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Judgment
D. P. WADHWA, C.J. :
The Tribunal, Patna Bench, Patna, drew up a statement of case as directed by the High Court in proceedings under s. 256(2) of the IT Act, 1961 (for short, "the Act"), for the asst. yrs. 1974-75, 1975-76 and 1976-77. A common statement for six cases, three at the instance of the Revenue and three at the instance of assessee, was drawn up. For the asst. yr. 1974-75, the tax case at the instance of the Revenue is Tax Case No. 232 of 1981 and at the instance of the assessee is Tax Case No. 19 of 1983, for the asst. yr. 1975-76, the tax case of the Revenue is Tax Case No. 233 of 1981 and that of the assessee is Tax Case No. 18 of 1983 and for the asst. yr. 1976-77, the tax case of the Revenue is Tax Case No. 234 of 1981 and that of the assessee is Tax Case No. 17 of 1983.
The questions which have been referred to this Court for decision are as under :
"1. Whether the Tribunal was correct in holding that the assessee would be entitled to depreciation on the amounts of Rs. 1,66,54,990, Rs. 11,50,981 and Rs. 11,52,709 incurred by the assessee during the asst. yrs. 1974-75, 1975-76 and 1976-77, respectively ?
Whether the finding of the Tribunal that the abovementioned amounts had been spent by the assessee on acquiring patents and drawings is vitiated ?
Whether the Tribunal was correct in law in holding that the assessee was entitled to deduction of Rs. 84,834 and Rs. 1,51,033 incurred on giving tea to its customers for the asst. yrs. 1975-76 and 1976-77, respectively ?"
Whereas, the questions framed by the High Court at Patna in the assessees reference application are as under :
Asst. yr. 1975-76 (Tax Case No. 18 of 1983) :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 11,50,981 paid to the foreign collaborators on account of licence fees, engineering services fee and foreign technicians services was not deductible as revenue expenditure ?"
Asst. yr. 1976-77 (Tax Case No. 17 of 1983) :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 11,52,709 paid to the foreign collaborators on account of licence fees, engineering services fee and foreign technicians services was not deductible as revenue expenditure ?"
Asst. yr. 1974-75 (Tax Case No. 19 of 1983) :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 1,19,92,816 paid to Hindustan Steel Ltd. and the sum of Rs. 16,55,980 paid to the foreign collaborators were not deductible as revenue expenditure ?"
Then at the instance of the Revenue for the asst. yr. 1978-79 and the asst. yr. 1979-80 again a common question has been referred by the Tribunal to this Court in Tax Cases Nos. 57 and 58 of 1986 for its decision and it is as under :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee would be entitled to depreciation on the amounts of Rs. 1,36,48,796, Rs. 11,50,981 and Rs. 11,52,709 incurred by the assessee during the earlier assessment years ?"
To understand the controversy a brief background of the case may be necessary. The Hindustan Steel Ltd. (for short "HSL") entered into an agreement dt. 11th Feb., 1969, for ten years with the United Engineering & Foundry Company, USA (for short "foreign company"), incorporated in the United States of America, under which HSL acquired certain know-how from the foreign company. The know-how comprised of technical and manufacturing information, data, detailed design and related calculations, plans, drawings, blue prints and specifications relating to contract articles which were to be designed by HSL for manufacture by others and sold by HSL. The agreement contained details of know-how and the compensation payable by HSL to the foreign company for this know-how. It was stipulated that on the execution of the agreement HSL would pay $ 100,000 and each year thereafter from the date of the execution of the agreement (through the ninth year) and a similar amount of $100,000 provided of course, the agreement was not terminated earlier. In addition to this payment, HSL was to pay to the foreign company an amount equal to 4-1/4 per cent of the net sales comprised of all contract articles designed and manufactured by the HSL. This HSL had a unit known as Central Engineering and Design Bureau (for short, "the Bureau") which unit was giving technical consultancy to others and for which purpose HSL had entered into the aforesaid agreement with the foreign company. On the formation of Metallurgical and Engineering Consultants (India) Ltd. (in short "the assessee"), HSL assigned all its rights and benefits under the agreement dt. 11th Feb., 1969, with the foreign company for an outright consideration of Rs. 1.49 crore under an agreement dt. 13th Sept., 1973 (relating to the asst. yr. 1974-75). For the year 1974-75, the assessee paid a sum of Rs. 16,55,980 as licence fee, royalty, etc., to the foreign company after the agreement was assigned to it by the HSL for the use of the technical know-how. Initially, the assessee claimed the entire amount of Rs. 1.49 crore and Rs. 16,55,980 as the revenue expenditure. Subsequently, however, it revised its return claiming Rs. 136 lakhs as revenue expenditure and Rs. 30 lakhs was capitalised and depreciation was claimed at the rate of ten per cent. The Assessing Officer (AO) treated the entire payment as capital expenditure but he declined to allow any depreciation on the plea that no such depreciation was admissible as the assets acquired were intangible assets on which no depreciation was admissible. On appeal by the assessee, the AAC confirmed the order of the AO and held that payment of Rs. 1.49 crore to HSL was capital expenditure and not a revenue expenditure. He further held that the payment of Rs. 16.56 lakhs during the current year to the foreign company was also capital expenditure and not revenue expenditure. On further appeal to the Tribunal, the Tribunal concluded that as far as the amount of Rs. 1.49 crore was concerned, the same was payable in terms of the assigning agreement dt. 13th Sept., 1973, entered into with the HSL for which a capital asset was acquired by the assessee and, hence, it was a capital expenditure. As regards the balance payment of Rs. 16.56 lakhs, the Tribunal concluded that it was in the nature of revenue expenditure because the assessee was a dealer of technical know-how services. The Tribunal was of the view that depreciation was allowable on the payment of Rs. 1.49 crore and in support of its finding that depreciation was admissible on such capital asset, the Tribunal relied on the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd.,
