ORDER D.K. Jain, J.
1. In these references, at the instance of the Revenue, the Income-tax Appellate Tribunal (in short "the Tribunal") has referred the following common question under Section 256(1) of the Income-tax Act, 1961 (for short the Act) for our opinion:
"Whether on the facts and in the circumstances of the case and on proper construction of the collaboration agreement dated 9th June, 1961, the Tribunal was legally correct in holding that the entire payment of 1,25,000 Dutch Guilders was for the acquisition of patent rights by the assessee company?"
2. Though the references are four in number but they pertain to three assessment years, namely, assessment years 1969-70 to 1971-72, for which the relevant previous years ended on 31st December of each of the previous calendar years. The question referred and the statements of cases drawn by the Tribunal being similar for all the years, this judgment will govern all the references. Although Tribunal's order in respect of assessment years 1969-70 & 1970-71 does not form part of the paper book but from the statement of the case pertaining to the said years we feel that the issue seems to have been discussed in greater detail in Tribunal's order for the assessment year 1969-70, we will refer to the facts of that year, as illustrative.
3. The assessee, a private limited company, was initially engaged in the trading of machinery for printing. It, however, decided to go in for the manufacture of some of them. To achieve this, on 9th June, 1961, it entered into an agreement with a Dutch company by the name M/s. Nederlandse Snelpersenpabrik Mercedes NV (hereinafter referred to as "Mercedes") for the purpose of manufacturing "Mercedes" standard 42 X 57.5 cm. printing machine and after five years the high pile machines. As per this agreement, Mercedes was to supply to the assessee manufacturing drawings, specifications, lay outs, spare part catalogues and photographs etc., besides imparting training to a specified number of assessee's staff and furnishing all technical information, expert advice and assistance concerning the use and manufacture of "Mercedes" machines. Clause 6 of the agreement provided for the consideration payable by the assessee to Mercedes for the said services. The material part of the said Clause reads as under: (Quoted in the statement of the case) "6. In consideration of the grant of these technical aids and rights and services and other assistance in respect of know-how under this agreement to the satisfaction of the Print House and Mercedes, Print House shall pay to Mercedes a sum of Dutch Guilders 1,25,000."
4. The payment was to be made at three different stages. In addition to the said amount, 25000 Dutch Guilders were to be paid for know-how and consultation at specified intervals.
5. The agreement was approved by the Government of India on 18th February, 1961. 1,25,000 Dutch Guilders were paid in the calendar year 1961 i.e. in the assessment year 1962-63. Besides, against two instalments of Dutch Guilders 12,500, each to be paid in the calendar year 1962 and calendar year 1964, a total amount of 15,000 Dutch Guilders were paid during this period. The total amount thus paid by the assessee to Mercedes came to Dutch Guilders 1,40,000 equivalent to Rs.1,88,037/-, but as the question suggests, we are concerned with the payment of 1,25,000 Dutch Guilders. The assessee wrote off this amount in its books of account in five years and claimed 1/5 thereof as allowable deduction in each of the assessment years under reference. The claim was based on the following circular issued by the Central Board of Direct Taxes:
"113/B. 35A. Expenses incurred on purchase of Patents Admissibility of:
The question of allowing expenses incurred on the purchase of patents, for the purpose of Income-tax assessments, either as an admissible deduction from business profits or by way of depreciation had been under consideration of Government for quite some time. It has now been decided that the expenditure incurred on purchase of patent rights should be treated as consolidated revenue expenditure by spreading it over a period of 14 years. Accordingly, such expenditure may be allowed to be written off over the above-mentioned period."
6. However, at the time of completion of assessment, the Income-tax Officer took the view that the services to be rendered by Mercedes in terms of the said agreement were not merely in the nature of acquisition of patents by the assessee but something more as there was no bar on the assessee from parting with that information and, therefore, the said circular of the Board was not applicable in the case. He also held that since the expenditure had been incurred partly in 1962 and partly in 1964, this could not be allowed in the relevant assessment years. He, accordingly, rejected the claim of the assessee. Similar view was taken by the Assessing Officers in respect of the assessment years 1970-71 and 1971-72.
7. Aggrieved by the said disallowance, the assessee preferred appeals to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner it was pleaded that since the assessee was able to bring out proto-type of sample machines in September, 1967 and bulk production had commenced only in 1968, the assessee could write off the amount only after the actual production had commenced. Agreeing with the assessee, the Appellate Assistant Commissioner held that provisions of Section 35A of the Act were applicable to the assessee's case. He also held that the claim could be allowed in the relevant previous year in terms of proviso to the Explanation to Section 35 of the Act. He, accordingly, directed the Income-tax Officer to allow the deduction claimed by the assessee.
