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PETITIONER: COMMISSIONER OF INCOME-TAX,U.P., LUCKNOW.

       Vs.

RESPONDENT: BRITISH INDIA CORPN. LTD., KANPUR.

DATE OF JUDGMENT03/02/1987

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) NATRAJAN, S. (J)

CITATION:  1987 AIR  798            1987 SCR  (2) 133  1987 SCC  (2)  96        JT 1987 (1)   328  1987 SCALE  (1)221

ACT:     Income   Tax Act,  1922--s.10(2)(XV)--Assessee  Company- Entering into agreement with another company appointing  its nominee  as distributors of assessee’s products--In lieu  of benefit of technical knowledge assessee paid to the distrib- utors  for  meeting initial expenses  of  establishment   of distributorship--Assessee     claiming     deduction-Payment whether capital expenditure or revenue expenditure.

HEADNOTE:     The assessee-company entered into an agreement with M/s. Charles Walker and Company, London which, inter alia, stipu- lated  that the latter would permit the use by the  assessee of  a  number  of registered trade marks  specified  in  the agreement  and  disclose  to the approved  officers  of  the assessee the technique, practices and application of specia- lised  tanning processes. Paragraph 7 of the agreement  pro- vided  that the assessee would appoint Textile  and  General Supplies, nominee of the Charles Walker, as its distributors for  the  sale of industrial leather manufactured by  it  in India and the assessee would pay Rs.50,000 to the  distribu- tors  for meeting the initial expenses of  establishing  the distributorship.  This  agreement was to be in force  for  a period of seven years. Simultaneously, another agreement was entered  into between the assessee and Textile  and  General Supplies  for a period of seven years, but no reference  was made  therein  to  the obligation of  the  assessee  to  pay Rs.50,000 to the distributors.     For the assessment year 1959-60 the assessee claimed the payment  of Rs.50,000 to Textile and General Supplies  as  a deduction  permissible under s. 10(2)(XV) of the Income  Tax Act,  1922,  which was rejected by the Income  Tax  Officer, Appellate  Assistant  Commissioner and the Tribunal  on  the ground that the said payment was in the nature of a  capital expenditure.     In  the Reference, the High Court allowed the  claim  of the  assessee  holding that the payment in  question  was  a revenue expenditure. Dismissing the Appeal of the Revenue, 134     HELD:  1. The real question is whether the payment  that

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had been made by the assessee under the contract in question is a mere division of profits with another party or is it  a payment  to the other party, the amount of which  is  ascer- tained by reference to the profits. [138A-B]     2.  No test of Universal application can be  laid  down. The aim and object of the expenditure was one of the guiding factors. The aim and object of incurring the expenditure  in this case was the acquisition of the know-how. Rs.50,000 was really part of the price paid by the assessee to obtain  the know-how. Pursuant to Paragraph 7 of the said agreement  the assessee was bound to appoint Textile and General  Supplies, nominee  of Charles Walker, as its distributor for the  sale of  leather manufactured by it in India. Paragraph 7 was  an integral part of the agreement with Charles Walker and was a part of the consideration for the receipt of the benefit. It was necessary condition of the agreement with Charles Walker to  appoint Textile and General Supplies as distributors  of the  assessee. It was perhaps done to protect the  technical know-how  which Charles Walker was parting so that the  dis- tributors  would be a nominee of Charles Walker.  [138D;  H; 139C-D]     3.  Having  regard to the nature of  the  agreement  and having  regard to the facts that the organisational  set  up under the distributorship agreement was to endure for  seven years and upon the expiry of the period, the assessee had no relationship  with the organisation and that the  period  of agreement  between  the assessee and  the  distributors  was contemporaneous with the agreement between the assessee  and Charles  Walker under which the assessee became entitled  to use the registered trade marks, it must be considered to  be a revenue expenditure, because it,was part of the price  for the  acquisition of technical know-how and the condition  of appointment  was a stipulation mentioned by Charles  Walker. [139D-F]     British  Sugar Manufacturers, Ltd. v. Harris  (Inspector of  Taxes),  7 I.T.R. 101; Countess Warwick  Steampship  Co. Ltd.  v. Ogg, [1924] 2 K.B. 292 at 298; Assam Bengal  Cement Co.  Ltd.  v. Commissioner of Income-Tax,  West  Bengal,  27 I.T.R. 34; Commissioner of Income-Tax, Bombay City Iv.  Ciba of  India Ltd., (and vice versa), 69 I.T.R. 692;  Travancore Sugar  and  Chemicals  Ltd. v.  Commissioner  of  IncomeTax, Kerala,  62  I.T.R. 566; Commissioner  of  Income-Tax,  West Bengal  H v. Coal Shipments P. Ltd., 82 I.T.R.  902;  Empire Jute  Co. Ltd. v. Commissioner of Income-Tax, 124 I.T.R.  1; L.H.  Sugar Factory and Oil Mills (P) Ltd., v.  Commissioner of  Income-Tax, U.P., 125 I.T.R. 293 and Commentry of  Kanga and Palkhivala’s Income Tax, Seventh Edition, Volume 1  page 484 to 488, referred to. 135

