Commissioner of Income Tax Vs Kirloskar Pneumatic Co. Ltd.

Kania, Actg. C.J.

1. These six references u/s 256(1) of the Income Tax Act, 1961, arise on a common statement of the case. The questions referred to in the said references are substantially similar. In these circumstances, we propose to dispose of these references by this common judgment.

2. Kirloskar Brothers Limited, which is regarded as the parent company of the assessee-company, carried on business, inter alia, of manufacturing air-compressors since its incorporation in 1928. In 1958, Kirloskar Brothers Limited considered it desirable to carry on the said business by floating a new company, namely, the assessee-company. The assessee-company was, therefore, formed in 1958 with the main object of manufacturing industrial engineering products. It started with the production of air-compressors, including industrial air-compressors. It entered into several collaboration agreements for manufacturing the full range of air-compressors, pneumatic tools and rock drills. Two of these agreements were with Messrs. Grasso Koninklijke Machine fabrication N.V. (hereinafter referred to as "Grasso"). The first of these two agreements was dated January 2, 1962, and was for manufacturing air-compressors. The second was dated April 1, 1965, and was for manufacturing refrigeration compressors and other products. On December 1, 1964, the assessee entered into a collaboration agreement with Twin Disc Clutch Company (referred to hereinafter as "Twin Disc") for manufacturing power transmission units. In 1969, the assessee negotiated a collaboration agreement with the National Research Development Corporation of India. It is not necessary to set out in detail the terms of these agreements although the Tribunal as done so, because the questions referred appear to be covered by certain decisions to which we shall presently refer. It is sufficient to state that all these agreements were for the acquisition of what is commonly known as "technical know-how". The questions posed to us for our determination in these references are as follows :

"(i) Whether, on the facts and in the circumstances of the case, the payments by the assessee-company to Grasso in the respective years were permissible deductions ?

(ii) Whether, on the facts and in the circumstances of the case, the payments by the assessee-company to Twin Disc in the respective years were permissible deduction ?

(iii) Whether, on the facts and in the circumstances of the case, the payment by the assessee-company to the National Research Development Corporation of India was a permissible deduction ?"

3. We may mention at this stage that as far as question No.(i) is concerned, it pertains to the assessment years 1964-65 to 1969-70. As far as question No.(ii) is concerned, it pertains to the assessment years 1965-66 to 1969-70, and as far as question No.(iii) is concerned, it pertains to the assessment year 1966-67.

4. Coming to question No.(i) first, it relates to the payment made by the assessee-company to Grasso under the agreements for acquisition of technical know-how and the dispute is whether these payments are permissible as revenue deductions. In this regard, a Division Bench of this court in Kirloskar Pneumatic Co. Ltd. Vs. Commissioner of Income Tax, Poona, , considered this very question which is before us. That case related to certain payments by the assessee before us to the very same concern and the agreement in question was the very agreement dated January 2, 1962, with which we are also concerned. The other agreement with Grasso dated April 1, 1965, is admittedly in similar terms. After considering the said agreement dated January 2, 1962, the said Division Bench to which one of us was a party, held that the agreement had to be considered generally and broadly and reading it as a whole, it was clear that the intention of the parties was not to enter into a separate contract for the purchase of the drawings; the intention of the assessee was to acquire technical knowledge and know-how from Grasso for a limited period and the drawings were acquired as part of this technical knowledge. This know-how was bound to become obsolete with technological developments and changes in techniques. The assessee, therefore, did not acquire any asset or benefit of an enduring nature and the payments made by it were allowable as revenue expenditure. The Division Bench placed strong reliance on the decision of a Division Bench of this court in Commissioner of Income Tax, Bombay City-I Vs. Tata Engineering and Locomotive Co. Pvt. Ltd., . In that decision, this court has pointed out that technical know-how cannot be called a tangible asset. Technical know-how and technical advice for the time being cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is hot of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. Merely because an assessee, who has entered into a contract with regard to know-how, is entitled to use the know-how even after the agreement has expired, it does not mean that he has acquired a benefit of an enduring nature. An agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction of acquiring the necessary technical information with regard to the technique of production. Instead of employing persons having knowledge of techniques and utilising their knowledge, technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. In view of these decisions, it is clear that the payments made by the assessee to Grasso which are referred in the question must be treated as permissible revenue deductions. It was submitted by Mr. Jetly, however, that these payments must be regarded as of a capital nature and in support of that argument he placed strong reliance on the decision in the case of Fenner Woodroffe and Co. Ltd. Vs. Commissioner of Income Tax, . That is the decision of a Division Bench of the Madras High Court. Unfortunately, that decision does not help Mr. Jetly in the present case because it has been expressly dissented from by the Division Bench of this court which decided the aforesaid case of Commissioner of Income Tax, Bombay City-I Vs. Tata Engineering and Locomotive Co. Pvt. Ltd., . In view of this, question No. (i) must be answered in the affirmative and in favour of the assessee.

5. As far as question No. (ii) is concerned, it has been pointed out by the Tribunal that the clauses of the agreement between the assessee and Grasso were similar to the clauses of the agreement between the assessee and Twin Disc. The payments referred to in question No. (ii) have been made by the assessee to Twin Disc under the agreement and what we have said in connection with question No. (i) is applicable equally to question No. (ii). Hence, question No. (ii) is also answered in the affirmative and in favour of the assessee.

6. As far as question No. (iii) is concerned, it relates to the payments made by the assessee to the National Research Development Corporation of India. The facts found by the Tribunal show that these amounts were paid as per the terms and conditions of the draft agreement between the assessee-company and the said Corporation which had not been executed. However, this does not make any difference as far as the question before us is concerned, because it is common ground that both the parties have acted pursuant to this draft agreement. The said Corporation has supplied know-how under the said draft agreement and the assessee has made payments under the draft agreement. In view of this, it must be regarded as a binding agreement and if not a written one, then oral. In fact, no contention has been raised by Mr. Jetly on the ground that the payments were made under a draft agreement. The facts found by the Tribunal show that the said Central Mechanical Engineering and Research Institute had developed an invention and process for the manufacture of ice-flaking machines which had been assigned to the Corporation. The said Corporation agreed to grant to the assessee the licence to use the said invention and process in consideration of Rs. 20,000. It is not necessary to set out the detailed terms of this agreement and it is the agreed position before us that this agreement is essentially an agreement for the supply of know-how by the said Corporation to the assessee in consideration of payment of Rs. 20,000. Certain drawings were also to be supplied as a part of the said know-how, but it is well settled that these drawings cannot be considered to be a capital asset. The nature of the payment of Rs. 20,000 by the assessee to the said Corporation will have to be determined in accordance with the principles laid down in the aforesaid decision in the case of Commissioner of Income Tax, Bombay City-I Vs. Tata Engineering and Locomotive Co. Pvt. Ltd., and Kirloskar Pneumatic Co. Ltd. Vs. Commissioner of Income Tax, Poona, . In view of these decisions, it must be held that the payments made by the assessee to the said Corporation under the draft agreement were payments of a revenue nature and entitled to be deducted as revenue expenditure. Hence, question No. (iii) is also answered in the affirmative and in favour of the assessee.

7. The Commissioner to pay to the assessee the costs of the references.