M/s. NICHOLAS PIRAMAL INDIA LTD., MUMBAI V. JT. CIT SPL. Rg. - 5, MUMBAI

ITA 4379/MUM/2005

• Counselvise Citation: 437919914 RSA 2005
• Duration Of Justice: 5 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 15-12-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 13-06-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJEEV DUTT PER R K
• Keywords: Capital asset; Business expenditure; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 63

Judgement Text

1 ITA NO.4379/MUM/2005 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI I BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R K PANDA, AM AND SMT. ASHA VIJAYARAGHA VAN, J.M. ITA NO. 4379/MUM/2005 (ASST YEAR 1997-98) NICHOLAS PIRAMAL INDIA LTD (SUCCESSOR IN BUSINESS OF PHON POULENC (I) LTD 4 TH FLOOR PIRAMAL TOWER ANNEXURE GANPATRAO KADAM MARG LOWER PAREL, MUMBAI 13 VS THE JT COMMR. OF INCOME TAX RANGE 5 MUMBAI (APPELLANT) (RESPONDENT) PAN NO.AAACR3171J ASSE SSEE BY SHRI J.P. BAIRAGRA REVENUE BY SHRI SANJEEV DUTT PER R K PANDA, AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 24.3.2005 OF THE CIT (A) XIX, MUMBAI RELATING TO A SSESSMENT YEAR 1997- 98. 2 THIS APPEAL WAS EARLIER DECIDED BY THE TRIBUNAL V IDE ORDER DATED 11.06.2009 GIVING PART RELIEF TO THE ASSESSEE. SUBS EQUENTLY, THE TRIBUNAL VIDE ORDER DATED 17.2.2010 AGAINST M.A. FILED BY TH E ASSESSEE RECALLED GROUND OF APPEAL NO. 2 OF THE ASSESSES APPEAL FOR FRESH ADJUDICATION. THEREFORE, THIS ORDER IS CONFINED ONLY TO ADJUDICAT E GROUND NO. 2 OF THE ASSESSEES APPEAL WHICH READS AS UNDER: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN DI SALLOWING MARKETING KNOW- HOW EXPENDITURE AMOUNTING TO ` 270 LAKHS AS REVENUE EXPENDITURE AND TREATING THE SAME AS CAPITAL EXPENDITURE ON THE ALL EGED GROUND THAT THE SAME HAD BEEN INCURRED IN CONNECTION WITH THE ACQUISITIO N OF NEW LINE OF BUSINESS. 2 ITA NO.4379/MUM/2005 HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT EXPENDITURE INCURRED ON MARKETING KNOW-HOW WAS ONLY OUT OF COMMERCIAL EXPED IENCY AND DID NOT RESULT INTO BENEFIT OF ENDURING NATURE. THE APPELLANT THEREFORE PRAYS THAT IT BE HELD THAT EXPENDITURE INCURRED ON ACQUIRING MARKETING KNOW-HOW IS REVENUE EXPENDITURE AND ACCORDINGLY THE AFORESAID DISALLOWANCE MADE BY THE ASSESSING OFFICE R BE DELETED. 3. FACTS OF THE CASE IN BRIEF, ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY ACQUIRED A PART OF BRANDED AND GENERIC PHARMACEUTICALS BUSINESS OF MAX INDIA LTD. THE A.O. NOTED THAT THE ASSESSEE ENTERED INTO MEMORANDUM OF UNDERSTANDING (MOU) WITH MAX INDIA LTD., ON 9.11.1996 TO ACQUIRE BRANDED AND GEN ERIC PHARMACEUTICALS BUSINESS FOR ` 325 LACS. IN CONSEQUENCE OF THIS MOU, THE ASSESSEE ENTERED INTO THREE AGREEMENTS WITH MAX INDIA LTD., ON 27.1. 1997. FIRST AGREEMENT WAS FOR ACQUISITION OF TRADEMARKS AND GOODWILL FOR WHICH CONSIDERATION WAS FIXED AT ` 50 LACS. SECOND AGREEMENT WAS FOR TRANSFER OF GENE RIC BUSINESS, MARKET KNOW-HOW AND NON-COMPETITION FOR FIVE YEARS FOR WHICH CONSIDERATION WAS FIXED AT ` 270 LACS. THIRD AGREEMENT WAS FOR ACQUISITION OF TECHNICAL KNOW-HOW FOR A CONSIDERATION OF ` 5 LACS. THE ASSESSEE COMPANY HAS TREATED ` 50 LACS PAID FOR ACQUISITION OF TRADEMARKS WITH GO ODWILL AS CAPITAL EXPENDITURE. BUT THE BALANCE PAYMENT OF ` 2,75,00,000/- HAS BEEN CLAIMED AS REVENUE EXPENDITURE IN THE RETURN OF INC OME. IN THE BOOKS OF ACCOUNTS AS MENTIONED IN NOTE 1(F) OF NOTES TO ACCO UNTS, THESE EXPENSES WERE WRITTEN OFF OVER A PERIOD OF 5 YEARS. DURING T HE YEAR, THE ASSESSEE HAS ONLY DEBITED ` 9,16,667/- INTO THE P&L ACCOUNT AND BALANCE AMOUNT HAS BEEN SHOWN AS DEFERRED EXPENDITURE UNDER THE HEAD M ISCELLANEOUS EXPENDITURE IN THE BALANCE SHEET. IN THE COMPETITI ON OF INCOME FILED ALONG WITH THE RETURN, THE ASSESSEE COMPANY HAS ADDED BAC K THE AMOUNT OF ` 9,16,667/- DEBITED TO THE P&L ACCOUNT BUT MADE A C LAIM OF DEDUCTION OF TOTAL AMOUNT OF ` 2,75,00,000/-. 3.1. THE A.O. ASKED THE ASSESSEE TO EXPLAIN AS TO HOW THIS AMOUNT OF ` 2,75,00,000/- IS A REVENUE EXPENDITURE AND ALSO TO EXPLAIN AS TO WHY THIS 3 ITA NO.4379/MUM/2005 EXPENDITURE SHOULD NOT BE TREATED AS CAPITAL EXPEND ITURE AND TECHNICAL KNOW-HOW FEES SHOULD NOT BE AMORTISED AS PER THE PR OVISIONS OF SEC. 35AB. 3.2 THE ASSESSEE IN ITS REPLIES SUBMITTED THAT TH E PAYMENT MADE TO MAX INDIA LTD AMOUNTING TO ` 2,70,00,000/-AND ` 5,00,000/- ARE ALLOWABLE AS REVENUE EXPENSES. REGARDING APPLICATION OF SECTION 35AB, THE ASSESSEE SUBMITTED THAT IN THE CASE OF ASSESSEE, KNOW-HOW IS RELATED TO MARKETING KNOWLEDGE AND INFORMATION AND IT DOES NOT RELATE TO KNOWLEDGE RELATING TO MANUFACTURE OR PROCESSING OF GOODS AS DEFINED IN SE C. 35AB. THEREFORE, THE AMOUNT OF ` 2,75,00,000/- DOES NOT COME UNDER THE COMPASS OF SEC. 35AB. IT WAS VEHEMENTLY CONTENDED THAT THE KNOW-HOW ACQUI RED BY THE ASSESSEES IS FOR STRENGTHENING THE EXISTING MARKETING AND DIS TRIBUTION NETWORK OF THE COMPANY. IT WAS SUBMITTED THAT THE COMPANY HAS BEEN IN PHARMACEUTICAL BUSINESS IN LAST SEVERAL YEARS. IT HAS BEEN PRIMARI LY IN THE BUSINESS OF BRANDED PHARMACEUTICAL PRODUCTS AND HAS ITS OWN MAR KETING AND DISTRIBUTION NETWORK. THE ASSESSEE HAS NOW ACQUIRE D THE MARKETING AND DISTRIBUTION KNOW-HOW FOR GENERIC RANGE OF PRODUCTS FROM MAX INDIA LTD. GENERIC PRODUCTS ARE NOT BRANDED PRODUCTS. GENERIC PRODUCTS NEED PUSH DISTRIBUTION/SELLING, RATHER THAN A PULL TYPE OF SE LLING. IN OTHER WORDS, THE GENERIC PRODUCTS REQUIRED MORE OF A SUPPORT OF STRO NG AND WIDE NETWORK OF DISTRIBUTORS AND DEALERS, GOOD PRICING THAT IS WHAT IS ACQUIRED BY THE ASSESSEE FROM MAX INDIA LTD FOR WHICH THE PAYMENT OF ` 2,75,00,000/- HAS BEEN MADE. IT WAS FURTHER CONTENDED THAT THE NATURE OF THESE ARRANGEMENT AND THE BENEFIT THAT IS ACQUIRED OUT OF IT IS NOT O F A LASTING ARRANGEMENT AS IT MAINLY CONSIST OF MARKETING/DISTRIBUTION NETWORK AN D IN SUCH AN ARRANGEMENT DEALER CAN SWITCH OFF OR A DISTRIBUTOR CAN LEAVE. THE MARKET SCENARIO IS VOLATILE IN THESE DAYS AND SUCH ARRANGE MENT IS CHANGING ON DAY TO DAY BASIS BECAUSE OF THE COMPETITION AND CHANGIN G PATTERN THAT IS EMERGING IN THE MARKET PLACE. IT IS, THEREFORE, NOT CORRECT TO CONCLUDE THAT THE PAYMENT FOR THIS KIND OF ARRANGEMENT CAN BE TRE ATED AS CAPITAL EXPENDITURE. 