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1163 (NT) of 1974.     From  the  Judgment and Order dated 25.11. 1971  of  the Allahabad High Court in Income Tax Reference No. 310 of 1968     S.C.  Manchanda, M.N. Tandon and Miss A. Subhashini  for the Appellant. B.P. Singh and Ranjit Kumar for the Respondent. The Judgment of the Court was delivered by     SABYASACHI  MUKHARJI,  J.  This is an  appeal  from  the judgment and order of the High Court of Allahabad dated 25th November, 1971.     The  Income-Tax Appellate Tribunal had referred  to  the

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High Court the following question for its opinion: "Whether, on the facts and in the circumstances of the case, the expenditure of Rs.50,000 was a capital expenditure which could not be allowed as a deduction under section  10(2)(xv) of the Income-tax Act, 1922?"     The assessee carried on the business of manufacture  and sale of woolen goods, cotton textiles and hides and  leather products.  The activity of tanning hides  and  manufacturing leather products was carried on under the name and style  of Cooper  Allen and North West Tannery branches. For  the  as- sessment  year 1959-60, under the Income-tax Act, the  rele- vant  accounting of which being the calender year ending  on 31st December, 1958, the assessee had claimed a deduction of Rs.50,000 paid to Messrs Textile & General Supplies  Private Ltd.  Bombay (hereinafter referred to as "Textile &  General Supplies"). The assessee’s claim was made on the basis  that the  assessee  was  bound under  an  agreement  with  Messrs Charles  Walker & Co., London to pay that amount to  Textile General  Supplies  for meeting the initial  expenditure  for establishing  it as distributor of the assessee’s  products. The Income-tax Officer rejected the claim, and the Appellate Assistant  Commissioner upheld that decision.  The  assessee went up in appeal before the Income-tax Appellate  Tribunal. The Tribunal also rejected the claim of the assessee. At the instance of the 136 assessee,  the  Tribunal made a reference on  the  aforesaid question to the High Court.     The  question  is whether the assessee was  entitled  to claim deduction in the computation of its profits and  gains of  business in respect of the expenditure in question,  not being  in  the nature of capital expenditure,  laid  out  or expended  wholly  or  exclusively for the  purpose  of  such business. In other words, on the background of the facts  in controversy in this case whether it was revenue  expenditure or capital expenditure.     This  question has been discussed in the  various  deci- sions.  It is settled that the question must be viewed  from the  practical point of view. There are deluge of cases  and no principle can be laid out with substantial accuracy which will  be  applicable  in all the cases. The  answer  to  the question must depend on the facts and circumstances of  each case  on  the application of the principles of law  as  laid down  by the courts. The agreement in question in this  case between  the  assessee with Charles Walker  stipulated  that Charles  Walker  would permit the use by the assessee  of  a number of registered trade marks specified in the  agreement and further disclose and make known to the approved officers of the assessee the technique, practices and application  of specialised  tanning  processes. Besides providing  for  the provision  of  technical supervision by Charles  Walker  and payment  by way of salary, travelling expenses  and  mainte- nance  to the personnel sent out by it to India, the  agree- ment  also provided that in the event of  liberalisation  of imports  Charles Walker would limit its export to  India  of certain  products. The assessee undertook to pay to  Charles Walker technical fees calculated at 5% on the selling  price of the products by the processes disclose to it. Paragraph 7 of the agreement was to the following offect:               "The Second participant (the assessee)  agrees               to  appoint Textile and General Supplies  Pri-               vate  Ltd., Army and Navy  Buildings,  Mahatma               Gandhi Road, Bombay-1, India a nominee of  the               first participant (CharLes Walker) as distrib-               utors  of the second participant for the  sate