In Scientific Engineering House (P) Ltd. Vs. Commissioner of Income Tax, Andhra Pradesh, the Supreme Court was considering the question "Whether, on the facts and in the circumstances of the case and on a true interpretation of the collaboration agreements between the assessee and Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000 by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of depreciable asset". In that case, the assessee-company had entered into two separate collaborations with the foreign company for undertaking the manufacture of microscopes and theodolites, under which the foreign collaborator, in consideration of payment of Rs. 1,60,000 under both the agreements agreed to supply to the assessee all the technical know-how required for the manufacture of those instruments. To enable the assessee to manufacture the instruments in India in terms of the agreement, the foreign collaborator agreed to render "documentation service" by supplying to the assessee an up-to-date and correct complete set of each of the five types of documents like manufacturing drawings, processing documents, designs, charts, plans, etc. The foreign collaborator was also required to render training and imparting of knowledge of the know-how technique of manufacturing instruments. The assessee debited the amount of Rs. 1,60,000 under the head "Library". It claimed a sum of Rs. 12,000 by way of depreciation on library. This was claimed on the ground that the payment of Rs. 1,60,000 had been made for the outright purchase of designs, drawings, charts and other literature which constituted the pages of a book and the assessee had claimed depreciation at the appropriate rate. The AO was of the view that the amount of Rs. 1,60,000 did not represent the value of books purchased by the assessee but, in fact, represented the price paid for acquiring the technical know-now which amounted to a capital expenditure but since no tangible or depreciable asset was brought into existence, no depreciation could be allowed. On appeal by the assessee, the AAC held that what the assessee had done was to make an outright purchase of certain specimen drawings, charts, plans, etc., on special papers and those documents when collected together constituted a book on which depreciation, as in the case of plant and machinery, would be allowable at the appropriate rate. He directed the ITO to allow the depreciation claimed. The Revenue appealed to the Tribunal which was of the view, after examining the relevant terms of the agreement, that the payment of Rs. 1,60,000 was partly on capital account and partly revenue account. The Tribunal, however, confirmed the deduction of Rs. 12,000 as revenue expenditure and not as depreciation allowance and in that way it, in effect, confirmed the order of the AAC. At the instance of both the assessee and the Revenue the question of law, as noted above, was referred to the High Court for its opinion. The High Court was of the view that the payment of Rs. 1,60,000 did not mainly represent the purchase price of the designs, drawings, charts, etc., as contended by the assessee; that the rendering of "documentation service" was incidental; and that no part of the expenditure was on revenue account but the whole of it was of a capital nature bringing into existence an asset of enduring benefit to the assessee but what was brought into existence was a non-depreciable asset and, therefore, the assessee was not entitled to any relief. The High Court held that the assessee was not entitled to any relief either by way of depreciation or revenue expenditure. On appeal to the Supreme Court, the Court accepted the claim of the assessee and answered the question in favour of the assessee to the effect that payment made by the assessee to the foreign collaborator was attributable wholly towards acquisition of a depreciable asset. In this connection, the Supreme Court approved the decision of the Gujarat High Court in Elecon Engineering Co.s case (supra) where the High Court had held that drawings and patterns which constituted know-how and are fundamental to the assessees manufacturing business were "plant". The Supreme Court thus held that drawings, designs, charts, plans, processing data and other literature comprised in the "documentation service" specified in cl. 3 of the agreement constituted a "book" and fell within the definition of "plant" in s. 43(3) of the Act."Plant" under s. 43(3) includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock. After the decision of the Supreme Court in Scientific Engineering House (P) Ltd.s case (supra), the appeal of the CIT, Gujarat, in Elecon Engineering Co.s case (supra) also came before the Supreme Court. It is reported in CIT v. Elecon Engineering Co. Ltd., (1987) 166 ITR 66 (SC) The Supreme Court affirmed the decision of the Gujarat High Court in CIT vs. Elecon Engineering Co. Ltd. (supra) and the appeal of the Revenue was dismissed.