4 ITA NO.4379/MUM/2005 3.3 IT WAS FURTHER CONTENDED THAT THE ASSESSEE COMP ANY HAS NOT ACQUIRED THE ENTIRE BUSINESS OF MAX INDIA LTD. AFTER THIS AR RANGEMENT, MAX INDIA LTD HAS BEEN CARRYING ON ITS ONGOING BUSINESS ENTERPRIS E. IN FACT, MAX INDIA LTD HAS COME FOR AN ISSUE OF BONUS SHARES. THUS, IT WAS CONTENDED THAT THIS ARRANGEMENT RELATES TO MARKETING KNOW-HOW AND TECHN ICAL KNOW-HOW. IT IS NOT FOR BUYING THE BUSINESS BUT ONLY FOR EXTENDING THE COMPANYS PRODUCT RANGE AND OBTAINING THE ALLIED FACILITIES IN MARKET ING AND DISTRIBUTION THEREOF WHICH IS OF REVENUE NATURE. 3.4 AS REGARDS NON-COMPETITION CLAUSE, IT WAS SUBMI TTED THAT THE SAID CLAUSE PROVIDES NON-COMPETITION ONLY DURING 5 YEARS PERIOD AND EVEN DURING SUCH PERIOD, MAX INDIA LTD HAS ALL THE FREEDOM, SUC H AS MANUFACTURING, MARKETING, PROMOTING, ACTING AS A LOAN LICENSEE, SU BJECT ONLY TO CERTAIN CONDITIONS, SUCH AS NON REPETITION OF DESIGN, COLOU R SCHEME OR CALLIGRAPHY ETC. NON-COMPETITION CLAUSE IS ONE OF THE ROUTINE CLAUSES WHICH IS NORMALLY PUT IN SUCH AGREEMENT AND CANNOT BE INTERPRETED TO MAKE SAID PAYMENT MADE BY THE COMPANY TO MAX INDIA LTD AS CAPITAL EXP ENDITURE. FIVE YEARS PERIOD DOES NOT JUSTIFY TREATING THE EXPENDITURE AS OF CAPITAL IN NATURE. VARIOUS CASE LAWS WERE ALSO CITED AS PER PARA 12.4 OF THE ASSESSMENT ORDER. 3.5 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATIONS GIVEN BY THE ASSESSEE. HE HELD THAT THE VARIOUS CAS E LAWS RELIED ON BY THE ASSESSEE DO NOT HAVE ANY APPLICATION TO THE FACTS O F THE ASSESSEES CASE. HE HELD THAT IN THE INSTANT CASE, THE ASSESSEE COMPANY HAS EXCLUSIVELY ACQUIRED THE TRADE MARKS WITH GOOD WILL, TECHNICAL KNOW-HOW AND ALSO ENTERED INTO A NONCOMPETITION CLAUSE. ACQUISITION WAS NOT CONFINED TO A LIMITED PERIOD BUT IT WAS FOREVER. HE HELD THAT THE ASSESSEE COMPANY A CQUIRED THE BRANDED AND GENERIC BUSINESS OF MAX INDIA LTD. ACCORDING TO THE ASSESSING OFFICER, BY SUCH ACQUISITION, THE ASSESSEE HAS ENLARGED ITS PRO FIT MAKING APPARATUS FROM WHICH THE ASSESSEE COULD DRAW AN ENDURING BENE FIT. THE AMOUNT OF RS. 2,70,00,000/-, THEREFORE, IS AN INVESTMENT. GENERIC FORMULATIONS ACQUIRED BY ASSESSEE ARE NEW PROFIT MAKING APPARATUS AND EXP ENDITURE IS ON CAPITAL 5 ITA NO.4379/MUM/2005 ACCOUNT. HE HELD THAT EVEN IF THE ASSESSEE ACQUIRED A PART OF BUSINESS OF ANOTHER PERSON, THE EXPENDITURE WILL BE OF CAPITAL NATURE. IT IS NOT NECESSARY THAT THE ENTIRE BUSINESS SHOULD BE ACQUIRED. SUCH ACQUISITION WOULD ACCELERATE COMPANYS SALES TURNOVER AND PROFITS IN COMING YEARS. THE NONCOMPETITION AGREEMENT ALSO INDICATES THAT THE AS SESSEE HAS ACQUIRED ADVANTAGE OF ENDURING NATURE. FOR THE ABOVE PROPORT IONS, THE ASSESSING OFFICER RELIED ON THE FOLLOWING DECISIONS: I) BEHARI LAL BENI PAARSHAD VS CIT 35 ITR 576 (PUNJ ) II)TRUCK OPERATORS UNION VS CIT 86 ITR 322 (DEL) III) NEEL KAMAL TALKIES VS CIT 87 ITR 691 (ALL) IV) BLAZE & CENTRAL P LTD VS CIT 120 ITR 33 (MAD) V) CIT VS HINDUSTAN PILKINGTON GLASS WORKS 139 ITR 581 (CAL) VI) CHELPARK CO LTD VS CIT 191 ITR 249 (MAD) VII) GROVER SOAP P LTD VS CIT 221 ITR 229 (MP) 3.6 THE ASSESSING OFFICER FURTHER HELD THAT THE EFF ECTIVE DATE I.E. DATE FROM WHICH THE TRANSACTION WILL BE EFFECTIVE AND ENFORCE ABLE FALLS IN THE SUBSEQUENT ASSESSMENT YEAR I.E. ASSESSMENT YEAR 199 8-99. HE REJECTED THE EXPLANATION BY THE ASSESSEE THAT THE COMPANY HAD IN CURRED THE LIABILITY TO PAY FOR THE MARKETING KNOW-HOW IN THE ACCOUNTING YE AR ENDED ON 31.3.1997, THE AGREEMENT IS DATED 27.1.1997, THE SUMS OF RS. 4 1 LACS AND RS. 125 LACS WERE PAID BY THE DATE OF EXECUTION OF THE SAID AGRE EMENT, THAT THE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, THAT THE U NPAID ACCOUNT HAD BEEN DULY PROVIDED, THAT THE LIABILITY WAS WHOLLY ASCERT AINED, THAT THE EFFECTIVE DATE I.E. 30.6.1997 AS DEFINED IN THE AGREEMENT IS ONLY AN OUTER LIMIT FOR THE COMPLIANCE WITH THE SUBSTANTIVE PART OF THE CONDITI ONS AND SO LONG AS BOTH THE PARTIES ARE SATISFIED AND THAT THERE IS NO QUES TION OF PUSHING THE EFFECTIVE DATE BEYOND THE SAID DATE OF AGREEMENT I. E. 27.1.1997. ACCORDING TO THE ASSESSING OFFICER, THE VERY FACT THAT PART OF T HE PAYMENT WAS REQUIRED TO BE MADE ON THE EFFECTIVE DATE PROVES THAT THE TRANS ACTION PERTAINS TO SUCCEEDING YEAR. 3.6.1. THE A.O ALSO SOUGHT INFORMATION FROM MAX IN DIA LTD AS REPRODUCED IN PARA 13.4 OF THE ASSESSMENT ORDER. AC CORDING TO THE ASSESSING 6 ITA NO.4379/MUM/2005 OFFICER FROM THE REPLY RECEIVED FROM MAX INDIA LTD, THE EFFECTIVE DATE WAS 1.7.1997. THE ASSESSEE WAS CONFRONTED WITH THE REPL Y RECEIVED FROM MAX INDIA LTD. IT WAS EXPLAINED BY THE ASSESSEE THAT ON THE DATE OF AGREEMENT THE LIABILITY ACCRUED, THAT THE CONDITIONS REGARDING EF FECTIVE DATE IS NOTHING BUT FIXING THE TERMS OF PAYMENT FOR THE TRANSACTION WHI CH TOOK PLACE ON 27.1.1997. ACCORDING TO THE ASSESSING OFFICER, THE LIABILITY ACCRUED ONLY ON THE EFFECTIVE DATE I.E. 1.7.1997. ACCORDING TO HIM, EFFECTIVE DATE IS IMPORTANT BECAUSE ON THAT DATE ONLY CERTAIN ENFORCEABLE LIABI LITY HAD ACCRUED OR ARISEN. THUS, THE LIABILITY PERTAINS TO ASSESSMENT YEAR 199 8-99 AND NOT TO ASSESSMENT YEAR 1997-98. REJECTING THE VARIOUS EXPL ANATIONS GIVEN BY THE ASSESSEE AND RELYING ON A COUPLE OF DECISIONS, THE A.O. HELD THAT THE EXPENDITURE IS OF CAPITAL IN NATURE AND THAT THE EX PENDITURE DID NOT PERTAIN TO THIS ASSESSMENT YEAR. 3.7 BEFORE THE CIT(A), THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE ASSESSING OFFICER AND CITED VARIOU S CASE LAWS. IT WAS SUBMITTED THAT THE VARIOUS DECISIONS RELIED ON BY T HE ASSESSING OFFICER ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HOWEVER, THE CIT(A) ALSO WAS NOT CONVINCED WITH THE ARGUMENT S ADVANCED BEFORE HIM. HE DISTINGUISHED THE VARIOUS DECISIONS CITED BEFORE HIM AND HELD THAT EXPENDITURE OF ` 270 LAKHS INCURRED BY THE ASSESSEE COMPANY IS CAPI TAL IN NATURE. WHILE DOING SO, HE NOTED THAT THE CRUX OF THE MATTER IS THE NATURE OF TRANSACTION. FOR THIS PURPOSE, THE MOU DATED 9.11.9 6 IS THE BASIC DOCUMENT. HE ANALYSED THE VARIOUS CLAUSES OF THE A GREEMENT AND CAME TO THE CONCLUSION THAT MAX INDIA LTD. WANTED TO SELL A ND THE ASSESSEE COMPANY HAS PURCHASED (A) CERTAIN PART OF THE BRANDED PHARM ACEUTICALS, (B) ENTIRE GENERIC FORMULATION BUSINESS, (C) EXPORT REGISTRATI ON AND (D) TECHNICAL & MARKETING KNOWHOW RELATING TO SUCH BRANDED FORMULAT ION BUSINESS AND GENERIC FORMULATION BUSINESS. 