COMMISSIONER OF INCOME TAX Vs. WAVIN INDIA LIMITED

JUDGEMENT

(1.) IN these tax cases, we face the perennial problem of having to decide whether a given expenditure is capital or revenue in nature. The expenditure in question was made pursuant to a foreign collaboration agreement. There are no separate tests under the income -tax law for distinguishing between capital and revenue expenditure in so far as they arise out of a foreign collaboration agreement. However, the law reports carry a number of decisions of Courts which have dealt with this aspect of the question, as if they demand special attention. Almost invariably the Courts have held that the real character of the expenditure incurred under collaboration agreements will have to be examined and determined on a consideration of the particular terms of the collaboration agreement on hand. A study of the decided cases shows that the usual run of collaboration agreements provide for distinct subjects on which the foreign collaborator aids the Indian concerns. First comes the establishment or setting up of the factory or industrial unit. Then comes the running of the factory. Provision for assignment of patents or provision for licence for working the patents, training of technical personnel, sharing of the results of the research and development, are some of the aspects of collaboration connected with the running of the factory. It is usual to find in collaboration agreements all these aspects of aid by the foreign collaborator to the local concern. The consideration provided for in the agreements may, however, take different forms. In some of them, we find only a composite payment. In other agreements we would find consideration specifically related to each and every one of the different aspects of collaboration.

(2.) IN the present case the foreign collaboration between the assessee and the foreign firm was on the subject of production of what in the trade is called P. V. C. pipes. The foreign collaborators are Industriele Onderneming Wavin N. V., hereinafter referred to as "Wavin". They are a Dutch company. They are specialists in the manufacture of P.V.C. pipes. They have, for long, developed the technical know -how for these pipes. They entered into a composite collaboration agreement. Under the terms of the collaboration, an Indian company was to be promoted and that company was to be aided and guided to produce P.V. C. pipes in India for being marketed all over the world. Under the agreement, Wavin undertook several things, namely, to supply the plant and machinery to the Indian company, to work the relevant patent for the manufacturing process, and to help in the running of the factory. It was provided in the agreement that Wavin should part with all their technical knowledge obtained as a result of research and development for the purpose of updating the technical know -how of the Indian company. In all these respects the collaboration agreement between Wavin and the assessee -company follow the common pattern. However, in one significant respect the agreement in the present case manifests a difference. While Wavin undertook to provide technical information, patents, licences and also research and development, the agreement did not provide for any consideration to pass from the Indian company to Wavin in respect thereof. The relevant clause in the agreement showed that Wavin had to part with these processes and information gratis and without any quid pro quo. The expression used in the agreement was "free of any charges". As for the undertaking of Wavin to share the results of research and development, even that was not expressed to be for any stated consideration. However, for the part played by Wavin in the setting up of the factory, by the provision or supply of plant and machinery, there was a specific consideration which passed from the assessee to Wavin. That consideration took the form of allotment of equity shares to the extent of 49 per cent in the Indian company. Apart from the initial aspect of installation of the factory, which was taken care of by allotment of equity shares, for the actual running of the factory, however, the collaborating parties did not contemplate that any consideration should pass from the Indian company to Wavin. It was quite clear that the assessee obtained for a song from Wavin technical information and know -how, the grant of patents and licences, and the results of research and development in Wavin's foreign plant.

(3.) CLAUSE 10 -As a contribution towards the cost of research carried out by Wavin in the Netherlands and in other laboratories in the Netherlands with whom Wavin has arrangements, the Indian company shall pay in Dutch guilders or in sterling, Wavin, an amount calculated at the following rates :