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             of  industrial  leather  manufactured  by  the               second participant in India for the period  of               this  agreement at a discount of 15%  (fifteen               per  cent) on the prices at  which  Industrial               Leather covered by this agreement are sold  to               textile mills and other consumers. In addition               the second participant will pay Rs.50,000 (Rs.               Fifty thousand only) to the distributors for               137               meeting  the initial expenses of  establishing               the  distributoship of the second  participant               on  the express understanding that  the  first               participant will not part with his interest in               Textile & General Supplies Private Ltd.  with-               out  the  prior  approval in  writing  of  the               second participant." Seven years was the period of the agreement as agreed.     It  is clear from paragraph 7 as aforesaid read  in  the background of the entire facts that the assessee was obliged to  appoint Textile & General Supplies, nominee  of  Charles Walker,  as  its  distributors for the  sale  of  industrial leather  manufactured  by  it in  India.  The  assessee  was obliged  by the aforesaid agreement to pay Rs.50,000 to  the distributorship.     An  agreement  was  entered into by  the  assessee  with Textile  & General Supplies in which after referring to  the agreement  with  Charles Walkar it was stipulated  that  the distributors  would  receive a discount of 15% of  the  sale price  fixed  by the assessee and that the  agreement  would extend  for  the period of seven  years.  Significantly,  no reference was made to the obligation of the assessee to  pay Rs.50,000  to the distributors, a condition which  was  men- tioned  in  the  agreement with Charles  Walker  alone.  The obligation  to pay Rs.50,000 to the distributors was one  of the conditions subject to which the assessee became entitled to the use of the registered trade marks and to the  disclo- sure  of  the  technical practices and  application  of  the specialised processes to be supplied by Charles Walker. This clause regarding appointment contained in paragraph 7 formed part and integral part of the agreement and was a considera- tion  for  the receipt of the benefit  from  Charles  Walker under the agreement.     It was a condition to get the technical knowledge of the know-how that their nominee should be appointed as distribu- tor  and  for the setting up of the  distributor’s  business rupees  fifty thousand was required to be paid. This was  in essence an integral part of the bargain for the  acquisition of the technical knowledge to have this particular distribu- tor.     Numerous  decisions  have dealt with this  question.  In British  Sugar Manufacturers, Ltd. v. Harris  (Inspector  of Taxes),  7 I.T.R. 101 the Court of Appeal in  England  dealt with this question and Romer, L.J. at page 108 of the report observed  in dealing with the question which was similar  to the present one that the real question is, is the 138 payment that has to be made by the trader under the contract in question a mere division of profits with another party or it  is a payment to the other party, the amount of which  is ascertained  by reference to the profits? The  Lord  Justice observed that it was a difficult question. In that case  the Lord  Justice  held that the payment was made  to  earn  the profit. It was condition precedent to the acquisition of the know how that the payment had to be made for installation of the  set up of the distribution arrangement. Rowlatt, J.  in