3.8. ACCORDING TO LD. CIT(A), GENERIC DRUGS ARE THO SE DRUGS WHICH BY VIRTUE OF EXPIRY OF THE PERIOD OF PATENT OWNERSHIP, ARE NO T GOVERNED BY THE PATENT 7 ITA NO.4379/MUM/2005 ACT. ANYBODY IS FREE TO MAKE SUCH GENERIC PRODUCT AND MARKET THE SAME. THEY MAY BE BRANDED BY EACH MANUFACTURER BY DIFFERE NT NAMES. SINCE THE ASSESSEE WAS NOT IN THIS LINE OF BUSINESS AND WAS D ESIROUS OF ACQUIRING SUCH BUSINESS FROM MAX INDIA LTD., THEREFORE, THE ASSESS EE HAS ACQUIRED A NEW LINE OF BUSINESS I.E. BUSINESS OF MANUFACTURING AND MARKETING UNPATENTED AND GENERIC PRODUCTS AS AGAINST EXISTING BUSINESS O F MANUFACTURING AND MARKETING OF PATENTED PRODUCTS. HE FURTHER HELD TH AT THE BIFURCATION MADE BY THE ASSESSEE TOWARDS PAYMENT OF CONSIDERATION OF ` 325 LAKHS INTO THREE COMPONENTS IE. (I) MARKETING KNOWHOW, (II) TECHNICA L KNOWHOW & (III) SALE/ASSIGNMENT OF BRANDS IS NOT BASED ON ANY SCIEN TIFIC, CONCRETE OR TANGIBLE DATA BASE. THEREFORE, THE ENTIRE AMOUNT N EEDS TO BE VIEWED TOGETHER AS PAYMENT FOR ACQUIRING CERTAIN NEW BUSIN ESS OF MANUFACTURING AND MARKETING UNPATENTED AND GENERIC PRODUCTS ALONG WITH THE RELATED TECHNICAL AND MARKETING KNOWHOW. ACCORDING TO HIM, THE THREE AGREEMENTS DTD. 27.1.97 FLOW FROM THE MOU DT. 9.11.96 AND THER EFORE CANNOT BE READ OR VIEWED INDEPENDENT OF THE MOU WHICH HAD DETERMINED THE CONSIDERATION. RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF JONAS WOODHEAD & SONS (INDIA) LTD. VS. CIT REPORTED IN 22 4 ITR 342 (SC), THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F CIT VS. W.S. INSULATORS OF INDIA LTD., REPORTED IN 243 ITR 348 AND HOST OF OTHER DECISIONS MENTIONED AT PARA 13 TO 15 OF HIS ORDER , HE HELD THE AMOUNT OF ` 270 LAKHS PAID AS CAPITAL EXPENDITURE. FURTHER RELYING ON A COUPLE O F DECISIONS, HE HELD THAT THE COMPENSATION PAID IN VIEW OF THE NON-COMPETITIO N AGREEMENT IS OF AN ENDURING BENEFIT AND, THEREFORE, CANNOT BE ALLOWED AS A DEDUCTION. HE, HOWEVER, DISAGREED WITH THE VIEW OF THE A.O. THAT T HE LIABILITY PERTAINS TO A.Y. 1998-99 AND HELD THAT THE LIABILITY ACCRUED DURING THE YEAR IN VIEW OF THE DATES OF THE MOU AND THE DATES OF THE AGREEMENT. 3.9. AGGRIEVED WITH SUCH ORDERS OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 8 ITA NO.4379/MUM/2005 4. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE A.O. AND LD. CIT(A) AND SUBMITTED T HAT THE ASSESSEE COMPANY ACQUIRED PART OF THE GENERIC PHARMACEUTICA L BUSINESS OF M/S MAX INDIA LTD., FOR ` 3.25 CRORES AS PER THE TERMS OF MOU WITH M/S MAX I NDIA LTD DT 9.11.1996. AS PER TERMS OF THE MOU, THE ASSESSEE COMPANY ENTERED INTO THREE AGREEMENTS WITH M/S MAX INDIA LTD DT 27.1.199 7. THE FIRST AGREEMENT WITH M/S MAX INDIA LTD WAS FOR ACQUISITION OF TRADE MARKS AND GOODWILL FOR ` 50 LAKHS, WHICH HAS BEEN TREATED AS CAPITAL IN NATU RE AND THE ASSESSEE IS NOT IN APPEAL ON THIS ISSUE. THE SECOND AGREEMENT W AS FOR TRANSFER OF GENERIC BUSINESS, MARKETING KNOW-HOW AND NON COMPET ITION FEE FOR 5 YEARS FOR ` 2.70 CRORES. THE THIRD AGREEMENT WAS FOR ACQUISITI ON OF TECHNICAL KNOW- HOW FOR MANUFACTURING FOR CONSIDERATION OF ` 5 LAKHS. HE SUBMITTED THAT THE ASSESSING OFFICER HAS TREATED THE AMOUNT OF SECOND AND THIRD AGREEMENT AS CAPITAL IN NATURE AND HAS MADE A DISALLOWANCE OF ` 2.75 CRORES. HE SUBMITTED THAT THE MARKETING KNOW-HOW WAS ACQUIRED BY THE ASSESSEE, WHICH RELATES TO THE MARKETING KNOWLEDGE AND INFORM ATION AND DOES NOT RELATE TO MANUFACTURING OR PROCESSING OF THE GOODS. THE KNOW-HOW ACQUIRED BY THE ASSESSEE IS FOR STRENGTHENING THE EXISTING M ARKETING AND DISTRIBUTION NETWORK OF THE COMPANY. THE ASSESSEE COMPANY IS ALR EADY IN THE BUSINESS OF BRANDED PHARMACEUTICALS SINCE THE LAST 70 YEARS AND HAS ITS OWN MARKETING AND DISTRIBUTION NET WORK AND THEREFORE, IT COULD N OT BE SAID THAT THE ASSESSEE HAS STARTED OR ACQUIRED A NEW LINE OF BUSI NESS. HE SUBMITTED THAT THE GENERIC PRODUCTS OF PHARMACEUTICAL ARE NOT THE BRANDED PRODUCT THEREOF. THE GENERIC PRODUCTS REQUIRE MORE SUPPORT OF STRONG AND WIDE NETWORK OF THE DISTRIBUTORS AND DEALERS AS COMPARED TO THE BRA NDED PRODUCTS OF PHARMACEUTICAL PRODUCTS. HE SUBMITTED THAT THE ASS ESSEE HAS NOT ACQUIRED THE ENTIRE BUSINESS OF M/S MAX INDIA LTD. AND IT HA S ONLY ACQUIRED THE MARKETING KNOW-HOW. WITH REGARD TO THE GENERIC PROD UCTS OF PHARMACEUTICAL FROM MAX INDIA LTD. WITH REGARD TO THE NON-COMPETIT IVE CLAUSES, HE SUBMITTED THAT THE SAID CLAUSES PROVIDE FOR NON-COM PETITIVE ONLY FOR A PERIOD OF 5 YEARS AND EVEN DURING THIS PERIOD M/S MAX INDI A LTD. HAS THE FREEDOM SUCH AS MANUFACTURING, MARKETING, PROMOTING AND ACT ING AS A LOAN LICENSEE 9 ITA NO.4379/MUM/2005 SUBJECT TO CERTAIN CONDITIONS SUCH AS NON-REPETITIO N OF DESIGN, COLOUR SCHEME OR CALLIGRAPHY. IN THESE FACTS, HE SUBMITTE D THAT THE AMOUNT OF ` 2.70 CRORES PAID BY THE ASSESSEE FOR ACQUIRING MARK ETING KNOW-HOW TO M/S MAX INDIA LTD. IS REVENUE IN NATURE. HE SUBMITTED THAT THE VARIOUS CASE LAWS CITED BY THE REVENUE AUTHORITIES HAVE NO RELEV ANCE TO THE FACTS OF THE CASE OF THE ASSESSEE AS THE AGREEMENT OF THE ASSESS EE COMPANY WITH M/S MAX INDIA LTD. MAINLY PROVIDES FOR SUPPLY OF MARKET ING KNOW-HOW OF GENERIC BUSINESS, WHEREAS THE DECISIONS CITED BY THE ASSESS ING OFFICER AND CIT(A) RELATE TO THE ISSUE OF ARISING ENDURING BENEFIT TO THE ASSESSEE. HE SUBMITTED THAT THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF ` 2.70 CRORES ON TWO COUNTS, NAMELY (I) THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL IN NATURE AND (II) THAT THE EXPENDITURE DID NOT PER TAIN TO THE RELEVANT YEAR AS THE LIABILITY HAS ACCRUED IN THE SUBSEQUENT ASSESSM ENT YEAR. HE SUBMITTED THAT THE SECOND GROUND OF THE ASSESSING OFFICER IN DISALLOWING THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE DID NOT PERTAIN T O THE RELEVANT YEAR HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE