Case: Jonas Woodhead &amp; Sons Ltd., Madras Vs. Commissioner of Income Tax., Madras

These two appeals by special leave at the instance of the assessee are directed against the order of the Madras High Court answering the question posed in favour of the revenue and against the assessee. The Income-tax Appellate Tribunal, Madras Bench, referred the following question to the Madras High Court for its opinion:"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 25% of the amount paid by the assessee as royalty to Messrs Jonas Woodhead &Sons., was capital expenditure and therefore not allowable as revenue expenditure under the provisions of the Income- tax under the provisions of the Income-tax Act, 1967, for the assessment years 1967-68 and 1968- 69?"The aforesaid question of law a rose out of order of the Appellate Tribunal arising out of assessment proceedings for the assessment years 1967-68 and 1968-69. The assessee, a limited company incorporated in March 1963 to carry on the business of manufacture of automobiles springs entered into an agreement with M/s. Jonas Woodhead and Sons Ltd., (hereinafter referred to as "foreign company") of United Kingdom for manufacture of all types of springs and suspension for road and rail vehicles. Under the terms and conditions of the agreement between the parties it was stipulated that the foreign firm will give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical know-how relating to the setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other data and information necessary to manufacture the products and to set up proper and efficient plants. The said agreement between the parties also provide that in consideration of the information to be furnished and services to be rendered to the assessee by the foreign firm the assessee shall pay a royalty at the rates of the licensed products, turnover of the assessee to be calculated in accordance with the provisions of the agreement. The production of the assessee commenced on 1.1.1966 and in terms of the agreement the assessee made payments of Rs. 24, /000/- and Rs. 47, 000/- respectively to the foreign firm for assessment years 1967-68 and 1968-69 as royalty. In the assessment proceedings the Income-tax Officer disallowed 1/4th of the aforesaid payments on the ground that such payment represented the consideration for service provided by the foreign company of an enduring nature and is, therefore, a capital receipt. The assessee preferred appeals before the Appellate Assistant Commissioner and being unsuccessful therein preferred second appeal to the Income- tax Appellate Tribunal. The Tribunal having dismissed the second appeal an application was filled by the assessee under Section 256(1) of the Income-tax Act for referring the question of law as already indicated to the High Court of Madras for being answered. The High Court by the impugned judgment answered the question in favour of the revenue and against the assessee. The assessee thereafter moved this Court and on leave being granted , these appeals have been registered. In answering the question posed in favour of the revenue the High Court considered the different clauses of the agreement between the parties and is of the opinion that the assessee acquired a benefit of enduring nature which will constitute "acquisition of an asset and amount paid for the same would constitute capital expenditure". The High Court also came to the conclusion that the payment stipulated under clause 12 of the agreement by the assessee to the foreign firm was not the remuneration for using of the rights granted by the foreign firm but a composite payment for all the services rendered and information furnished by the said foreign firm to the assessee in the setting up of the factory as well as in the manufacture of the licensed products in that factory. The judgment of the High Court has since been reported in 117 1979 ITR 55.

Reasoning: It would thus appear that the courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign-firm, exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payments made by the company to the foreign-firm whether a definite one or dependant upon certain contingencies, right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign-firm, payment whether made "once for all" or in different instalments co- relatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the court comes to the conclusion that it does so then it has to be held to be a capital expenditure. As has been held by this Court and already indicated in Alembic Chemical Works case [177 1989 ITR 377) no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined. But in the case in hand the Tribunal having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is a revenue expenditure merely because the payment is required to be made on a certain percentage of the rates of the gross turnover of the products of the income as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the revenue and against the assessee.