordon Ltd., London ?" In order to bring out the real controversy between the parties and to focus attention of all concerned on that real controversy, we will reframe question No. 1 as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the payments made to M/s CalorEmag, Germany, in respect of drawings, designs, etc., referred to in the agreement between the assessee and M/s CalorEmag, Germany, are of a revenue nature ?"
2. The assessment years under reference are asst. yrs. 1962-63, 1963-64, 1964-65, 1965-66 and 1966-67. The assessee before us is a limited company and carries on business of manufacturing oil engines, electric motors, pumps, switchgears, etc. It manufactures, inter alia, water turbines, switchgears and switchboards. The contentions raised by the assessee in these matters related to disallowance of certain payments made by the assessee to two foreign collaborators, namely, M/s Gilberts Gilkes and Gordon Ltd., referred to in the record as the English company, and M/s Calor- Emag, Germany, referred to in the record as the German company. It must be clarified that the payments in dispute are payments made to these foreign collaborators in respect of drawings, designs, specifications, etc. The collaboration with the English company was in respect of manufacture of water turbines and the collaboration with the German company was for the manufacture of switchgear, switchboards, etc. The details of the amounts paid to the English company and the German company for each of the five years which are under reference and which came to be disallowed by the ITO are as set out in the following table : The contention of the assessee-company regarding these payments made to the English company in the years 1964-65, 1965-66 and 1966-67 was that these payments were of a revenue nature but when that contention was negatived and it was held that the expenditures were in the nature of a capital expenditure, the assessee contended that these drawings, designs, specifications, etc., for the manufacture of water turbines supplied by the English company were "plant" and hence the assessee should be allowed depreciation allowance and development rebate in respect of these payments made to the English company. This contention of the assessee was based on the decision of this High Court in CIT vs. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj). The Tribunal upheld that contention of the assessee and held that the payments in respect of drawings, designs, etc., made by the assessee to the English company were payments of a capital nature and were entitled to depreciation and development rebate, on that basis. In Elecon Engineering Co.'s case (supra), it was held that drawings, patterns, designs, etc., like books, were the embodiments of know-how and served the purpose of teaching at long range and there was no reason to exclude these drawings, patterns, designs, etc., from the wide meaning of the term "plant" having regard to the legislative intent to give a wide meaning to the word "plant", and material record of know- how (even assuming that know-how itself was intangible) was clearly included within the meaning of the word "plant" in s. 32 and it was held that the assessee in that particular case was entitled to depreciation in respect of those assets on the pro rata cost of their acquisiion. It is clear that in the light of this decision in CIT vs. Elecon Engineering Co. Ltd. (supra), once drawings, designs, patterns and specifications and other such embodiments of know-how are treated as capital assets and expenditure incurred for the purpose of acquisition of these capital assets is treated as expenditure of a capital nature, the necessary concomitant of so treating these capital assets, that is, drawings, designs, patterns and specifications, etc., would be to treat them as "plant" and hence to make such expenditure admissible for the purposes of depreciation and development rebate. The same conclusion was reached by this Court in CIT vs. S.L.M. Maneklal Industries Ltd. (1977) 107 ITR 133 (Guj) in respect of those items of expenditure which were treated as items of a capital nature. In view of this position emerging from these two decisions of this Court, it is obvious that question No. 2 must be answered in the affirmative, that is, in favour of the assessee and against the Revenue.