8. Being aggrieved, the Revenue took the matter in appeal to the Tribunal. The stand of the Revenue before the Tribunal was that Section 35A did not apply to the instant case as it dealt with the expenses incurred only after 28th February, 1966 and, therefore, the expenditure having been incurred by the year 1964, the said Section had been wrongly applied by the Appellate Assistant Commissioner. It was also argued before the Tribunal that the present was not a case of acquisition of patent rights or copyrights and the assessee had in fact bought only technical know-how which did not fall within the ambit of the afore-noted circular. The Tribunal remanded the case back to the Appellate Assistant Commissioner with certain directions, namely, to find out whether the foreign concern had patent rights and how much of the cost could be attributed to the acquisition of the patent rights etc. After analysing the terms of the agreement afresh, the Appellate Assistant Commissioner held that the "mercedes" did not have a patent and trade mark for the machine; they had authorised the assessee to manufacture and not only Dutch Guilders 15,000 were payable to Mercedes for technical know-how, a further sum of Dutch Guilders 1,25,000 could also be attributed towards these services. He, however, held that payment of remaining 50% of Dutch Guilders 1,25,000 could be attributed towards the acquisition of the patent rights. He, thus, came to the conclusion that besides supplying patent rights, the Mercedes had also furnished technical know-how and other services relating thereto, which could not be clubbed with patent rights. Holding that Section 35A of the Act had no application to the case, but the assessee was entitled to relief under the Board's circular dated 31 May 1961, he allowed deduction of only 1/4th of half of the said amount as deduction in the year under reference in the light of the said circular.
9. Against the said finding of the Appellate Assistant Commissioner, the assessee took the matter in further appeal to the Tribunal. It is not clear from the statement of the case, whether the revenue had preferred appeal to the Tribunal against the finding of the Appellate Assistant Commissioner that 50% of the payment was towards acquisition of patent rights and that Board's said circular was applicable to the facts of the case. The stand of the assessee before the Tribunal was that the entire amount of Dutch Guilders 1,25,000 was to acquire patent rights and it was only the other amount of Dutch Guilders 15,000 paid in 1962, which was for the purpose of acquiring technical know-how. Accepting the assessee's plea, the Tribunal observed that permission by the holders of patents to use it does not merely mean passing on the rights available under the patents but also the technical know-how as the latter is a part of the patents right and inseparable from it; the patent does not mean only the particular name but it also includes the designing technique and process involved in the manufacture of an article and all these things together would pass as patent. The Tribunal, thus, held that various services contained in the agreement relating to the patents were part and parcel of the patents themselves and could not be evaluated separately. Having found so, the Tribunal came to the conclusion that the entire amount of Dutch Guilders 1,25,000 was for the acquisition of the patent rights by the assessee. While arriving at the said conclusion the Tribunal also referred to the letter issued by the Government of India approving the above agreement, which according to the Tribunal, indicated that the Government had also treated the two payments of Dutch Guilders 1,25,000 and Dutch Guilders 25,000 separately - the former for supply of manufacturing drawings etc. and the latter as consideration for know-how and consultancy services. On Revenue's moving applications under Section 256(1) of the Act, references on the afore-noted question have been made.
10. Despite service, the assessee remained un-represented. We have heard Mrs. Prem Lata Bansal for the Revenue.
11. Learned counsel for the Revenue has strenuously urged that though manufacturing drawings, lay out specifications, catalogue or photographs may form part of a patent but the process cannot be held as a part of the patent. It is submitted that technical know-how cannot be included in the patent rights. It is thus asserted that the assessee having merely acquired technical know-how, its case does not fall either within the ambit of Section 35A or Board's afore-noted circular and, therefore, the amount of Dutch Guilders 1,25,000, paid by the assessee, had to be capitalised and that too in the relevant previous year when it was paid and not in the years under reference.
12. The question whether the expenditure is a revenue expenditure or capital expenditure is a vexed question and despite attempts by the Courts to evolve principles to distinguish a capital expenditure from revenue expenditure, it has not been possible to lay down any exhaustive test to determine the question. The answer to the question necessarily depends on the real aim, object and quality of payment. The quantum or the manner of the payment is not decisive(See: Assam Bengal Cement Co. Ltd. Vs. Commr. of Inc. Tax,). Therefore, each case has to be tested on its own facts and the legal principles involved in it. Thus the issue has to be examined by reading the agreement involved as a whole and not by just picking up a particular clause pertaining to the quantum and mode of payment. Even from the commercial point of view it cannot be ignored altogether. If under the agreement an assessee acquires a mere licence for the use of patents, technical knowledge and the trade mark for the purpose of producing profits in the conduct of its business, the payment has to be regarded as a revenue expenditure but if on the other hand by making the payment the assessee acquires an asset or an advantage for the enduring benefit of its business, the expenditure may be regarded as a capital outlay.
13. In the instant case, unfortunately, neither the agreement in question has been annexed with the statement of the case nor its terms have been fully set out in the statement or in any one of the orders of the Tribunal. We are, therefore, handicapped in examining the agreement as a whole. What we have before us is the afore-extracted clause(6), which only provides for the quantum and the time for payment of the various amounts as consideration, for "the grant of these technical aids and rights and services and other assistance in respect of know-how under this agreement". This clause, in our view is not sufficient for us to test the legality or otherwise of the finding recorded by the Tribunal to the effect that various services contained in the agreement relating to the patents were part and parcel of the patents themselves and could not be evaluated separately. Even otherwise we feel that the said categorical finding recorded by the Tribunal has not specifically been challenged by the Revenue in the proposed question. However, since we are not in a position to examine the various clauses of the agreement dated 9 June 1961, entered into by the assessee with the Dutch company, it will not be proper for us to record any finding in that behalf. In this view of the matter, in the absence of sufficient material on record, we are unable to answer the afore-noted question referred to us.
14. Accordingly we return the references un-answered.