CIT(A ), WHO HAS HELD THAT THE EXPENDITURE DID PERTAIN TO THE YEAR UNDER CONSIDERA TION. HE SUBMITTED THAT THE REVENUE HAS NOT FILED ANY APPEAL AGAINST THE OR DER OF THE CIT(A) ON THIS ISSUE AND THEREFORE, THE ONLY ISSUE WHICH REMAINS T O BE DECIDED BY THE TRIBUNAL IS THAT WHETHER THE EXPENDITURE INCURRED B Y THE ASSESSEE FOR ACQUISITION OF MARKETING KNOW-HOW OF GENERIC PRODUC TS IS CAPITAL OR REVENUE IN NATURE. HE REFERRED TO THE RELEVANT CLAUSES OF THE MOU AND THE THREE AGREEMENTS ENTERED INTO BY THE ASSESSEE COMPANY WIT H M/S MAX INDIA LTD., AND A COPY OF WHICH IS FILED IN THE COMPILATION BEF ORE THE TRIBUNAL. HE SUBMITTED THAT THE AGREEMENT DT. 27.01.97 FOR SUPPL YING THE MARKET KNOW- HOW IN TERM NO. 1 HAS EXPLAINED THE MEANING OF MAR KETING KNOW-HOW AS KNOWLEDGE OF POTENTIAL AND EXISTING MARKET AND MARK ETING TECHNIQUES, RESULTS AND ANALYSIS OF MARKET SERVICE, KNOWLEDGE O F AND CREATION OF DISTRIBUTION OF NET WORK AND ALL OTHER INFORMATION AND KNOWLEDGE USED BY M/S MAX INDIA LTD. IN THE MARKETING OF THE PRODUCTS . HE SUBMITTED THAT THE MARKET INFORMATION WAS NECESSARY FOR THE ASSESSEE T O ESTABLISH ITSELF IN THE GENERIC PHARMACEUTICAL PRODUCTS BUSINESS AND BUT FO R THE ACQUISITION FROM 10 ITA NO.4379/MUM/2005 M/S MAX INDIA LTD., THE ASSESSEE COMPANY WOULD HAVE TO APPOINT ITS OWN MARKETING PERSONNEL FOR SURVEYING THE VAST MARKET O F GENERIC PHARMACEUTICAL PRODUCTS IN THE COUNTRY. THE LD COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLO WING DECISIONS: I) CIT VS KIRLOSKAR TRACTORS LTD 231 ITR 849 (BOM) II) MADRAS AUTO SERVICE P LTD 223 ITR 468 (SC) III) CIT VS HEDE CONSULTANCY P LTD & ANR 258 ITR 380 (BO M) IV) G-4 S SECURITY SERVICES (I)P LTD VS DCIT 9 DTR(DEL ) (TRIB) 353 V) ACIT VS ASHIMA SYNTEX LTD 117 ITD 1 (AHD SB) VI) AIRTIME MARKETING & SALES IND P LTD 2008 TIOL 398 (DEL) VII) CIT VS CIBA OF INDIA LTD 69 ITR 692 (SC) VIII) ALEMIBIC CHEMICAL WORKS CO LTD VS CIT 177 ITR 377(S C) IX) TRIVENI ENGG WORKS LTD VS CIT 136 ITR 340 (DEL) X) CIT VS POWER BUILD LTD 244 ITR 19 (GUJ) XI) CIT VS. ANAND BAZAR PATRIKA LTD. 184 ITR 542 (CAL) XII) COROMANDEL FERTILISERS LTD. VS. CIT 148 ITR 546 (A. P) XIII) CIT VS. TATA ENGINEERING & LOCOMOTIVE CO. (P) LTD. 123 ITR 538(BOM.) 4.1. THE LD D.R. ON THE OTHER HAND WHILE SUPPORTIN G THE ORDER OF THE CIT(A) SUBMITTED THAT THE ORDER OF THE CIT(A) RELY ING UPON VARIOUS APPLICABLE AND RELEVANT JUDICIAL PRECEDENTS IS IN A CCORDANCE WITH LAW AND NEEDS TO BE UPHELD. HE SUBMITTED THAT THE LANDMARK JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL C EMENT CO LTD VS CIT REPORTED IN 27 ITR 34 (SC) IS SQUARELY APPLICABLE T O THE FACTS OF THE PRESENT CASE. HE SUBMITTED THAT THE ASSESSEE WAS EARLIER IN THE BUSINESS OF PATENTED PRODUCTS AND NOW BY ACQUIRING THE BUSINESS OF NON P ATENTED GENERIC AND BRANDED FORMULATIONS, THE ASSESSEE HAS VASTLY IMPRO VED ITS PROFIT MAKING APPARATUS. IT IS A CLEAR CASE OF EXTENSION OF BUSI NESS AND THE EXPENDITURE SO INCURRED FALLS IN THE CATEGORY OF CAPITAL EXPENDITU RE. THE KNOW-HOW ACQUIRED BY THE ASSESSEE FROM MAX INDIA LTD WAS NOT IN CONNE CTION WITH THE EXISTING BUSINESS OF MANUFACTURING AND MARKETING OF PATENTED DRUGS BUT FOR THE PURPOSE OF EXTENSION OF BUSINESS. AS PER THE DIRECT ORS REPORT, THIS WOULD ACCELERATE THE ASSESSEES SALES TURNOVER AND PROFIT S IN THE COMING YEARS. THUS, THE BENEFIT DERIVED BY THE ASSESSEE WAS NOT T EMPORARY OR EPHEMERAL BUT WAS OF ENDURING NATURE. THE ASSESSEE IS TRYING TO PROJECT THE ACQUISITION 11 ITA NO.4379/MUM/2005 OF MARKETING KNOW-HOW AS BEING SEPARATE FROM OR IND EPENDENT OF THE ACQUISITION OF BUSINESS OF NON-PATENTED GENERIC AN D BRANDED FORMULATIONS FROM MAX INDIA LTD IN TERMS OF MOU DATED 9.11.1996 WHICH CANNOT BE PERMITTED. EXPENSES INCURRED UNDER ALL THE THREE AG REEMENTS HAVE TO BE VIEWED NOT IN ISOLATION BUT AS A WHOLE AND THE CUMU LATIVE EFFECT OF ALL THE TERMS AND CONDITIONS OF THE MOU AS WELL AS THREE SE PARATE AGREEMENTS HAVE TO BE TAKEN INTO ACCOUNT. REFERRING TO THE VARIOUS DECISIONS RELIED ON BY THE LD. CIT(A), HE SUBMITTED THAT THE ORDER OF THE LD. CIT(A) ON THIS ISSUE BE UPHELD. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE A.O. AND LD. CIT(A) AND T HE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS RELIED ON BY BOTH THE SIDES. THERE IS NO DISPUTE TO THE F ACT AS PER THE MOU DTD. 9.11.96 WITH MAX INDIA LTD., THE ASSESSEE COMPANY A CQUIRED PART OF THE BRANDED AND GENERIC PHARMACEUTICAL BUSINESS FOR ` 325/- LAKHS. THERE IS ALSO NO DISPUTE TO THE FACT THAT AS PER THE TERMS O F THE MOU THE ASSESSEE COMPANY ENTERED INTO THREE AGREEMENTS WITH MAX INDI A LTD. DTD. ON 27.1.1997. THE FIRST AGREEMENT IS FOR ACQUISITION OF TRADE MARK & GOODWILL FOR ` 50 LAKHS WHICH HAS BEEN TREATED AS CAPITAL IN NATU RE BY THE ASSESSEE. THE SECOND AGREEMENT IS FOR TRANSFER OF GENERIC BUS INESS, MARKETING KNOWHOW AND NON-COMPETITION FEES FOR 5 YEARS FOR ` 270 LAKHS. THE THIRD AGREEMENT FOR ACQUISITION OF TECHNICAL KNOWHOW FOR MANUFACTURING FOR A CONSIDERATION OF ` 5 LAKHS. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE COMPANY HAS TREATED THE ABOVE ` 270 LAKHS AND ` 5 LAKHS RESPECTIVELY AS REVENUE EXPENDITURE. WE FIND THAT THE A.O. DISALLO WED THE CLAIM OF REVENUE EXPENDITURE OF ` 270 LAKHS ON TWO COUNTS IE. (I) THE EXPENDITURE I NCURRED BY THE ASSESSEE WAS CAPITAL IN NATURE BECAUSE OF ENDUR ING BENEFIT AND (II) THE EXPENDITURE DID NOT PERTAIN TO THE YEAR UNDER CONSI DERATION SINCE THE LIABILITY ACCRUED IN THE SUBSEQUENT YEAR. 12 ITA NO.4379/MUM/2005 5.1. WE FIND THE LD. CIT(A) RELYING ON A COUPLE OF DECISIONS HELD THAT EXPENDITURE OF ` ` 270 LAKHS INCURRED BY THE ASSESSEE COMPANY IS CAPI TAL IN NATURE. HE, HOWEVER, HELD THAT THE DISALLOWANCE BY THE A.O. ON THE GROUND THAT THE LIABILITY HAS NOT ACCRUED DURING THE YEAR BUT PERTAINED TO THE NEXT YEAR IS NOT CORRECT. WE FIND THE ABOVE FINDING GIV EN BY THE LD. CIT(A) THAT THE EXPENDITURE DID PERTAIN TO THE IMPUGNED ASSESSMENT YEAR IN VIEW OF THE DATES OF MOU AND DATES OF THE AGREEMENT HAS NOT BE EN CHALLENGED BY THE REVENUE. THEREFORE, THE ONLY ISSUE TO BE DECIDED I S AS TO WHETHER THE AMOUNT OF ` 270 LAKHS PAID BY THE ASSESSEE FOR TRANSFER OF GEN ERIC BUSINESS, MARKETING KNOWHOW AND NON-COMPETITION FEES FOR 5 YE ARS TO MAX INDIA LTD. IS REVENUE IN NATURE AS CLAIMED BY THE ASSESSEE OR CAPITAL IN NATURE AS HELD BY THE A.O. AND UPHELD BY THE LD. CIT(A). 