COMMISSIONER OF INCOME TAX Vs. SOUTHERN SWITCHGEAR LIMITED

JUDGEMENT

(1.) THE first batch of five references is at the instance of the Revenue while the second batch of five cases is at the instance of the assessee against the same orders of the Tribunal.

(2.) THE assessee -company entered into a collaboration agreement with a foreign company by name M/s Brush Electrical, Engineering Co. Ltd., U.K., on December 12, 1963. Under the said agreement, the foreign company agreed to provide the assessee -company technical aid and information in the manufacture of low tension switchgear, high tension switchgear, etc., and the right to sell such products. The foreign company also agreed to keep the Indian company posted with the latest and modern developments in the field of manufacture of switchgears and transformers and to train the necessary personnel at the U.K. factory, etc. Under the said agreement, the assessee -company agreed to pay as consideration for the services rendered by the foreign company a lump sum of pounds 20,000 sterling payable in five equal instalments of pounds 4,000 sterling each, the first instalment to be paid three months after the date of the agreement and subsequent payments at intervals of 12 months from the first payment. For the year 1966 - 67, the assessee -company claimed the payment made to the foreign company as a revenue expenditure. The ITO, however, held that as the consideration paid in the form of royalty was an enduring benefit to the assessee, a part of it will have to be disallowed. He, therefore, deducted from the loss claimed by the assessee for the asst. year 1966 -67, the technical collaboration fees and 1/4th of the royalty paid and similarly for the asst. yrs. 1967 -68, 1968 -69, 1969 -70 and 1971 -72. The details of the disallowance for each of the years are given below.

(3.) AGAINST the orders of the AAC, both the assessee -company and the Revenue filed appeals and cross -objections before the Tribunal. The Revenue contended that the AAC erred in holding that 1/4th of the expenditure towards technical aid fees alone had to be considered as capital. The Tribunal after considering the various clauses in the collaboration agreement dated December 12, 1963, in extenso, came to the conclusion that as per the said clauses of the agreement, the technical knowledge that the assessee obtained through this agreement was an enduring advantage and benefit in so far as the same was available to the assessee for its manufacturing and industrial processes even after the termination of the agreement, and that in view of the decision of this Court in Transformer & Switchgear Ltd. vs. CIT 1976 CTR (Mad) 110 : (1976) 103 ITR 352 (Mad), 1/4th of the technical aid fees has rightly been disallowed as relating to capital expenditure. In this view, the Tribunal upheld the order of the AAC relating to both the disallowance of 1/4th of the technical aid fees and 1/4th of the royalty amount. Aggrieved by the order of the Tribunal, both the Revenue and the assessee filed reference applications before the Tribunal and the Tribunal has referred the following common questions for the opinion of this Court.