In view of the aforesaid decisions of the Supreme Court, it has to be held that acquisition of technical know-how is entitled to depreciation and thus the amount of Rs. 1.49 crore paid by the assessee to HSL would not be treated as revenue expenditure. The question thus sought by the assessee has to be answered in favour of the Revenue and the decision of the Tribunal is upheld. This answer also takes care of the second part of the question referred at the instance of the Revenue for the asst. yr. 1974-75 and it is answered in the affirmative in favour of the assessee and against the Revenue by holding that the Tribunal was correct in holding that the assessee was entitled to depreciation on the said amount of Rs. 1.49 crore.
In Commissioner of Income Tax, Calcutta Vs. Indian Oxygen Limited, answering the question, "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 2,97,480 paid by the assessee to the British Oxygen Co. Ltd., London, in pursuance of the agreement dt. 1st Oct., 1959, was a permissible deduction under s. 37(1) of the IT Act, 1961," the Court held that it was nothing but revenue expenditure. The Court noted that the High Court after examining the various clauses in the agreement between the assessee and the British Oxygen Co. Ltd. found as follows :
"The English company did not sell any information, processes and inventions to the Indian company. Under cl. 22 of the agreement, the Indian company is not entitled to use them after the termination of this agreement. The Indian company is prohibited from disclosing these information, processes and inventions during the currency and also after the determination of this agreement in view of its cl. 11. Though this agreement is for a period of ten years, it can be terminated earlier as provided in cl. 23. Therefore, it cannot be said that the Indian company has incurred the expenditure for the purposes of bringing into existence any asset or advantage of an enduring nature. It must also be held that this expenditure is not a capital but a revenue expenditure, for it was incurred by the Indian company for running its business or working it with a view to produce profits."
The Court said that the understanding of the agreement by the High Court was correct and dismissed the appeal.
As regards the other questions referred at the instance of the assessee as well as of the Revenue to the effect that payments of Rs. 16,55,980, Rs. 11,50,981 and Rs. 11,52,709, respectively, for the asst. yrs. 1974-75, 1975-76 and 1976-77 to the foreign company on account of licence fees, engineering services, and foreign technicians services were not deductible as revenue expenditure and that it was entitled to depreciation have to be answered in favour of the assessee by holding that the Tribunal was not right in holding that the said payments were not deductible as revenue expenditure. This would be so in view of the judgment of the Supreme Court in Indian Oxygens case (supra). As a corollary the question raised at the instance of the Revenue in this respect has to be answered in the affirmative, i.e., in favour of the Revenue and against the assessee by holding that the Tribunal was not correct in coming to the conclusion that the assessee was entitled to depreciation on these payments.
In CIT vs . Patel Bros. & Co. Ltd. : [1995]215ITR165(SC) , the Court was considering the term "entertainment expenditure" prior to Expln. 2 to s. 37(2A) of the Act which was applicable w.e.f. 1st April, 1976. The Court referred to the provisions of sub-s. (2A) of s. 37 of the Act which was inserted w.e.f. 1st Oct., 1967, and to Expln. 2 inserted by the Finance Act, 1983, retrospectively w.e.f. 1st April, 1976. We do not think it is necessary to set out these provisions as the Supreme Court has held that the provision of ordinary meals to outstation customers according to established business practices could not be entertainment expenditure. The Court said that ordinarily "entertainment" connotes something which might be beneficial for mental or physical well-being but is not essential or indispensable for human existence and a bare necessity, like an ordinary meal, was essential or indispensable and, therefore, was not entertainment. The Court said that where such a bare necessity was offered, it was hospitality, not entertainment and that the definition of entertainment did not include hospitality. The Court in this connection approved the decision of the Delhi High Court in Commissioner of Income Tax Vs. Rajasthan Mercantile Co. Ltd., India Tourism Development Corporation Ltd. and Gulshan Kumar Vijay Ku, . The Court also affirmed an earlier decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., from which the present appeal before the Supreme Court in CIT vs. Patel Bros. & Co. Ltd. (supra) had arisen, but it said that the decision of the Gujarat High Court contained certain wide observations which the Court did not affirm.
In view of the aforesaid decision of the Supreme Court, the other question referred at the instance of the Revenue relating to the asst. yrs. 1975-76 and 1976-77 as to whether the Tribunal was correct in law in holding that the assessee was entitled to deduction of Rs. 84,834 and Rs. 1,51,033, respectively, incurred on giving tea to customers has also to be answered in the affirmative in favour of assessee and against the Revenue. There shall be no order as to costs.
S. J. MUKHOPADHAYA, J. :
I agree.