5.2. WE FIND THE DEFINITION OF MARKETING KNOW-LOW GIVEN IN CLAUSE (1) OF THE AGREEMENT DTD. 27.1.97 (A COPY OF WHICH IS PLAC ED AT PAPER BOOK PAGE 28) READS AS UNDER:- MARKETING KNOW-HOW SHALL MEAN KNOWLEDGE OF POTENTI AL AND EXISTING MARKETS, MARKETING TECHNIQUES, RESULTS AND ANALYSIS OF MARKET SURVEYS, KNOWLEDGE OF AND THE CREATION OF DISTRIBUTION NETWO RK AND ALL OTHER INFORMATION AND KNOWLEDGE USED BY MAX INDIA IN THE MARKETING OF THE PRODUCTS. 5.3 CLAUSE (4) OF THE AGREEMENT I.E TERMS FOR PAYME NT OF MARKETING KNOW- HOW READS AS UNDER (PAGE 31 OF THE PAPER BOOK):- IN CONSIDERATION OF MAX INDIA PROVIDING THE MARKET ING KNOW-HOW TO RPIL UNDER THIS AGREEMENT, RPIL SHALL PAY TO MAX INDIA A N AGGREGATE OF ` 270 LACS . THE AFORESAID AMOUNT OF ` 270 LACS SHALL BE PAYABLE AS FOLLOWS..... 5.4 SIMILARLY, WE FIND FROM CLAUSE (5) OF THE AGREE MENT I.E. NON- COMPETITION WHICH PROVIDES NON-COMPETITION ONLY DUR ING THE 5 YEARS PERIOD AND EVEN DURING SUCH PERIOD, MAX INDIA HAS ALL THE FREEDOM SUCH AS MANUFACTURING, MARKETING, PROMOTING, ACTING AS LOAN LICENSEE SUBJECT ONLY TO CERTAIN CONDITIONS SUCH AS NON-REPETITION OF DES IGN, COLOUR SCHEME OR CALLIGRAPHY ETC. WE FINBD THE 3 SEPERATE AGREEMENTS DTD. 27.1.97 BETWEEN 13 ITA NO.4379/MUM/2005 THE ASSESSEE COMPANY AND MAX INDIA LTD. BIFURCATING THE CONSIDERATION OF ` 3.25 CRORES INTO 3 PARTS FOR ACQUISITION OF 3 DIFFE RENT RIGHTS IS AS PER CLAUSE 5 OF MOU DTD. 9.11.96 WHICH IS AS PER PAGE 4 OF THE P APER BOOK. AFTER GOING THROUGH THE ABOVE AGREEMENTS AND MOU, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE COMPANY HAS NOT ACQUIRED THE ENTI RE BUSINESS OF MAX INDIA LTD. IT IS NOT BUYING THE BUSINESS BUT ONLY E XTENDING THE COMPANYS PRODUCT RANGE AND OBTAINING THE ALLIED FACILITIES I N MARKETING AND DISTRIBUTION THEREOF WHICH IS REVENUE IN NATURE. I T DOES NOT RELATE TO MANUFACTURING OR PROCESSING OF THE GOODS SO AS TO T REAT THE SAME AS CAPITAL IN NATURE. 5.5. FROM THE VARIOUS CLAUSES OF THE AGREEMENT, WE FIND FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE THA T THE PURPOSE OF ACQUIRING SUCH INFORMATION WAS TO AVOID SPENDING ON A RECURRING BASIS, TIME, MONEY AND EFFORTS IN CARRYING OUT MARKET SURV EYS, APPOINTING PROFESSIONALS AND/OR EXPERT STAFF FOR WORKING OUT MARKETING AND SALES STRATEGIES AND FORECASTS AND THEREBY REDUCING THE L EARNING PERIOD AND AUGMENT THE COMPANYS PROFITS FROM THE VERY FIRST Y EAR. THUS, THE EXPENDITURE INCURRED ON ACQUISITION OF THE INFORMAT ION WAS OUT OF COMMERCIAL EXPEDIENCY AND AS A SUBSTITUTE FOR A SER IES OF OTHER REVENUE EXPENSES THAT WOULD HAVE TO BE INCURRED ON APPOINTI NG EXPERTS/PROFESSIONALS AND CONDUCTING MARKET SURVEYS ETC. ON PHARMACEUTICAL PRODUCTS WHICH IS THE EXISTING LINE OF BUSINESS OF THE ASSESSEE. WE ALSO FIND FORCE IN THE SUBMISSION OF T HE LD. COUNSEL FOR THE ASSESSEE THAT THE NON-COMPETITION CLAUSE IN CASE OF THE ASSESSEE IS ONE OF THE ROUTINE CLAUSES WHICH IS NORMALLY PUT IN SUCH A GREEMENTS AND CANNOT BE INTERPRETED TO MAKE THE SAID PAYMENT MADE BY THE ASSESSEE TO MAX INDIA AS CAPITAL EXPENDITURE. 5.6. WE FIND THE HONBLE A.P. HIGH COURT IN THE CAS E OF COROMANDEL FERTILISERS LTD. (SUPRA) FOLLOWING THE DECISIONS OF HONBLE SUPREME COURT IN 14 ITA NO.4379/MUM/2005 THE CASES OF CIT VS. CIBA OF INDIA LTD. ( 69 ITR 69 2) AND EMPIRE JUTE CO. LTD. VS. CIT (124 ITR 1 HAS HELD AS UNDER:- (SHORT NOTES) IN THE CASE OF A COLLABORATION AGREEMENT, THE CUMUL ATIVE EFFECT OF ALL THE TERMS AND STIPULATIONS OF THE AGREEMENT AND THE NATURE OF THE BENEFIT ACCRUED AND THE RESTRICTIONS IMPOSED ON THE RESPECTIVE PARTIES, THE PERIOD DURING WHICH THE AGREEMENT IS OPERATIVE AND THE RIGHTS THAT FLOW TO THE ASSESSEE THEREFROM HAVE TO BE TAKEN INTO ACCOUNT AND ON AN ASSESSMENT OF AL L THOSE FACTORS, THE QUESTION WHETHER THE EXPENDITURE INCURRED BY PAYMEN T OF THE CONSIDERATION UNDER THE AGREEMENT CONSTITUTES REVENUE OR CAPITAL EXPENDITURE HAS TO BE DETERMINED. IN THIS CONTEXT, IT CANNOT BE IGNORED T HAT WITH THE PACE OF DEVELOPING TECHNOLOGY AND SCIENTIFIC KNOWLEDGE AND EASY INTER-COMMUNICATION BETWEEN ADVANCED COUNTRIES AND THE DEVELOPING COUNT RIES, TECHNICAL KNOW- HOW WITH RESPECT TO EACH PRODUCT, FAR FROM REMAININ G STATIC, WOULD BE NOT ONLY DEVELOPING AT A VERY FAST PACE BUT ALSO SPREADING T O ALL PARTS OF THE WORLD QUICKLY. THEREFORE, TECHNICAL KNOW-HOW IS LIABLE TO SPEEDY OBSOLESCENCE AND MIGHT NOT BE A BENEFIT OF AN ENDURING NATURE. IN THE CASE OF ELIMINATION OF COMPETITION ALSO, THE TEST LAID DOWN IS WHETHER BENEFIT OF AN ENDURING NATURE WAS ACQUIRED AND, IN DETERMINING THAT, THE COURT SHOULD CONSIDER WHETHER A COMPETITOR IN BUSINESS WA S ELIMINATED FOR A CONSIDERABLE PERIOD OF TIME. THE MAIN OBJECT OF THE ASSESSEE, A COMPANY WITH ITS REGISTERED OFFICE IN ANDHRA PRADESH, WAS MANUFACTURE OF FERTILIZERS IN I NDIA. IT ENTERED INTO AN AGREEMENT WITH EID PARRY WHEREBY EID PARRY AGREED T O IMPART TO THE ASSESSEE ITS KNOW-HOW REGARDING AGRONOMICAL RESEARCH, SOIL F ORMATION AND CHEMICAL COMPOSITIONS, CROPPING PATTERNS PARTICULARLY APPLIC ABLE TO SOUTH INDIA AS ALSO ITS KNOW-HOW FOR PROMOTING SALE OF FERTILIZERS MANU FACTURED BY IT. EID PARRY AGREED NOT TO SELL ITS PRODUCTS IN ANDHRA PRADESH A ND OTHER AREAS ADJACENT THERETO. THE ASSESSEE PAID RS. 6,34,500 TO EID PARR Y AND CLAIMED IT AS REVENUE EXPENDITURE. THE CLAIM WAS REJECTED BY THE INCOME-TAX OFFICER AND THIS WAS CONFIRMED BY THE TRIBUNAL. HELD, THAT IN THE INSTANT CASE TECHNICAL KNOW-HOW W AS NOT TOTALLY TRANSFERRED TO THE ASSESSEE. THE ASSESSEE WAS GIVEN ONLY AN EXCLUSIVE RIGHT TO USE THE KNOW-HOW IN ANDHRA PRADESH AND OTHER AREAS ADJACENT THERETO. THE ASSESSEE COULD NOT ASSIGN THIS KNOW-HOW TO ANY THIR D PARTY. ACQUISITION OF SALES KNOW-HOW, MARKET CONDITIONS AND SOIL COMPOSIT IONS WERE NOT OF A LASTING AND ENDURING NATURE. THE AMOUNT PAID FOR IT WOULD, THEREFORE, CONSTITUTE REVENUE EXPENDITURE. THE TECHNICAL KNOW-HOW IN THIS CASE BEING OF A FLEETING NATURE AND LIABLE TO BECOME OBSOLETE, THE FACT THAT NO PERIOD WAS PRESCRIBED DURING WHICH EID PARRY MIGHT NOT SELL COMPLEX FERTI LIZERS WITHIN ANDHRA PRADESH AND ITS ADJACENT AREAS, WAS NOT OF MUCH CON SEQUENCE. THEREBY IT COULD NOT BE SAID THAT ANY TANGIBLE BENEFIT OF AN E NDURING NATURE WAS ACQUIRED BY THE ASSESSEE SO AS TO MAKE THE EXPENDIT URE INCURRED BY IT CAPITAL EXPENDITURE. THE AMOUNT OF RS. 6,35,400 PAID BY THE ASSESSEE WAS, THEREFORE, DEDUCTIBLE UNDER SECTION 10(2)(XV) OF THE 1922 ACT. 15 ITA NO.4379/MUM/2005 5.7. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF TATA ENGINEERING & LOCOMOTIVE CO. (P) LTD. (SUPRA) HAS H ELD AS UNDER (SHORT NOTES) :- TECHNICAL KNOW-HOW CANNOT BE CALLED A TANGIBLE ASS ET. TECHNICAL KNOW-HOW AND TECHNICAL ADVICE FOR THE TIME BEING CANNOT IN T HESE DAYS OF TECHNOLOGICAL AND SCIENTIFIC DEVELOPMENT AND CONSEQUENT CHANGE IN PRODUCTION TECHNIQUES, BE TREATED AS A CAPITAL ASSET. THE LENGTH OF THE PE RIOD OF AGREEMENT IS NOT 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 NO T MEAN THAT HE HAS ACQUIRED A BENEFIT OF AN ENDURING NATURE. AGREEMENT OF FOREIGN COLLABORATION WHERE FOREIGN KNOW-HOW IS AVAILED OF IN LIEU OF PAY MENT, IS IN SUBSTANCE A TRANSACTION OF ACQUIRING THE NECESSARY TECHNICAL IN FORMATION WITH REGARD TO THE TECHNIQUE OF PRODUCTION INSTEAD OF EMPLOYING PERSON S HAVING KNOWLEDGE OF TECHNIQUES AND UTILISING THEIR KNOWLEDGE TECHNICAL KNOW-HOW IS ACQUIRED. TECHNICAL KNOW-HOW MADE AVAILABLE BY A PARTY TO SUC H, AN AGREEMENT DOES NOT STAND ON THE SAME FOOTING AS PROTECTED RIGHTS U NDER A REGISTERED PATENT. THE ASSESSEE, TELCO, ENTERED INTO TWO AGREEMENTS ON E WITH DAIMLER BENZ AND ANOTHER WITH, HENRICOT. UNDER THE FIRST AGREEMENT D AIMLER BENZ WERE TO PROVIDE DRAWINGS AND DESIGNS AND FULL TECHNICAL INF ORMATION REQUIRED FOR THE MANUFACTURE OF AUTOMOTIVE PRODUCTS. THEY WERE TO PR OVIDE TRAINING FACILITIES FOR INDIAN PERSONNEL IN THEIR GERMAN PLANTS. TELCO COULD USE THE NAME AND TRADE MARK OF DAIMLER BENZ. THE PERIOD OF AGREEMENT WAS FIFTEEN YEARS BUT ONE OF THE PARTIES COULD TERMINATE THE AGREEMENT BY SIX MONTHS' NOTICE IN CASE OF A SERIOUS BREACH OF ITS TERMS AND CONDITIONS. AF TER THE AGREEMENT CAME TO AN END TELCO WAS ENTITLED TO CONTINUE ITS MANUFACTURE BUT THEY COULD NOT USE THE TRADE NAME OF TATA-MERCEDEZ-BENZ. UNDER THE SECOND AGREEMENT HENRICOT AGREED TO GIVE TECHNICAL ADVICE, INFORMATION AND AS SISTANCE TO TELCO STEEL FOUNDRY AND PROVIDE FACILITIES FOR TRAINING INDIAN PERSONNEL IN THEIR BELGIAN PLANT. THE AGREEMENTS PROVIDED FOR PAYMENTS OF ROYA LTY AND A PERCENTAGE OF PROFITS FOR PROVISION OF KNOW-HOW. TELCO HAD TO BEA R THE EXPENSES OF TRAINING ITS PERSONNEL IN THE FOREIGN FACTORIES. TELCO CLAIM ED THE AMOUNTS PAID UNDER THE COLLABORATION AGREEMENTS AND EXPENSES INCURRED IN TRAINING ITS PERSONNEL FOR THE ASSESSMENT YEAR 1959-60 AS DEDUCTIBLE EXPEN DITURE: HELD, (I) ON THE FACTS, THAT IN ESSENCE THE AGREEME NTS WERE FOR ACQUIRING TECHNICAL KNOWLEDGE REGARDING METHODS OF PRODUCTION AND IN THE CASE OF DAIMLER BENZ FOR USE OF THE TRADE NAME. THE ASSESSE E HAD NOT ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR THE BE NEFIT OF ITS BUSINESS. THE AMOUNTS PAID FOR PROVISION OF KNOW-HOW AND LICENCE TO USE THE TRADE NAME WERE REVENUE EXPENDITURE. (II) THAT THE EXPENDITURE ON TRAINING OF PERSONNEL WAS INCURRED WITH A VIEW TO ACHIEVING MAXIMUM AND EFFICIENT PRODUCTION. THE EXP ENDITURE INCURRED ON SUCH TRAINING WAS CLOSELY RELATED TO THE PROFIT EAR NING PROCESS AND WAS ALLOWABLE AS REVENUE EXPENDITURE 16 ITA NO.4379/MUM/2005 5.8. WE FIND THE HONBLE SUPREME COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. (SUPRA) HAS HELD AS UNDER:- (SHORT NOTES):- ON JUNE 8, 1961, THE APPELLANT, A COMPANY ENGAGED IN THE MANUFACTURE OF ANTIBIOTICS AND PHARMACEUTICALS, WAS GRANTED A LICE NCE FOR THE MANUFACTURE OF PENICILLIN. BY THE YEAR 1963, IT HAD ALREADY MADE A N OUTLAY OF MORE THAN RS. 66 LAKHS FOR SETTING UP A PLANT FOR THE PRODUCTION OF PENICILLIN. IN THE INITIAL YEARS, THE APPELLANT WAS ABLE TO ACHIEVE ONLY MODER ATE YIELDS OF PENICILLIN. WITH A VIEW TO INCREASING THE YIELD, THE APPELLANT STARTED NEGOTIATIONS IN 1963, WITH MEIJI, A REPUTED JAPANESE ENTERPRISE ENGAGED I N THE MANUFACTURE OF ANTIBIOTICS, WHICH CULMINATED IN AN AGREEMENT DATED OCTOBER 9, 1963, WHEREUNDER MEIJI, IN CONSIDERATION OF A 'ONCE FOR A LL PAYMENT' OF U.S.$ 50,000 (EQUIVALENT THEN TO RS. 2,39,625), AGREED TO SUPPLY TO THE APPELLANT THE 'SUBCULTURES OF MEIJI'S MOST SUITABLE PENICILLIN PR ODUCING STRAINS,' IN A PILOT PLANT, THE TECHNICAL INFORMATION, KNOW-HOW AND WRIT TEN DESCRIPTION OF MEIJI'S PROCESS FOR FERMENTATION OF PENICILLIN ALONG WITH A FLOWSHEET OF THE PROCESS IN THE PILOT PLANT, AND THE DESIGN AND SPECIFICATIONS OF THE MAIN EQUIPMENT IN SUCH PILOT PLANT, AND TO ARRANGE FOR THE TRAINING O F THE APPELLANT'S REPRESENTATIVES IN MEIJI'S PLANT IN JAPAN AT THE AP PELLANT'S EXPENSE AND ADVISE THE APPELLANT IN LARGE SCALE MANUFACTURE OF PENICIL LIN FOR A PERIOD OF TWO YEARS. THE APPELLANT WAS TO KEEP THE TECHNICAL KNOW-HOW CO NFIDENTIAL AND SECRET AND WAS NOT TO SEEK ANY PATENT FOR THE PROCESS. FOR THE ASSESSMENT YEAR 1964-65, THE APPELLANT CLAIMED DEDUCTION OF THE SUM OF RS. 2 ,39,625 AS A REVENUE EXPENDITURE. BOTH THE DEPARTMENT AND THE TRIBUNAL R EJECTED THE CLAIM HOLDING THAT THE EXPENDITURE WAS CAPITAL IN NATURE. IN COMI NG TO THIS CONCLUSION, THE TRIBUNAL HELD, ON AN INTERPRETATION OF THE AGREEMEN T, (I) THAT THE APPELLANT HAD TO INSTAL A LARGER PLANT MODELLED ON THE PILOT PLAN T; (II) THAT THE PAYMENT WAS NOT MADE IN THE COURSE OF CARRYING OUT AN EXISTING BUSINESS BUT WAS FOR THE PURPOSE OF SETTING UP A NEW PLANT AND A NEW PROCESS ; (III) THAT THE OUTLAY WAS INCURRED FOR COMPLETE REPLACEMENT OF THE EQUIPMENT OF THE BUSINESS INASMUCH AS A NEW PROCESS WITH A NEW TYPE OF PLANT WAS TO BE PUT UP IN THE PLACE OF THE OLD PROCESS AND OLD PLANT. ON A REFERENCE, THE HIGH COURT HELD THAT THE SUM OF RS. 2,39,625 WAS NOT A REVENUE EXPENDITURE. ON APPE AL TO THE SUPREME COURT: HELD, REVERSING THE DECISION OF THE