ISMAIL J.

All these references relate to the same assessee and deal with the same question but concern different assessment years T.C.No. 59/72 covers assessment years 1962-63 to 1967-68, T.C. No. 33/74 covers assessment year 1968-69 and T.C. No. 234/74 covers assessment year 1969-70.

The assessee entered into an agreement on October 12, 1959, with M/s. Societa Italiana Pompe Aturia of Italy (hereinafter referred to as "Aturia") for manufacture of submersible pumps, centrifugal pumps, etc. The relevant clauses of the agreement were as follows :

Clause (i) stated that Aturia shall grant a licence to the assessee to manufacture and sell electric submersible pumps up to 12HP; clause (ii) dealt with supply to the assessee with a copy of patents deposited in India and in force in various countries such as United States, Germany and England; clause (iii) provided that the assessee will have exclusive rights to manufacture and sell the above pumps within India and imposed an obligation on the assessee not to assign their rights and duties under the licence or to grant any sub-licence to third parties for the manufacture of the aforesaid pumps without the permission of Aturia; clause (iv) reserved the right of the assessee to export and sell such materials to any neighbouring countries such as Pakistan, Ceylon, Burma and Malaya, but imposed an obligation on Aturia not to export or sell the said pumps inside India directly or through third parties without the written approval from the licensee; clause (v) dealt with the nature of the technical documents to be provided by Aturia to the assessee. This clause also provided that the assessee shall pay a reasonable price for special studies and documents for special purposes to be preliminarily agreed upon each time and this clause imposed an obligation on the assessee not to disclose to third parties any of the above mentioned documents without having received a written authorisation from Aturia; clause (vi) provided for Aturia placing at the disposal of the assessee during the continuance of this agreement and at the desire of the assessee any specialised technician; clause (vii) provided Aturia making available to the licensee any improvement, modification or addition to designs covered by the licence during the period of the agreement; clause (viii) dealt with payment to be made by the assessee to Aturia in terms of this agreement and stated

"IAEC shall pay ATURIA for the know-how under clause (v) and the use their names, patents, etc., and for the manufacture of units commercially saleable and generally fulfil all the conditions of agreement, a sum of rs. 2, 40, 000 equal to Lires 31, 200.000. The above amount shall be paid to ATURIA year by year in advance starting from the 3rd year of the validity of the contract by instalments of Rs. 30, 000 equal to Lires 3, 900, 000 per year" *

. Clause (ix) provided that Aturia will do the needful to keep the patents in force or to deposit new partents and will take upon themselves all expenses for the same. Under this clause Aturia undertook not to surrdnder their patents without the consent of the assessee. This clause further provided that for the period of validity of this contract in case additional patents with improvements concerning the pumps considered in this contract were to be deposited Aturia shall extend the benefit to the assessee free of charge. It also provided for the action to be taken by the assessee against any counterfeits and under this clause Aturia undertook to place at the disposal and to render all assistance for prosecuting counterfeiters and the further provision in the clause is

"all law suits, expenses shall be divided half and half and indemnification cost, if any, shall be divided half and half."Clause (x) provided :" This agreement will be for a period of ten years from the date of signing and shall be renewed on terms and conditions to be mutually agreed upon. Any extension of the period of the agreement beyond the initial period of ten years shall be with the prior approval of the Government of India." *

For the assessment years in question the assessee paid Rs. 30, 000 per annum to Aturia in terms of clause (viii) of the agreement. The Income-tax Officer allowed only 15% of the said payments as revenue expenditure and disallowed the balance of 85% as capital expenditure. When the assessee preferred appeals to the Appellate Assistant Commissioner, that officer held that 50% of the annual payment of Rs. 30, 000 should be treated as revenue expenditure for the services rendered by the foreign collaborators such as grant of licence for the manufacture of submersible pumps, use of patent and trade marks and training of Indian engineers, etc. and the other 50% should be treated only as capital expenditure. Against this order of the Appellate Assistant Commissioner, the assessee as well as the revenue preferred appeals to the Tribunal. The assessee put forward the contention that the entire payment was allowable as revenue expenditure and the department put forward the contention that 85% of the payment constituted capital expenditure. The Tribunal held that the entire payments constituted revenue expenditure and, therefore, allowed the appeals preferred by the assessee and dismissed the appeals preferred by the department. It is the correctness of this conclusion that is challenged by the Commissioner of Income-tax, by applying for and obtaining a reference of the following questions for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that 85% of the amount paid towards the technical know-how fees, disallowed by the Income-tax Officer as capital expenditure was allowable as revenue expenditure (T.C No. 58/72) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that 85% of the amount paid towards the technical know-how fees, disallowed by the Income-tax Officer as capital expenditure was allowable as revenue expenditure (T.C. No. 333/74)

Whether, on the facts and in the circumstances of the case, the Appellate Assistant Commissioner was right in holding that the entire annual payment made by the assessee to M/s societa Italiana Pompe Aturia of Italy under the collaboration agreement dated October 12, 1959, should be allowed as a deduction (T.C. No.234/1974) " *

Though the three questions are couched in slightly different language all the three questions admittedly raise the same point for consideration.

