Transformer and Switchgear Ltd. vs Commissioner of Income Tax

Ramanujam, J.—The assessee in these cases is a public limited company manufacturing transformers at its factory at Adyar, Madras. For

the asst. yr. 1961-62, the assessee received technical assistance from a West German Company (hereinafter referred to as foreign Company). The

subject matter of assistance and the terms and conditions thereof were contained in an agreement dt. 28-12-1956. For the earlier asst. yrs. 1957-

58 to 1960-61, the fee paid to the foreign company under the said agreement was allowed as a revenue expenditure by the ITO. However, for the

asst. yr. 1961-62, the ITO took the view that a portion of the fee relatable to the supply of technical know-how, patents and designs was a

payment for obtaining an asset of a permanent nature and hence it is capital in nature, but the fee referable to the user of the patents and designs

was a revenue expenditure. On appeal, the AAC took the view that the technical know-how received by the assessee from the foreign company

was neither a capital asset or an asset of a permanent nature. However, the matter was taken in appeal by the revenue to the IT Appellate

Tribunal. The Tribunal divided the services to be rendered by the foreign company under the agreement into three categories, firstly, assistance for

establishment, starting of work and operation of the work, secondly giving technical know-how for the manufacture; and thirdly, grant of right to

use the licences, patents, etc., and held that the fee paid for the first two categories of assistances was capital in nature though the amount spent

under the third category cannot be treated as capital in nature. The Tribunal also felt that since the fee paid to the foreign company was a

composite payment as contemplated under the agreement, 50% of the amount paid under the agreement can be treated as capital expenditure. The

matter was taken to this court by the assessee on a reference on the following question : ""Whether, on the facts and in the circumstances of the

case, and the terms of the agreement, the treatment of 50% of the licence fees paid by the assessee as capital expenditure is right in law ? A

Division Bench of this court has answered the reference against the assessee in Transformer and Switchgear Ltd. Vs. Commissioner of Income

Tax, . In support of the view it has taken, the Division Bench has referred to an earlier decision in Fenner Woodroffe and Co. Ltd. Vs.

Commissioner of Income Tax, .

For the subsequent years 1962-63 to 1968-69, the same question arose. Having failed before ITO, the assessee appealed to the AAC but

without success. Thereafter, the assessee took the matter to the Tribunal and the Tribunal followed its view taken in the earlier asst. yr. 1961-62.

Ultimately, the assess obtained a reference to this could on the following questions :

Whether, on the facts and in the circumstances of the case and the terms of the agreement, the treatment of 50% of the licence fee paid by the

assessee as capital expenditure is right in law ?.

The judgment of this court rendered in the assessee''s own case for the asst. yr. 1961-62 is said to be the subject matter of appeal before the

Supreme Court, necessary leave having been granted by this court. Having regard to the fact that the same question in the assessee''s own case for

the prior year has been answered against the assessee in Transformer and Switchgear Ltd. Vs. Commissioner of Income Tax, following the said

decision, we answer the common question in all these cases in the affirmative and against the assessee.

The ld. counsel for the assessee makes an oral application for leave to appeal to the Supreme Court against the judgment now pronounced,

since leave has been granted by this court against the judgment in Transformer and Switchgear Ltd. Vs. Commissioner of Income Tax, which has

been followed in these cases. Having regard to the fact that leave has already been granted against the judgment rendered in Transformer and

Switchgear Ltd. Vs. Commissioner of Income Tax, following the same, leave to file appeal to the Supreme Court is also granted in these cases on

the basis of the oral application made by the assess''s counsel. There will be no order as to costs.