COMMISSIONER OF INCOME TAX Vs. SUNDARAM CLAYTON LIMITED

JUDGEMENT

(1.) THE following common question have been referred by the Tribunal under s. 256(1) of the I.T. Act for the assessment years 1966-67 to 1969-7 :

(2.) THE assessee, is a company which was incorporated some time in 1962. Its busines is in the manufacture and sale of air-compressor equipments for automotive vehicles and industrial equipment. It entered into a technical collaboration agreement with M/s. Clayton Dewandre Company Ltd., U.K., on July 1, 1962, and another agreement with M/s Bendix Westinghouse Automotive Air Brake Company Ltd., USA, on January 9, 1964. THE assessee claimed that the payments made to the respective foreign companies in accordance with the terms of the two agreements should be allowed as deductions in arriving at the taxable income for the years mentioned above. Taking the assessment years 1966-67 as typical, the amounts paid to M/s. Clayton Dewandre Co. Ltd., fall in two part : (1) royalty, and (2) technical aid fees. Royalty come to Rs. 9,965 and technical aid fees to Rs. 7,473. Similarly, in the case of M/s. Bendix Westinghouse Automotive Airbrake Co., the amount paid as royalty was Rs. 31,302. For the other years, the figures vary, but the nature of the payments is the same.

(3.) THE agreement in the present case with M/s. Clayton Dewandre Company Ltd., grants a licence for the entire territory of India. the licence is exclusive and non-transferable and is for the purposes of using and selling in India the licensed devices, and parts thereof, but there is no right to import or export of sell for import of export into other countries such licensed devices. Articles IV required the foreign company upon the written request of the Indian company to supply blue prints of assembly and detailed drawings and the results of technical investigations, tests, and research. THE information has to be kept confidential and has not to be disclosed to any other person at any time. In consideration of the technical services rendered, the foreign company was entitled to by paid a fee amounting to one and a half per cent of the factory cost of all licensed devices and spare parts for such devices sold by the assesse-company. In consideration of the licences and other rights granted under the agreement in respect of the licensed patents and licensed devices, a royalty amount of 2% of the factory cost of all licensed device and spare parts was also to be paid to the foreign company. THE agreement was to be in force for a period of 10 years, subject to extension for a further period of five years, unless notice was given by either party by registered notice of its intention to terminate the agreement. THE notice had to be given at least one years prior to such termination date. In the event of the termination of the agreement, all future and continuing rights and obligations were to cease and terminate. THE Indian company will also have the right during the ensuring years subsequent to the termination of the agreement to dispose of any stock on hand. THE nature of the agreement appears to us to be purely for the purposes of obtaining the relevant know-how for manufacturing and selling the materials manufactured. THE agreement is for the purposes of running the business. Though the agreement may have been entered into soon after the formation of the company, it cannot be stated that the payments under the agreement are liable to be treated as capital expenditure merely because the agreement came into existence at the commencedment of the company's career. Even at the initial stages after the formation of the company, it may enter into agreements for the purposes of enabling it to manufacture the proposed goods. Just as it enters into agreements with its employees, engineers, technicians, etc., it enters into agreement for the purposes of the obtaining the know-how. THE nature of the expenditure is not dependent upon the time at which the relevant agreement came into existence. THE quality of the expenditure will have to be tested with reference to the object for which it was incurred. Judged by this test, we do not find that there is any capital element in the expenditure.