As regards the German company, it must be pointed out that though drawings, designs, patterns and specifications in connection with switchgears, switchboards, etc., may be "plant" and
Assessment year . Payments made to . Total . English company . German company . . Rs. . Rs. Rs. 1962-63 . . . . . 12,173 12,173 1963-64 . . . . . 16,891 16,891 1964-65 12,107 . . . . . 12,107 1965-66 28,385 . 33,320 61,705 1966-67 3,113 . 27,602 30,715
may be assets of a capital nature, every item of expenditure incurred by an assessee in connection with such assets is not necessarily expenditure of a capital nature. If from the terms of the collaboration agreement it follows that in respect of licensing agreement for the manufacture of a particular product, drawings, designs, patterns and specifications are supplied by the foreign collaborator to the Indian manufacturer but the property in the specifications, drawings, etc., does not pass to the Indian manufacturer, the amounts spent year after year or from time to time by the Indian manufacturer will necessarily be in the nature of a revenue expenditure and not in the nature of a capital expenditure. In CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC), the Supreme Court pointed out that where the assessee did not, under the agreement, become entitled exclusively even for the period of the agreement, to the patents and trade marks of the Swiss company and had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded and where the assessee was a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade marks of that company, the assessee could be said to have acquired under the agreement merely the right to draw, for the purpose of carrying on the business of a manufacturer and dealer, upon the technical knowledge of the Swiss company for the limited period ; by making that technical knowledge available, the Swiss company did not part with the assets nor did the assessee-company acquire any asset or advantage of an enduring nature for the purpose of its business, and it was held that these payments were of a revenue nature and not of a capital nature because the knowledge of technical know-how placed at the disposal of the Indian manufacturer was for a short duration, that is, for the duration of the licence which was being granted by the Swiss manufacturer and at the end of the period of the licence, the Indian manufacturer could not utilise that know-how any further. The same point was emphasised by this Court in CIT vs. S. L. M. Maneklal Industries Ltd. (supra) and there it was pointed out (see headnote page 135) :
"Whether the assessee in the instant case acquired ownership of the workshop drawings, manufacturing instructions, etc., as contemplated by law, and, therefore, whether payment made for acquisition of workshop drawings, etc., was capital expenditure incurred by the assessee depends on whether, by spending this money, the assessee purchased from SLM, and SLM sold to the assessee, the workshop drawings, etc., mentioned in cl. (2) of the agreements. To decide whether there was a sale, the main point for consideration is whether the property in these workshop drawings, etc., passed or, was in contemplation of the parties to pass, from SLM to the assessee-company. Normally, when a person purchases any property and there is a completed sale, he gets full title over the property and he can deal with the purchased articles in such manner as he likes, Was it contemplated that the property in the goods, viz., workshop drawings, etc., should pass from the supplier, i.e., SLM, to the assessee-company. This was not an independent sale but was a part of an over-all arrangement by which the licence to manufacture rotary air- compressors, etc., was being granted by SLM to the assessee-company. There was no independent sale of the workshop drawings, etc. Further, the workshop drawings, etc., by themselves, were of no use to the assessee-company unless they were meant for the purpose of manufacturing different types of machinery, viz., rotary air- compressors, rotary blowers, water-ring pumps and vertical diesel engines. There are also restrictions set out in cls. (7), (8), (9) and (12) of the agreement which hedge in the rights of the assessee-company with regard to the workshop drawings, etc. Under these clauses, the assessee-company, having received the supply of the workshop drawings, etc., could only utilise them for the purpose of the licence and not for any other purpose. It could not assign its rights in connection with these workshop drawings, etc., or the know-how, nor could the assessee-company at any time deviate from these workshop drawings, etc., nor could it make any alterations, and if any deviations or alterations were contemplated, prior approval of SLM is necessary. Even if the assessee-company proposed to incorporate any improvements in the design, the benefit of those improvements has to be made available to SLM and, as cl. (9) makes it very clear, these drawings and other technical information supplied by SLM have to be used only for the scope of and during the continuance of the agreement."
On these facts, it was held that the expenditure incurred by the assesee for the purchase of workshop designs, drawings and patterns from the foreign owner under agreements for the manufacture of certain machinery, was allowable as revenue expenditure. The agreement with the German company was entered into on November 1, 1959. The assessee- company is referred to as licencee and the agreement is to manufacture various types of switchgears and switchboards in India. Article 1 of the agreement, which is annex. D-1 to the paper book, points out : "Calor-Emag is prepared to grant the licence to licensee under similar conditions for further types of switchgears manufactured at Calor-Emag Factory in Germany for entire or partial manufacture in India, subject to this being necessary and useful and its being suitable to Calor-Emag. Calor-Emag is further prepared to give help to licensee in technical matters in every form, to advise him and to keep him informed of improvements during the continuance of the agreement. This licence is an exclusive one, that is to say, Calor-Emag agrees not to grant such licence or right of manufacture for such equipment to any other party in India.
