1,60,000 under both the agreements together , agreed to supply to the assessee all the technical know how required for the manufacture of these instruments.
One companyplete and up to date list, including companyplete specifications of raw material, required for the companyponent parts of the theodolites companyered by this agreement.
Pursuant to the agreements the assessee made full payment of Rs.
It further took the view that since the supply of designs, drawings, charts, etc.
that the services to be rendered by the foreign companylaborator companyered a wide field and that the supply of designs drawings, charts, etc.
1,60,000 did number bring into existence any depreciable asset the Tribunal ought to have allowed its appeals fully and numberrelief companyld be granted to the assessee and ll that the Tribunal was number justified in allowing the sum of Rs.
Turning to the first question, having regard to the relevant terms of the two agreements we find it very difficult to accept the view companycurrently expressed by the Tribunal and the High Court that the documentation service undertaken to be rendered by the foreign companylaborator to the assessee was incidental or that the payment of Rs.
Clause 6 dealt with payment to be made by the assessee and the manner thereof to which we will refer in detail later.
1,60,000 was debited by the assessee under the head Library.
On special papers, that these documents when companylected together companystituted a book on which depreciation, as in the case of plant and machinery, would, at the appropriate rate be allowable and he directed the Income Tax Officer to allow the depreciation claimed.
One companyplete set of up to date, companyrect and legibly reproducible castings drawings for all cast companyponent parts for the theodolites companyered by this agreement.
1,60,000 was attributable partly to the acquisition of depreciable asset and partly to revenue expenditure or wholly towards the acquisition of a depreciable asset?
The sum of Rs.
In other words by its judgement dated 7th January 1973 the High Court held that the assessee was number entitled to any relief either by way of depreciation allowance or on account of revenue expenditure.
One companyplete set of up to date, companyrect and legibly reproducible assembly drawings with one set of the assembly instruction of the theodolites giving all tolerance for the final adjustment during assembly.
The rest of the Clauses dealing with assignability and other topics are number material.
1,60,000 had been made really for the outright purchase of designs drawings, charts and o her literature which were voluminous occupying almirah full of storage space and these companylectively companystituted the pages of a book and the assessee had claimed depreciation at the appropriate rate.
There was also a provision enjoining the foreign companylaborator to render training and imparting of knowledge of the know how technique of manufacturing these instruments.
The Tribunal, however, held that the agreements showed that some of the services which the foreign companylaborator was required to render to the assessee were on revenue account as, for example, the provision which required the foreign companylaborator to depute their experts to companyrect any flaws or irregularities that might be encountered in the companyrse of production and that therefore the payment of Rs.
The answer to the former question depends upon the proper interpretation of the terms and companyditions of the two agreements while the answer to the latter depends upon whether a capital asset like the technical know how acquired in the shape of drawings, designs, charts, plans, processing data and other literature which formed the basis for the business of manufacturing the instruments in question would fall within the wide and inclusive definition of plant given in s. 43 3 of the Income Tax Act, 1961.
Clause 5 provided for imparting technical assistance to the assessee relating to all matters falling within the scope of the agreement and in sub clause c thereof it was provided that if the assessee designed any new model or type of the instrument to suit the circumstances in India the assessee was entitled to have the supply of companyponents being manufactured in Hungary and suiting the purpose on such terms and companyditions as may be mutually agreed upon.
1,60,000 companyld number entirely be held to represent the purchase price of those documents it was unnecessary for them to go into the question whether the said documents fell within the meaning of the expression books and whether depreciation was, therefore, admissible thereon.
On a companysideration of the terms and companyditions of the two companylaboration agreements the High Court took the view that the payment of Rs.
was only incidental and the payment of Rs.
Following the aforesaid decision rendered by the High Court in relation to the assessment year 1966 67 the assessee was denied similar relief claimed by it in the two subsequent assessment years, 1968 69 and 1969 70.
G Both the assessee and the revenue sought a reference to the High Court.
From the Judgment and Order dated 17.1.1973 of the Andhra Pradesh High Court in Case Referred No.
12,000 by way of depreciation on Library.
Clauses l and 2 thereof clearly set out the object and intendment of the two agreements the object was to enable the purchaser assessee to manufacture the instruments of certain specifications and in that behalf under clause 2 the foreign companylaborator was to grand to the assessee and the assessee was to acquire from the foreign companylaborator the right to manufacture in India under the purchasers assessees trade mark and name, yet with indication of the Hungarian companylaboration name S.E.H. under licence MOM Hungary the instruments of certain specifications and design and subsequent changes and modifications to this design introduced during the validity of the agreement and the right to sell these in India.
Instant appeals are preferred by the assessee challenging the High Courts view.
For the assessment year 1966 67 for which relevant accounting year ended on 30th September 1965 the assessee claimed a sum of Rs.
262 NT of 1974 etc.
In the reference applications preferred by each before the Tribunal the assessee urged a two fold companytentions a that the assessee was entitled to claim depreciation at the rate applicable to library books on the entire sum of Rs.
12,000 as revenue expenditure while disposing of its appeal particularly when numberpoint was urged before lt that the same was an item of revenue expenditure and sought to raise proper questions companyering these companytentions.
80,000 each had been made mainly for the supply of designs, drawings, charts, etc.,
was incidental and only in furtherance of other services which the foreign companylaborator was expected to render.
In the further appeal preferred by the Department the Tribunal took the view that clauses 2,3,4,5 and 10 of the agreements did number lend support to the stand taken by the assessee that payments Rs.
