COMMISSIONER OF INCOME-TAX, TAMIL NADU-V Vs. LAKSHMI CARD CLOTHING MANUFACTURING COMPANY PRIVATE LIMITED

JUDGEMENT

(1.) This is a reference at the instance of the Revenue referring the following question of law :

(2.) The assessee is a private limited company carrying on business in the manufacture and sale of card clothing. The company was incorporated in 1961. It entered into a collaboration agreement with Graf Sales Limited of Switzerland (hereinafter to be referred to as the "foreign company") on February 23, 1961. Clauses 3 and 9 of the collaboration agreement provide :

(3.) For the licence granted under clause 3 and for the services rendered in pursuance of clause 9, the assessee has to pay to the foreign company an annual fee of 6,000 francs for a period of 10 years, the first payment commencing from July 1, 1961. The ITO came to the conclusion that it is in the nature of capital expenditure and disallowed the deduction claimed.On appeal, the AAC held that the consideration for the services in the shape of technical advice and for the grant of license to exploit the foreign company's patents in India is partly for services and partly in the nature of royalty and it is, therefore, on revenue account and qualified for deduction. On further appeal, the Tribunal, after analysing clauses 3 and 9 and also looking into the correspondence, came to the conclusion that the payment to the foreign company for sending periodical instruction on various points regarding raw materials, designs, drawings, etc., is only in the nature of royalty and the instructions given by the foreign company from time to time is to help the assessee in the normal running of its manufacturing business and the amount paid to the foreign company is only a revenue expenditure and should be allowed as a deduction under s. 37(1). At the instance of the Revenue, the question set out supra has been referred for being answered by this court.