(3.) THE licensee agrees to manufacture switchgears and switchboards according to the directives of Calor-Emag and to take care that the technical conditions of the parts manufactured in India correspond to those manufactured by Calor-Emag in Germany. Any deviation of the design, etc., requires the approval by Calor- Emag." Article 2 in terms provides that the licensee, that is, the assessee before us, agrees to utilise all documents, experience, etc., furnished to the licensee only by itself or for its suppliers of parts of switchgear. He further agrees to treat them as confidential and not to make such information accessible to any other party. THE licensee agrees not to enter into any agreement or contract with any other party in regard to the equipment manufactured for sale by Calor-Emag. THE licensee further agrees not to develop or manufacture its own designs of equipment which might reduce the quantity of sales or of manufacture of equipment or programme of sales of Calor-Emag. By Art. 5 of the agreement, it has been provided : "Calor-Emag agrees to furnish to licensee all information required for the production of products covered by this agreement and, in particular, design and workshop drawings, wiring diagrams, specifications and techni cal manufacturing information as mutually agreed upon to enable the licensee to manufacture products covered by this agreement. This above- mentioned things will be furnished to the licensee against the payment."
Sufficient number of copies of such designs of any working drawings, specifications, etc., as may be necessary to disclose any change or improvements made in the products are also to be furnished. Under Art. 6, the terms of payment in respect of drawings, specifications and manufacturing instructions to be furnished by Calor-Emag to the licensee have been set out. For drawings of standardised frame type switchboards the net cost for reproduction only is to be paid and no compensation for the standardised frame type switchboard drawings is to be paid. The amount of royalty in respect of the licence granted is to be worked out on a footing altogether separate from that for the payment for these drawings, designs, etc. Article 20 of the agreement between the assessee and the German company is that the German company was granting to the assessee-company an exclusive licence to manufacture switchgears and switchboards according to the specifications and designs developed by the German company. Such right was for exclusive manufacture in India in the sense that no other manufacturer in India was going to be granted any such licence by the German company and during the period of subsistence of the licence, the assessee-company was required to pay royalty as contemplated by the terms of the agreement for exploitation of these designs of switchgears, switch-boards, etc. What is more important is that though separate payment for drawings, designs, specifications, etc., is contemplated, as soon as the licencing agreement came to an end, the drawings, designs, etc., were required to be returned to the German company or, at the option of the German company, to be destroyed in the presence of a representative of the German company. Thus, this clause in Art. 20 as to what is to happen to the drawings, designs, etc., clearly indicates that the property in these drawings, designs, etc., was not to pass on to the assessee before us. As part of the overall licensing agreement by which facility for the manufacture of switchboards and switch-gears developed by the German company in Germany was being placed at the disposal of the assessee-company which is functioning in India, the German company was prepared to furnish to the assessee-company the necessary drawings, designs, patterns, specifications, etc,, but these drawings, designs, etc., were only to be utilised by the assessee-company during the subsistence of the licence and even though payment had been made according to the agreed terms of payment in respect of these drawings, designs, etc., at the end of the period of the licence, the drawings, designs, etc., were required to be returned to the German company or were required to be destroyed at the option of the German company in the presence of a representative of the German company. These provisions of Art. 20 clearly indicate that the property in these drawings, designs, etc., was not to pass on to the assessee and there was not going to be any sale of these drawings, designs, etc., by the German company to the assessee. Hence, there was no question of acquisition of assets of a capital nature by the assessee so far as these drawings, designs, patterns, etc., furnished by the German company to the assessee-company were concerned. The payments which were being made by the assessee-company to the German company were undoubtedly in respect of the assets of a capital nature, but they were for the use of those assets during the period of the subsistence of the licence and the moment the licence came to an end, the assessee-company was no longer entitled to the know-how embodied in these patterns, drawings, designs, etc.In the case of Ciba of India Ltd. (supra) and in the case of S. L. M. Maneklal Industries Ltd. (supra), there were similar agreements where, at the end of the period of the licence, the know-how could no longer be utilised by the assessee concerned for its factories. The know-how embodied in the physical form in the shape of books, designs, drawings, specifications, etc., was to revert to the foreign collaborator, both in the case of Ciba of India Ltd. (supra) and in the case of S. L. M. Maneklal Industries Ltd. (supra) and the same is the position in the instant case and following the decision of the Supreme Court in Ciba of India Ltd. (supra) and the decision of this High Court in S. L. M. Maneklal Industries Ltd. (supra), it must be held that in view of the specific terms of the agreement between the assessee and the German company, the payments made by the assessee-company during some of the years under reference for drawings, designs, etc., were of a revenue nature and not of a capital nature. Under the circumstances, question No. 1 as reframed by us must be answered in the affirmative, that is, in favour of the assessee and against the Revenue.;