Ajit K.Sengupta, J. - (1.) In this reference, the following question has been referred to us by the Tribunal under Section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to claim the amount of Rs. 13,28,450 as revenue expenditure ?"
(2.) The matter relates to the assessment of the assessee for the assessment year 1982-83 for which the previous year ended on December 31, 1981.
(3.) Shortly stated the facts are that the assessee-company derives income from manufacture and sale of weighing and testing machines, weights, etc. The Assessing Officer held that the payment of Rs. 13,28,450 was of capital nature since as per the terms of the agreement relating to the use of trademarks and patents and copyrights of the Revere Corporation, the assessee-company had full right to use them in India not only until the existence of the said agreement but also after the expiry or termination of the agreement. The disallowance made by the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals). On the assessee's appeal, the Tribunal held that the payment under the agreement with the said foreign company of the amount of Rs. 13,28,500 was revenue expenditure and deductible as such. The Tribunal set forth its reasons for the conclusion as under : "We have considered the matter. As per Section 2 of Article VI, the assessee-company is entitled to continue to use the information transferred and imparted by the collaborator even after the expiry of the agreement. But at the same time, under Article VII of the said agreement, the assessee-company was prohibited from disclosing to others any information derived from technical or other data to be received from the collaborator under the said agreement. The argument of the income-tax department that the expenditure could be on capital account where the Indian company continues to get the benefit of technical know-how in the sense that it did not return it after the expiry of the agreement and that it continues to manufacture the same product thereafter, was rejected by the Andhra Pradesh High Court in the case of Praga Tools Ltd. v. CIT [1980] 123 ITR 773 [FB]. According to the Andhra Pradesh High Court, once the assessee had the advantage of utilising special knowledge and technical know-how along with the specific drawings, designs and other information during the period under the agreement it did not alter the true state of affairs by agreeing that the assessee would be free to make use of the technical know-how and the knowledge even after the period of the agreement. It also held that there was no property right in the know-how which was transferable. Further, according to the court, the imparting of special knowledge and technical know-how by the foreign collaborator would be like a teacher selling his skill or knowledge to his pupil. Same is the view of the Bombay High Court in the case of CIT v. Tata Engineering and Locomotive Co. Pvt. Ltd. [19801 123 ITR 538. In that case, the Bombay High Court held as under (headnote) : 'Technical know-how cannot be called a tangible asset. Technical know-how and technical advice for the time being cannot, in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of the agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. Merely because an assessee who has entered into a contract with regard to know-how is entitled to use the know-how even after the agreement has expired it does not mean that he has acquired a benefit of an enduring nature. Agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction of acquiring the necessary technical information with regard to the technique of production. Instead of employing persons having knowledge of techniques and utilising their knowledge, technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent'.";