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the  case  of Countess Warwick Steampship Co. Ltd.  v.  Ogg, [1924] 2 K.B. 292 at 298 observed that it is very  difficult to  lay  down any general rule which  is  both  sufficiently accurate and sufficiently exhaustive to cover all or even  a great  number of possible cases. Only broad tests  could  be laid  down. Some of such tests were laid down by this  Court in  Assam Bengal Cement Co. Ltd. v. Commissioner of  Income- Tax,  West  Bengal, 27 I.T.R. 34. This Court  discussed  the broad principles at page 45 of the report. It is not  neces- sary to reiterate all these principles but one of the  tests was  that the aim and object of the expenditure was  one  of the  guiding  factors. The aim and object of  incurring  the expenditure  in this case was the acquisition of  the  know- how.     This Court again in the case of Commissioner of  Income- Tax, Bombay City Iv. Ciba of India Ltd. (and vice versa), 69 I.T.R. 692 discussed the principles application in determin- ing  whether  the expenditure in such  circumstances  was  a capital  or a revenue in nature. See also  Travancore  Sugar and Chemicals Ltd. v. Commissioner of Income-Tax, Kerala, 62 I.T.R.  566;  Commissioner of Income-Tax, West Bengal  H  v. Coal Shipments P. Ltd., 82 I.T.R. 902; Empire Jute Co.  Ltd. v.  Commissioner  of Income-Tax, 124 I.T.R.  1.  This  Court observed  what was material to consider was the  nature  and the advantage in obtaining the asset in a commercial  sense. Also  see L.H. Sugar Factory and Oil Mills (P) Ltd. v.  Com- missioner of Income-Tax, U.P., 125 I.T.R. 293.     These principles have been summarised in the  Commentary of  Kanga  and  Palkhivala’s Income  Tax,  Seventh  Edition, Volume  1 page 484 to 488. But the cases referred  emphasise that no test of universal application can be laid down.     The  question  posed in this appeal has  to  be  decided bearing  the aforesaid principles in mind. It is clear  that Rs.50,000 was really part of the price paid by the  assessee to  obtain the know-how. It is clear that pursuant to  para- graph  7,  the  assessee was bound to  appoint  Textile  and General Supplies, nominee of Charles Walker, as its distrib- utor for the 139 sale  of leather manufactured by it in India.  Contemporane- ously,  an agreement was entered into by the  assessee  with Textile  & General Supplies in which after referring to  the agreement  with  Charles Walker it was stipulated  that  the distributors  would  receive a discount of 15% of  the  sale price  fixed  by the assessee and that the  agreement  would extend for a period of seven years. Significantly, no refer- ence  was  made  to the obligation of the  assessee  to  pay Rs.50,000 to the distributors, a condition which was in  the agreement with Charles Walker alone.     It  is clear that paragraph 7 referred  to  hereinbefore was  an integral part of the agreement with  Charles  Walker and  was a part of the consideration for the receipt of  the benefit.  It is ,not possible to find out the reasons  which persuaded  Charles Walker to insist upon the appointment  of Textile & General Supplies as distributors of the  assessee. It  was a necessary condition of the agreement with  Charles Walker.  It was perhaps done to protect the technical  know- how  which Charles Walker was parting so that the  distribu- tors would be a nominee of Charles Walker.     Having regard to the nature of the agreement and  having regard  to the facts that the organisation set up under  the distributorship agreement was to endure for seven years  and upon the expiry of the period, the assessee had no relation- ship with the organisation and that the period of  agreement between  the assessee and distributors  was  contemporaneous

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with  the agreement between the assessee and Charles  Walker under  which the assessee became entitled to use the  regis- tered  trade  marks, it must be considered to be  a  revenue expenditure.  Considerable  emphasis has been  laid  by  the revenue  on the facts that in paragraph 7 of  the  agreement with Charles Walker, it was mentioned that Rs. 50,000  would be  paid  to the distributors for meeting  the  initial  ex- penses. We are of the opinion that in the facts and  circum- stances of the case, this was a revenue expenditure  because it  was part of the price for the acquisition  of  technical know-how and the condition of the appointment was a stipula- tion mentioned by Charles Walker. In the premises we are  of the  opinion  that the High Court was right in the  view  it took. The appeal therefore fails and is accordingly dismissed with costs. A.P.J.                                         Appeal   dis- missed. 140