- (1.) This Reference under section 256(1) of the Income-tax 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. 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". It reads, inter alia, as follows:- Art. 1 Tor-Isteg grants to the Licensee a full license to use the following patents registered in Luxembourg relating to high tensile steel wires and/or bars known as 'Ribbed Tor-steel' for reinforcd concrete constructions: Art. 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-license 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 the fact which comes to the notice of the Licensee, to Tor-Isteg who will enjoy the full benefit thereof without any consideration therefore and utilize the improvement in any manner deemed fit by Tor-Isteg. Art. 3 (1) Tor-Isteg shall supply and disclose all technical, engineering and manufacturing information, I 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 service 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. Art. 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 utilization of Ribbed-Tor-steel. Art. 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. Art. 8 (a) This Agreement shall continue for as long as any of the patents or any renewals thereof remain in force, and/or the License uses the trade mark RIBBED TORSTEEL or any other registered trade mark of Tor-Isteg. (c) Tor-Isteg shall have the right to terminate this agreement if from 1st January 1968 the Licensee has not produced at least 5000 tons of Ribbed Tor-Steel during any calendar year except for reasons beyond their control. Art. 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 merely that breach. Art. 10 All steel produced under the terms of this Agreement shall be sold under the trade mark "RIBBED TORSTEEL". Tor-Isteg convenants that the Licensee shall be entitled to use the said trade mark. Art. 11 If the patents case to be in force in the Union of India, the Licensee will continue the use of the registered trade mark mentioned in Art. 10 and obtain the same services from Tor-Isteg mentioned in Art. 3 against payment of a fee of 5-% of those mentioned in Art. 6 the repatriable amount mentioned therein being reduced accordingly by 50%. Art. 13 Tor-Isteg reserves the right to grant license for the production of Ribbed Tor-steel in the Union of India to one or more prospective firms other than the License if and when Tor-Isteg considers it necessary in the interest of better utilization of its patents.
(3.) In the relevant previous year the assessee paid Rs.18,825/- to the foreign company under Article 6(a) of the agreement. The Income-tax Officer has disallowed the assessee's claim namely that this expenditure is allowable as a revenue expenditure. The Appellate Assistant Commissioner has allowed the claim but the Tribunal has rejected it.;