HIGH COURT, (I) THAT THERE WAS NO MATERIAL BEFORE THE TRIBUNAL TO COME TO THE FINDING THAT THE APPELLANT HAD OBTAINED UNDER THE AGREEMENT A 'COMPLETELY NEW PLANT' WITH A COMPLETELY NEW PROCESS AND A COMPLETELY NEW TECHNICAL KNOW-HOW FROM MEIJI. THE BUSINESS OF THE APPELLANT FROM THE COMMENCEMENT OF ITS PLANT IN 196 1 WAS THE MANUFACTURE OF PENICILLIN. EVEN AFTER THE AGREEMENT, THE PRODUCT C ONTINUED TO BE PENICILLIN AND THE AGREEMENT WITH MEIJI STIPULATED THE SUPPLY OF T HE 'MOST SUITABLE SUB- CULTURES' EVOLVED BY MEIJI FOR PURPOSES OF AUGMENTA TION OF THE YIELD OF PENICILLIN. (II) THAT THERE WAS NO MATERIAL FOR THE TRIBUNAL TO HOLD THAT THE AREA OF IMPROVISATION WAS NOT A PART OF THE EXISTING BUSINE SS OR THAT THE ENTIRE GAMUT OF THE EXISTING MANUFACTURING OPERATIONS FOR THE CO MMERCIAL PRODUCTION OF PENICILLIN IN THE APPELLANT'S EXISTING PLANT HAD BE COME OBSOLETE OR INAPPROPRIATE IN RELATION TO THE EXPLOITATION OF TH E NEW SUB-CULTURES OF THE HIGH YIELDING STRAINS SUPPLIED BY MEIJI. THE MERE IMPROV EMENT IN OR UPDATING OF THE FERMENTATION-PROCESS WOULD NOT NECESSARILY BE INCON SISTENT WITH THE RELEVANCE 17 ITA NO.4379/MUM/2005 AND CONTINUING UTILITY OF THE EXISTING INFRASTRUCTU RE, MACHINERY AND PLANT OF THE APPELLANT. (III) THAT THE LIMITATIONS PLACED IN THE AGREEMENT ON THE RIGHT OF THE APPELLANT IN DEALING WITH THE KNOW-HOW AND THE CONDITIONS AS TO NON-PARTIBILITY, CONFIDENTIALITY AND SECRECY OF THE KNOW-HOW, PERTAI NED MORE TO THE USE OF THE KNOW-HOW THAN TO ITS EXCLUSIVE ACQUISITION. (IV) THAT THE IMPROVISATION IN THE PROCESS AND TECH NOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINES S AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW OR FRESH VENTURE. THE FURTHER CIRCUMSTANCE THAT THE AGREEMENT PERTAINED TO A PROD UCT ALREADY IN THE LINE OF THE APPELLANT'S ESTABLISHED BUSINESS AND NOT TO A N EW PRODUCT INDICATED THAT WHAT WAS STIPULATED WAS AN IMPROVEMENT IN THE OPERA TIONS OF THE EXISTING BUSINESS AND ITS EFFICIENCY AND PROFITABILITY NOT R EMOVED FROM THE AREA OF THE DAY TO DAY BUSINESS OF THE APPELLANT'S ESTABLISHED ENTERPRISE. THE FINANCIAL OUTLAY UNDER THE AGREEMENT WAS FOR THE BETTER CONDU CT AND IMPROVEMENT OF THE EXISTING BUSINESS AND WAS REVENUE IN NATURE AND WAS ALLOWABLE AS A DEDUCTION IN COMPUTING THE BUSINESS PROFITS OF THE APPELLANT. BY THE COURT : (I) 'IT WOULD BE UNREALISTIC TO IGNO RE THE RAPID ADVANCES IN RESEARCH IN ANTIBIOTIC MEDICAL MICROBIOLOGY AND TO ATTRIBUTE A DEGREE OF ENDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW-H OW AT ANY PARTICULAR STAGE IN THIS FAST CHANGING AREA OF MEDICAL SCIENCE . THE STATE-OF-THE-ART IN SOME OF THESE AREAS OF HIGH PRIORITY RESEARCH IS CO NSTANTLY UPDATED SO THAT THE KNOW-HOW COULD NOT BE SAID TO BEAR THE ELEMENT OF T HE REQUISITE DEGREE OF DURABILITY AND NONEPHEMERALITY TO SHARE THE REQUIRE MENTS AND QUALIFICATIONS OF AN ENDURING CAPITAL ASSET. THE RAPID STRIDES IN SCIENCE AND TECHNOLOGY IN THE FIELD SHOULD MAKE US A LITTLE SLOW AND CIRCUMSP ECT IN TOO READILY PIGEONHOLING AN OUTLAY, SUCH AS THIS, AS CAPITAL.' (II) 'IN THE INFINITE VARIETY OF SITUATIONAL DIVERS ITIES IN WHICH THE CONCEPT OF WHAT IS CAPITAL EXPENDITURE AND WHAT IS REVENUE ARISES, IT IS WELL-NIGH IMPOSSIBLE TO FORMULATE ANY GENERAL RULE, EVEN IN THE GENERALITY OF CASES, SUFFICIENTLY ACCURATE AND REASONABLY COMPREHENSIVE, TO DRAW ANY CLEAR LINE OF DEMARCATION. HOWEVER, SOME BROAD AND GENERAL TESTS HAVE BEEN SUGGESTED FROM TIME TO TIME TO ASCERTAIN ON WHICH SIDE OF THE LINE THE OUTLAY IN ANY PARTICULAR CASE MIGHT REASONABLY BE HELD TO FALL. T HESE TESTS ARE GENERALLY EFFICACIOUS AND SERVE AS USEFUL SERVANTS; BUT AS MA STERS THEY TEND TO BE OVEREXACTING.' (III) 'THE QUESTION IN EACH CASE WOULD NECESSARILY BE WHETHER THE TESTS RELEVANT AND SIGNIFICANT IN ONE SET OF CIRCUMSTANCES ARE REL EVANT AND SIGNIFICANT IN THE CASE ON HAND ALSO. JUDICIAL METAPHORS ARE NARROWLY TO BE WATCHED, FOR, STARTING AS DEVICES TO LIBERATE THOUGHT, THEY END O FTEN BY ENSLAVING IT.' THE IDEA OF 'ONCE FOR ALL' PAYMENT AND 'ENDURING BE NEFIT' ARE NOT TO BE TREATED AS SOMETHING AKIN TO STATUTORY CONDITIONS; NOR ARE THE NOTIONS OF 'CAPITAL' OR 'REVENUE' A JUDICIAL FETISH. WHAT IS CAPITAL EXPEND ITURE AND WHAT IS REVENUE ARE NOT ETERNAL VERITIES BUT MUST NEEDS BE FLEXIBLE SO AS TO RESPOND TO THE CHANGING ECONOMIC REALITIES OF BUSINESS. THE EXPRES SION 'ASSET OR ADVANTAGE OF AN ENDURING NATURE' WAS EVOLVED TO EMPHASISE THE ELEMENT OF A SUFFICIENT DEGREE OF DURABILITY APPROPRIATE TO THE CONTEXT. 18 ITA NO.4379/MUM/2005 THERE IS ALSO NO SINGLE DEFINITIVE CRITERION WHICH, BY ITSELF, IS DETERMINATIVE WHETHER A PARTICULAR OUTLAY IS CAPITAL OR REVENUE. THE 'ONCE FOR ALL' PAYMENT TEST IS ALSO INCONCLUSIVE. WHAT IS RELEVANT IS THE PURPOSE OF THE OUTLAY AND ITS INTENDED OBJECT AND EFFECT, CONSIDERED IN A COMMONS ENSE WAY HAVING REGARD TO THE BUSINESS REALITIES. IN A GIVEN CASE, THE TES T OF 'ENDURING BENEFIT' MIGHT BREAK DOWN. 5.9 SIMILARLY, WE FIND THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. CIBA OF INDIA LTD. REPORTED IN 69 ITR 692 HAS HELD AS UNDER (SHORT NOTES):- THE ASSESSEE (ORIGINALLY NAMED CIBA PHARMA LTD.) W AS AN INDIAN SUBSIDIARY OF CIBA LTD. OF BASLE, A SWISS COMPANY ENGAGED IN T HE DEVELOPMENT, MANUFACTURE AND SALE OF MEDICAL AND PHARMACEUTICAL PREPARATIONS. THE PHARMACEUTICAL SECTION OF THE SWISS COMPANY IN INDI A WAS TAKEN OVER BY THE ASSESSEE FROM JANUARY 1, 1948. UNDER AN AGREEMENT D ATED DECEMBER 17, 1949, THE SWISS COMPANY UNDERTOOK TO DELIVER TO THE ASSESSEE ALL PROCESSES, FORMULATE, SCIENTIFIC DATA, WORKING RULES AND PRESC RIPTIONS PERTAINING TO THE MANUFACTURE OR PROCESSING OF PRODUCTS DISCOVERED AN D DEVELOPED IN THE SWISS COMPANY'S LABORATORIES AND TO FORWARD TO THE ASSESS EE AS FAR AS POSSIBLE ALL SCIENTIFIC AND BIBLIOGRAPHIC INFORMATION, PAMPHLETS OR DRAFTS, WHICH MIGHT BE USEFUL TO INTRODUCE LICENSED PREPARATIONS AND TO PR OMOTE THEIR SALE IN INDIA. IT GRANTED TO THE ASSESSEE FULL AND SOLE RIGHT AND LIC ENCE UNDER THE PATENT LISTED IN THE AGREEMENT TO MAKE, USE, EXERCISE AND VEND TH E INVENTIONS SPECIFIED THEREIN IN INDIA AND ALSO