Before the Tribunal the case of the assessee was that on the principles laid down by the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. 1968 69 ITR (SC) the entire payments made by the assessee during each of the years to Aturia was a revenue expenditure and, therefore, allowable. As against this, the case of the department was that, on the basis of the principles laid down by the Mysore High Court in Mysore Kirloskar Ltd. v. Commissioner of Income-tax the entire amount could not be allowed as a revenue expenditure and 85% as held by the Income-tax Officer, constituted capital expenditure. In Cibias case the Supreme Court held, on a consideration of the terms of the agreement with which they were dealing in that case, that the assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss Company for a limited period by making that technical knowledge available and the Swiss company did not part with any asset of its business not did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business. As against this, in Kirloskars case the Mysore High Court held on a consideration of the terms of the agreement with which they were dealing that the know-how acquired by the assessee was to become its property at the end of the period of agreement and it is not some knowledge acquired merely for the purpose of carrying on the day business of the assessee and that knowledge was acquired for manufacturing new types of machines, i.e., to bring into existence new business and that knowledge would be available to the assessee for all time to come in the future if the assessee carries out the terms of the agreement.It is not disputed before us that ultimately the question has to be decided on the basis of the terms of the particular agreement and the only general principle that can be derived from the decisions referred to above is that under the terms of the agreement if the assessee acquired a benefit of enduring nature that will constitute "acquisition of an asset" and any amount paid for the same would constitute "capital expenditure" and on the other hand if the assessee had acquired merely technical knowledge or knowledge for the manufacture of any particular item for a specified duration then he had acquired only a licence to use the other partys patent and knowledge and the amount would constitute "revenue expenditure". It is against the background of this general position we have now to consider the consequence of the different clauses in the agreement to which we have already drawn attention.

Having regard to the said clauses, we are clearly of the opinion that the Tribunal was right in its conclusion that the whole of the amount paid by the assessee constitutes revenue expenditure and has to be allowed as a deduction. From the terms of the agreement referred to above, the following facts are clear : (1) The agreement itself provides that what was granted by Aturia to the assessee is merely a licence to use its patents and designs exclusively in India; (2) The agreement is for a duration of 10 years with the parties having the option to extend the agreement or renew the same subject to the approval of the Government of India; (3) During the currency of the agreement, Aturia had undertaken not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs; (4) Aturia has also undertaken to enable the assessee to defend any counterfeit by others and also had undertaken to share the expenses with reference thereto; and (5) The assessee shall not disclose to third parties any of the documents made available by Aturia to the assessee without having received a written authorisation from Aturia. We are of the opinion that the above features clearly establish that what was obtained by the assessee is only licence and what was paid by the assessee to Aturia is only a licence fee and not the price for acquisition of any capital asset.The learned counsel for the revenue repeatedly contended before us that there was no provision in the agreement prohibiting the assessee from making use of the know-how after determination of the agreement, namely, the period of 10 years. We are of the opinion that this argument is misconceived. It at the determination of the agreement the assessee had an absolute right to make use of the know-how acquired during the period of the agreement the provision in clause (x), which we have extracted already, will be meaningless. The very provision in clause (x) for the parties renewing the agreement shows that the assessee does not acquire an absolute title or right to use the know-how in question. Therefore, notwithstanding the absence of any specific provision in the agreement that at the end of 10 years the assessee should not utilise the know-how already acquired by it, the provision of clause (x) makes it absolutely clear that the assessee could not use the said know-how after the agreement came to an end. In this respect the present case is directly in contrast to Kirloskars case where the Mysore High Court held that the knowledge was available to the assessee for all time to come in the future if the assessee carries out the terms of the agreement. It is again significant that clause (viii) of the agreement in the present case dealing with the payment of the amount in question expressly provides for the said payment for the know-how and use of the names and patents, etc. of Aturia and for the manufacture of units commercially saleable and for general fulfilment of other conditions of the agreement. The provisions also is fully in accordance with the nature of the right granted in the agreement, being only a licence as expressly stated in clause (i) of the agreement itself.Having regard to all these features of the agreement which are distinguishable from the case dealt with by the Mysore High Court in Kirloskars case we are of the opinion that the Tribunal was right in coming to the conclusion that the entire payments constituted revenue expenditure by applying the principles laid down by the Supreme Court in Cibas case Hence, we answer the questions referred to this court in all these three references in the affirmative and in favoaur of the assessee. The assessee will be entitled to its costs. Counsels fee Rs. 500 (Rupees five hundred only) one set.