Sriramulu, J. -
(1.) AT the instance of the assessee a consolidated reference under Section 256(1) of the Income-tax Act, 1961, for the four assessment years 1963-64 to 1966-67 has been made to this court by the Income-tax Appellate Tribunal, Hyderabad, on the following questions of law :
"(1) Whether, on the facts and in the circumstances of the case, the sums claimed by the assessee in terms of the agreement with the English company dated December 7, 1959, are allowable expenditure ?
(2) Whether, on the facts and in the circumstances of the case, the sums paid to the English company in each of the years in pursuance of the agreement dated September 29, 1959, as consultation fee, are a proper deduction ?
(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to have its chargeable profits determined under the Sur-tax Act with reference to its total income for income-tax purposes after allowance of the sums in question paid by the assessee to the English company respectively under the agreements dated December 7, 1959, and September 29, 1959?"
(2.) THE material facts are: THE assessee is a public limited company, carrying on business of manufacture of laminated materials, resins and moulding powders. Bakelite Company, London, was the proprietor of Indian Letter Patent Nos. 57094, 57095 and 57459 for the production of copper-clad laminates. For the purposes of manufacture of copper-clad laminates, patents of which were owned by the Bakelite Company Ltd., London, the assessee-company entered into an agreement on December 7, 1959, with Bakelite Company Ltd., London (hereinafter called the " English company"). By that agreement, the English company granted to the assessee an exclusive non-assignable licence to make use, exercise and vend laminates in accordance with processes covered by the Letter Patent Nos. 57094, 57095 and 57459. THE licence granted to the assessee-company was to continue for the unexpired term of those Indian Letter Patent and any extension or regrant thereof. As a consideration for the grant, the assessee agreed to pay 5% royalty on the net selling price of all laminated products made and sold by it in accordance with those patented processes. When the total of the royalty payments reached 5,000 the assessee was no more liable to pay the royalty. This agreement was entered into by the assessee with the English company pursuant to Clause (5) of the agreement dated February 1, 1949, which was already entered into by and between them. Under Clause 5(a) of the agreement dated February 1, 1949, the assessee-company agreed to pay a sum equal to 1/3 of the costs and expenses incurred by the English company in developing new laminated products, if at any time, at the request of the assessee, the English company supplied to it information regarding production of the new laminated products. In pursuance of the agreement dated December 7, 1959, the assessee-company paid the following amounts of royalty to the English company and claimed deduction of those amounts in the computation of its total income for the respective assessment years:
In order to acquire technical information on the manufacture and testing of the synthetic resins and compositions containing synthetic resins, possessed by the English company, the assessee entered into another agree ment dated September 29, 1959, with the English company. The technical information which the assessee-company wanted to acquire from the English company has been defined to mean " information relating to the manufacture and testing of the products and design, construction and operation of the plant used in making and testing the production and more particularly discribed in Schedule II attached hereto." The meaning of the word "of products" has also been stated in the agreement. The English company agreed to furnish exclusively to the assessee in India, during the term of the agreement, such technical information in the posses sion of the English company which is necessary for the manufacture and testing of the products, which the English company will have a right to transmit without infringing the right of any third party. As a considera tion therefor the assessee-company agreed to pay to the English company consultancy fee at 2% of net sales on all Class I products, and at 5% of the net sales on Class II products, sold by the assessee during every year, during which the agreement remained in force. It was also agreed that the consultancy fees paid to the English company was subject to Indian taxes. The agreement was to be in force for 10 years from the date thereof. Any extension thereafter was to be by mutual consent and with the approval of the Government of India. , Clause (5) of the said agreement cast an obligation on the assessee not to divulge to any person at any time during the tenure of the agreement, or thereafter, the information that it may acquire under this agreement from the English company. In pursuance of the second agreement, the assessee paid to the English company the following sums :
The assessee claimed deduction of those payments in the computation of its income for the respective assessment years as expenditure of a revenue nature.
(3.) THE Income-tax Officer disallowed the claim of the assessee for the deduction of the aforesaid amounts paid as royalty and as consultancy fees, on the ground that they were of the nature of capital expenditure. THE Income-tax Officer observed in the assessment order for 1963-64, that;
"Though the payment is stated to be royalty based on the annual sales, it is seen that in fact it is a payment for the technical know-how in respect of copper-clad laminates and the total amount is fixed as 5,000. Instead of the amount being paid in lump sum it has been made payable over a period of years and for the sake of convenience, the annual payment is linked on the sales but the sales as such have nothing to do with the total amount payable which is fixed at 5,000. THE entire amount of Rs. 6,750 is therefore disallowed as capital expenditure...."
For the same reason, other amounts were disallowed for the later years.;