DIPAK KUMAR SEN J. - (1.) B. N. Elias and Co. (P.) Ltd., the assessee, at the material time carried on the business of manufacture of carpet backing looms, cloth rolling machines and other machines. On September 14, 1964, the assessee entered into an agreement with M/s Taylor and Challen Ltd., a company incorporated in the United Kingdom. The object of the said agreement was to obtain assistance from the British company to enable the assessee to manufacture in India power press machines economically and efficiently. The relevant terms and conditions of the said agreement were as follows : " (1) The British company would supply to the assessee for use in India full and actual technical and other confidential information and advice for or in connection with the manufacture of the said machines. In consideration of such know-how, the assessee would pay to the British company a fee in Sterling in respect of each size of machine as specified in the schedule to the said agreement as and when the assessee would intend to manufacture such size or sizes of machines. The know-how would be supplied within two months on receipt of the request in writing from the assessee. Payment would be made in the United Kingdom by a representative of the assessee against one set of documents and materials relating to the know-how in respect of each size of machine. All such documents and materials would be handed over by the British company to the assessee, but the same would remain the property of the British company. (2) The British company would grant to the assessee-- (i) a sole licence to make and sell the said machines within the manufacturing territories during the continuance of the agreement subject to the condition that during the period of the agreement, the assessee would appoint another company named in the agreement as the sole concessionaire for the sale in the manufacturing territory of the said machines made by the assessee under this agreement on the terms and conditions to be agreed between the assessee and the sole concessionaire ; (ii) a non-exclusive licence to sell the said machines within the selling territory during the continuance of this agreement ; (iii) the expression " manufacturing territory " would mean for the purpose of this agreement the territory of India including Jammu and Kashmir, Goa, Bhutan, Nepal and Sikkim. The expression " selling territory" for the purpose of this agreement would mean a number of countries of South East Asia specified in the agreement. (3) In consideration of the rights granted to the assessee and the obligations assumed by the British company, the assessee would at all times during the continuance of this agreement pay to the British company in the United Kingdom or at places in the Sterling area as the British company might from time to time direct royalty at the rate of 6 1/2per cent of the net sale value of each of the machines manufactured by the assessee from time to time in Sterling. (4) The British company would not during the continuance of this agreement, licence or assist any other person, firm or company to manufacture or sell in the manufacturing territory the said machines except the said sole concessionaire, the representatives in India of the British company. (5) The rights conferred by the agreement would not be capable of assignment, encumbrance, letting or sub-licence by the assessee and the assessee would always treat the same and the said know- how, documents and materials as confidential and would ensure that the same would be used solely for the purpose of this agreement and would not be communicated to any person other than the responsible officers and employees of the assessee or sub- contractors engaged in the manufacture of parts or machines. (6) The British company would apply to the Registrar for registration of, and user of, its trade marks at its own expense in the territory as might from time to time be decided and after the said trade marks were registered, would appoint the assessee as a registered user under the terms of the user agreement to be entered into by and between the parties. The assessee would be regarded as the registered user of the trade marks in the register of trade marks in India. (7) Subject to the provisions of the subsequent clauses, the agreement would remain in force for a period of 10 years from the date the first machine manufactured by the assessee would be invoiced to the sole concessionaire, provided that unless either party would give to the other not less than one year's previous notice in writing that this agreement would stand terminated on the expiry of the said period of 10 years, the same would continue in force thereafter unless terminated by either party giving to the other not less than one year's previous notice in writing or for such lesser period as the assessee might approve. (8) The agreement might be terminated forthwith by a party not in default giving to the party in default a notice in writing terminating the agreement on the ground of certain events as specified happening. (9) Up to termination of the agreement after the initial period of 10 years, the assessee would subject to the other terms and conditions as aforesaid be at liberty to use and continue to use the said know-how acquired in pursuance of the agreement for manufacture of the said machines without being liable to make any further payment to the British company. "
(2.) IN the asst. yr. 1967-68, the accounting year ending on September 30, 1966, the assessee in terms of the aforesaid agreement paid a sum of Rs. 56,989 to the British company in respect of the technical know-how and debited the said amount in its accounts. IN its assessment to income-tax in the said asst. yr. 1967-68, the assessee claimed and was allowed deduction of the said amount by the ITO. Subsequently, the CIT initiated proceedings under s. 263 of the IT Act, 1961. It was noticed by the CIT in the assessment records that against payment of the said amount of Rs. 56,989 to the British company, the assessee had obtained a right to exploit the design and technical know-how of the British company for the manufacture of machine presses for an indefinite period and thereby brought into existence a benefit of an enduring character. It appeared to the CIT that the said expenditure was capital in nature and the ITO had erred in allowing deduction of the same as a revenue expenditure. The CIT came to the tentative conclusion that the said assessment was erroneous and prejudicial to the interests of the Revenue and issued a notice to the assessee to show cause why an order under s. 263 of the Act should not be passed modifying or cancelling the assessment and directing a fresh assessment. It was contended before the CIt on behalf of the assessee that the question raised was covered by a decision of the Supreme Court in the case of CIt vs. Ciba of India Ltd. (1968) 69 ItR 692. In that case, on a similar agreement for supply of technical and other confidential information, the Supreme Court had held that the amounts spent by the assessee for obtaining such technical and confidential information would be a revenue expenditure. It was submitted further that the documents and materials supplied by the British company to the assessee would continue to belong to the latter ; the rights under the agreement could not be assigned by the assessee and though the period of the agreement was for 10 years, the same was terminable by either party subject to one year's notice and in certain circumstances forthwith.
(3.) IT was submitted that the assessee was already carrying on business of manufacturing machines and payment for obtaining the confidential information and know-how had been made in the course of the assessee's business. IT was submitted that the payment had not been made to set up a new business but to run an existing business more efficiently and profitably. The payment made for the technical know-how was analogous to a payment made for raw materials and the same was allowable as a deduction. It was held by the CIT that the right to the technical know- how and designs vested in the assessee during the period of the agreement which was valid for 10 years, a long period, and the contract could be extended even after 10 years unless specifically terminated by either side. It was noted that in Ciba of India Ltd., the payment was made by the assessee to its foreign supplier for know-how periodically on the basis of sales, but under the agreement in the instant case, payment was being made once and for all, bringing into existence an asset of enduring benefit. The CIT held further that the assessee was not carrying on the business of manufacturing machine presses and, therefore, it could not be said that the payment was being made to the British company to obtain more profit from the existing business. It was held that the payment had been made to obtain technical know-how and design to start a new line of business in which the production sta in 1969. The CIT came to the conclusion that the payment of the said Rs. 56,989 was capital in nature and that the ITO had erred in allowing deduction of the same. On the above ground as also on other grounds the CIT held that the order of assessment was erroneous and prejudicial to the interests of the Revenue, set aside the same and directed the ITO to make a fresh assessment in the light of his findings in his order.;