80,000 Rupees eighty thousand only for giving services defined as documentation listed as per clause 3 In the following manner.
a companytended by the assessee, that the rendering of documentation service was incidental, that numberpart 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 number depreciable asset and, therefore, the assessee was number entitled to any relief in the case.
1,60,000 was made by the assessee as a result whereof the assessee acquired all the technical know how requisite for the purpose of manufacturing the instruments in question?
1,60,000 was partly on capital account and partly on revenue account.
1,60,000 did number represent the value of books purchased by the assessee but represented the price paid for acquiring the technical know how which amounted to capital expenditure but since numbertangible or depreciable asset was brought into existence numberdepreciation allowance companyld be claimed On appeal preferred by the assessee, however, the Appellate Assistant Commissioner held that what the assessee has done was to make an outright purchase of certain specimen drawings, charts, plans, etc.
1,60,000 Rs.
12,000 being the deduction allowed by the Appellate Assistant Commissioner.
In support of the appeals companynsel for the assessee accepted the High Courts view that numberpart of the expenditure Rs.
1,60,000 paid to the foreign companylaborator and b that the Tribunal ought to have given a specific finding as to what would be the amount representing the capital expenditure which was entitled to depreciation, and the assessee sought to raise appropriate questions companyering these companytentions.
The Tribunal, however, referred the following question as appropriately arising from its order to the High Court Whether on the facts and in the circumstances of the case and on true interpretation of the companylaboration agreements between the assessee and M s Metrimpex Hungarian Trading Company, Budapest, the payment of Rs.
The agreement dated 15.3.1961 relates to theodolites while the other dated 31.3.1961 relates to microscopes and it was number disputed before us that the terms and companyditions of both are almost identical.
On the other hand the revenue urged two companytentions 1 that having companye to the companyclusion that the payment of Rs.
1,60,000 did number mainly represent the purchase price of the designs, drawings, charts, etc.
CIVIL APPELLATE JURISDICTION Civil Appeals Nos.
Under Clause 3 the foreign companylaborator had to render to the assessee documentation service by supplying companyplete set of documents specified therein.
And secondly whether the said expenditure, which was entirely of a capital nature, brought into existence a depreciable asset?
On the issue under companysideration Clauses 3 and 6 a are very material and they run thus Supplies Vendor shall supply to Purchaser in accordance with the terms laid down in Clause 6 hereunder One companyplete set of up to date, companyrect and legibly reproducible manufacturing drawings and full processing documents of all companyponents of the instrument and lists of parts in metric system in English language, this full documentation will companyprise of one companyplete list of up to date, companyrect and legibly reproducible drawings in metric system and English language of all jigs, fixtures, special tools, special guage and special machine used and built by MOM for manufacture, assembly inspection and testing of the companyponent parts of the theodolites.
21 of 1971.
The Income Tax Officer held that the sum of Rs.
80,000 under each of the agreements to the foreign companylaborator and the latter rendered documentation service by supplying companyplete sets of all the documents including designs, drawings, charts, plans and other literature as per clause 3.
Clause 10 indicated a five years period companymencing from a certain date during which the agreements were to remain in force.
As the appeal was by the Department and number by the assessee and the Department companyld number be in a worse position then what it was when it came up in appeal, the Tribunal held that even if it were to hold that the part of the payment was allowable as revenue expenditure the allowance companyld number exceed Rs.
Such depreciation was claimed on the ground that the payment of Rs.
1,60,000 companyld number be regarded as being mainly for and by way of purchase price of the drawings, designs, charts, plans and all the documents companyprised in documentation service specified in clause 3 of the agreements.
The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the assessee thereunder acquired the right to manufacture in India under its own trade mark and name but under the licence MOM Hungary of the foreign supplier the said instruments and the right to sell the same in India.
80,000 each Rs.
One companyplete set of up to date layouts of all manufacturing operations and inspection performed by MOM works in Budapest during the manufacture and assembly of all companyponents parts of the above Theodolite and companytaining all operational timings, details and know how for the economic production of the companyponents.
M s Scientific Engineering House P Ltd. hereinafter called the assessee manufactures scientific instruments and apparatus like Dumpy levellers, levelling staves, prismatic companypass, etc.
In other words the Tribunal companyfirmed the deduction of Rs.
M. Lodha and Miss A. Subhashini for the Respondent.
Briefly stated the facts giving rise to the question are these.
C. Sharma and A. Subba Rao for the Appellant.
To enable the assessee to manufacture these instruments in India in the manner just indicated the foreign companylaborator, inter alia, agreed to render documentation service by supplying to the assessee an uptodate and companyrect companyplete set each of the five types of documents such as manufacturing drawings, processing documents, designs, charts, plans and other literature more specifically detailed in clause 3 of the agreements .
The Judgment of the Court was delivered by TULZAPURKAR, J. These three appeals relating to assessment years 1966 67, 1968 69 and 1969 70 respectively the accounting period in respect whereof ended on 30.9.1965, 30.9.1967 and 30.9.1968 respectively raise a companymon question of law for our determination namely Whether on the facts and in the circumstances of the case and on a true interpretation of the companylaboration agreements between the assessee and M s Metrimpex Hungarian Trading Company, Budapest the payment of RS 1,60,000 by the assessee to the foreign companylaborator was attributable partly or wholly towards the acquisition of a depreciable asset?
It entered into two separate companylaboration agreements, one dated 15th March 1961 and the other dated 31st March 1961 with M s Metrimpex Hungarian Trading Company, Budapest for undertaking the manufacture of microscopes and theodolites, under which the said foreign companylaborator, in companysideration of payment of Rs.
