COROMANDEL FERTILIZERS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The assessee is a company incorporated under the Companies Act, 1956, with its registered office at Secunderabad in Andhra Pradesh, whose main object is manufacture of fertilizers in India. EDI Parry Ltd., a company incorporated under the English Companies Act and having its registered office in London, is one of the largest manufacturers and distributors of fertilizers of various types in India for the last sixty years and had conducted extensive agronomical research and acquired in India unrivalled knowledge and experience of agronomy, agricultural practices and soil formations and chemical compositions, cropping patterns, particularly applicable to South India. The assessee-company, being desirous of obtaining from EID Parry the said know-how for promoting the sale of fertilizers manufactured by it, entered into an agreement with EID Parry Ltd. On 16/04/1964. The important features of this agreement, among others, are as follows : "(5) EID has agreed to impart and disclose to Coromandel its said know-how for the consideration and on the terms and conditions hereinafter set forth : 1.EID shall impart and disclose to Coromandel the said know-how for exploitation by Coromandel in India : all documents, materials and information relating to the said know-how shall be handed, given or imparted by EID to the representatives of Coromandel designated for the purpose. For the purpose of enabling Coromandel to make the fullest use of the know-how to be imparted and disclosed pursuant to clause 1 hereof, EID covenants not to impart or disclose the said know-how to third parties, that is parties not within the EID group of companies, which shall or may produce or sell fertilizers in competition with Coromandel in the State of Andhra Pradesh or other areas adjacent thereto and in which the complex fertilisers produced by Coromandel are then being sold. EID further undertakes that it will on or before Coromandel commencing production enter into a further agreement with Coromandel the terms of which shall be mutually agreed whereby EIDs right to market and sell complex fertilizer produced by it at its factory at Ennore, Madras, will be restricted to the State of Andhra Pradesh for the period of and in the manner provided by such agreement.

(2.) In consideration of the said know-how to be imparted and disclosed by EID as provided in clause 1 hereof and in consideration of the obligations undertaken by it under clause 2 hereof Coromandel shall within ninety days from the date hereof allot and issue to EID 63, 450 equity shares of rupees ten each in Coromandel all credited as fully paid up. Coromandel agrees and undertakes that it shall not disclose the said know - how to any person, firm or body corporate and that it shall use its best endeavors to ensure that the said know-how shall not divulged to third parties : PROVIDED however that nothing contained in this clause shall prevent Coromandel from disclosing the said know-how in so far as may be necessary to a director or other officer or employee of Coromandel for the proper performance and discharge of his duties towards Coromandel : PROVIDED that such director, officer or employee has previous to such disclosure and within the limits permissible by law given a written undertaking to Coromandel not to disclose the said know-how or any part thereof to any person, firm or body corporate." 3. For the assessment year 1969-70, the assessee claimed the amount of Rs. 6,35,400 paid by it to EID Parry Ltd. Os consideration under the said agreement as deductible revenue expenditure. The ITO by his order, dated 23/11/1972, held it to be payment for securing technical know-how and that the same had brought into existence an asset of an enduring nature and as such amounted to capital expenditure. In that view, he held that the question of granting of depreciation or deducting it as revenue expenditure did not arise. The AAC, on appeal, was of the view that :

(3.) He further held that the profit gaining apparatus had not been set in motion and the company was only in the initial stages of erection; only to understand the proper implications of the market and the types of products to be manufactured, that the above know-how was acquired and hence it must be treated as acquiring an asset of enduring advantage, and hence the payment of this sum can only be treated as capital expenditure.