A LICENCE TO USE CERTAIN SPECIFIED TRADE MARKS IN THE TERRITORY SUBJECT TO ANY EXISTING LICENCE WHICH THI RD PARTIES HELD AT THE DATE OF AGREEMENT, OR WHICH THE SWISS COMPANY MIGHT GRANT T O THIRD PARTIES THEREAFTER. IN CONSIDERATION OF THE RIGHT TO RECEIV E SCIENTIFIC AND TECHNICAL ASSISTANCE THE ASSESSEE AGREED TO MAKE CONTRIBUTION S OF 5 PER CENT., 3 PER CENT., AND 2 PER CENT., RESPECTIVELY, OF THE NET SA LE PRICE OF THE PRODUCTS SOLD BY THE ASSESSEE TOWARDS, (I) TECHNICAL CONSULTANCY AND TECHNICAL SERVICE RENDERED AND RESEARCH WORK DONE; (II) COST OF RAW MATERIAL U SED FOR EXPERIMENTAL WORK; AND (III) ROYALTIES ON TRADE MARKS USED BY THE ASSE SSEE. THE ASSESSEE FURTHER AGREED: (A) NOT TO DIVULGE TO THIRD PARTIES WITHOUT THE CONSENT OF THE SWISS COMPANY ANY CONFIDENTIAL INFORMATION RECEIVED UNDER THE AGREEMENT; (B) WITHOUT THE WRITTEN CONSENT OF THE SWISS COMPANY, N OT TO ASSIGN THE BENEFIT OF THE AGREEMENT OR GRANT SUB-LICENCES OF THE PATENTS AND TRADE MARKS; AND (C) UPON TERMINATION OF THE AGREEMENT FOR ANY CAUSE TO CEASE TO USE THE PATENTS AND TRADE MARKS AND TO RETURN TO THE SWISS COMPANY ALL COPIES OF INFORMATION, SCIENTIFIC DATA OR MATERIAL SENT TO IT AND TO REFRA IN FROM COMMUNICATING ANY SUCH INFORMATION, SCIENTIFIC DATA OR MATERIAL RECEI VED BY IT TO ANY PERSON. THE AGREEMENT WAS TO BE IN FORCE FOR A PERIOD OF 5 YEAR S FROM JANUARY 1, 1948, AND WAS LIABLE TO CANCELLATION BY EITHER PARTY IF T HE OTHER PARTY FAILED TO PERFORM OR OBSERVE THE PROVISIONS OF THE AGREEMENT, BY GIVING IT 3 MONTHS' NOTICE. BY A SUBSEQUENT AGREEMENT THE CONTRIBUTION PAYABLE WAS REDUCED FROM 10 PER CENT. TO 6 PER CENT. OF THE NET SELLING PRIC E OF THE PHARMACEUTICALS. THE QUESTION WAS WHETHER THE CONTRIBUTION OTHER THAN TH AT PART PAID AS ROYALTIES (ROYALTIES HAVING BEEN ALLOWED AS A DEDUCTION) WAS ADMISSIBLE AS AN ALLOWANCE EITHER UNDER CLAUSE (XII) OR UNDER CLAUSE (XV) OF SECTION 10(2) OF THE INDIAN INCOME-TAX ACT, 1922: 19 ITA NO.4379/MUM/2005 HELD, (I) THAT THE CONTRIBUTION WAS NOT ALLOWABLE U NDER SECTION 10(2)(XII) AS EXPENDITURE LAID OUT OR EXPENDED ON SCIENTIFIC RESE ARCH. PAYMENT MADE TO RECOUP ANOTHER PERSON FOR EXPENDITURE OR SCIENTIFIC RESEARCH INCURRED BY THAT OTHER PERSON, EVEN IF IT MIGHT ULTIMATELY BENEFIT T HE ASSESSEE, WAS, UNLESS IT WAS CARRIED ON FOR OR ON BEHALF OF THE ASSESSEE, NO T EXPENDITURE LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSI NESS OF THE ASSESSEE UNDER SECTION 10(2)(XII). (II) THAT, HOWEVER, THE CONTRIBUTION WAS ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 10(2)(XV). THE ASSESSEE DID NOT UNDER THE AGREEMENT BECOME ENTITLED EXCLUSIVELY EVEN FOR THE PERIOD OF THE AGR EEMENT, TO THE PATENTS AND TRADE MARKS OF THE SWISS COMPANY; IT HAD MERELY ACC ESS TO THE TECHNICAL KNOWLEDGE AND EXPERIENCE IN THE PHARMACEUTICAL FIEL D WHICH THE SWISS COMPANY COMMANDED. THE ASSESSEE WAS ON THAT ACCOUNT A MERE LICENSEE FOR A LIMITED PERIOD OF THE TECHNICAL KNOWLEDGE OF THE SWISS COMPANY WITH THE RIGHT TO USE THE PATENTS AND TRADE MARKS OF THAT CO MPANY. THE ASSESSEE ACQUIRED UNDER THE AGREEMENT MERELY THE RIGHT TO DR AW, FOR THE PURPOSE OF CARRYING ON ITS BUSINESS AS A MANUFACTURER AND DEAL ER OF PHARMACEUTICAL PRODUCTS, UPON THE TECHNICAL KNOWLEDGE OF THE SWISS COMPANY FOR A LIMITED PERIOD; BY MAKING THAT TECHNICAL KNOWLEDGE AVAILABL E THE SWISS COMPANY DID NOT PART WITH ANY ASSET OF ITS BUSINESS, NOR DID TH E ASSESSEE ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR THE BE NEFIT OF ITS BUSINESS. CIBA LTD., BASLE, THE SWISS COMPANY, AND MAY AND BA KER LTD., HAD MUTUALLY GRANTED TO ONE ANOTHER A NON-EXCLUSIVE LICENCE IN R ESPECT OF SULPHATHIAZOLE PRODUCTS IN DIFFERENT COUNTRIES INCLUDING INDIA. TH EY HAD AGREED TO TAKE ALL NECESSARY STEPS TO DEFEND PATENTS GRANTED TO OR APP LIED FOR BY THEM IN RESPECT OF SULPHATHIAZOLE PRODUCTS AGAINST INFRINGEMENT. BE FORE THE ASSESSEE-COMPANY WAS INCORPORATED, MAY AND BAKER LTD. INSTITUTED A S UIT IN THE CALCUTTA HIGH COURT AGAINST BOOTS DRUG CO., ALLEGING INFRINGEMENT OF ITS INDIAN PATENTS. IT WAS FOUND NECESSARY, PENDING THE SUIT, TO AMEND THE SPECIFICATIONS OF THE PATENTS, AND THE HIGH COURT GRANTED PERMISSION TO A MEND THE PLAINT CONDITIONALLY ON MAY AND BAKER PAYING TO BOOTS DRUG CO. COSTS OF AND INCIDENTAL TO THE APPLICATION FOR AMENDMENT. MAY AN D BAKER COMPLIED WITH THE ORDER FOR PAYMENT OF COSTS AND THE SWISS COMPANY PA ID ITS SHARE OF COSTS TO MAY AND BAKER LTD. THE ASSESSEE REIMBURSED THAT AMO UNT TO THE SWISS COMPANY AND CLAIMED IT AS A PERMISSIBLE DEDUCTION I N COMPUTING ITS PROFITS: HELD, THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCT THE CONTRIBUTION IT MADE TO THE SWISS COMPANY SINCE THE ASSESSEE WAS NOT ENT ITLED TO THE PATENT RIGHTS OF SULPHATHIAZOLE PRODUCTS. NOR COULD THE ASSESSEE BE SAID TO BE SEEKING TO PROTECT ITS TRADING INTERESTS BY MAKING THE PAYMENT . 5.10. IN VIEW OF THE RATIO LAID DOWN BY THE DECISIO NS CITED ABOVE AND AS PER THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. CO UNSEL FOR THE ASSESSEE MENTIONED AT PARA 4 OF THIS ORDER, THE AMOUNT OF ` 270 LAKHS PAID FOR TRANSFER OF GENERIC BUSINESS, MARKET KNOW-HOW AND N ON-COMPETE FEE FOR 5 20 ITA NO.4379/MUM/2005 YEARS IN OUR OPINION HAS TO BE TREATED AS REVENUE I N NATURE BEING INCURRED FOR COMMERCIAL EXPEDIENCY. 6. THE VARIOUS DECISIONS RELIED ON BY THE LD. CIT(A ) IN OUR OPINION ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AND ARE DISTINGUISHABLE. IN THE CASE OF EID PARRY INDIA LTD. VS. CIT REPORTED IN 2 57 ITR 253 (MADRAS) AND RELIED ON BY THE LD. CIT(A), WE FIND THE EXPENDITUR E WERE INCURRED FOR THE PURPOSE OF SETTING UP A NEW PROJECT. EXPENDITURE HA S BEEN INCURRED IN THE YEAR PRIOR TO THE ASST. YEAR IN QUESTION. THE ASSES SEE HAS SUBSEQUENTLY ABANDONED THAT PROJECT. ACCORDINGLY, IT WAS HELD T HAT SUCH EXPENDITURE IS NOT A REVENUE EXPENDITURE. 6.1 IN THE CASE OF SWADESHI COTTON MILLS CO. LTD. V S. CIT 63 ITR 65, RELIED ON BY THE LD. CIT(A) WE FIND THE ASSESSEE ENTERED I NTO CONTRACT FOR PURCHASE OF TEXTILE MACHINERY. SUBSEQUENTLY, THE ORDER WAS CANCELLED AS THE MACHINERY WAS NOT REQUIRED IN THE ALTERED CIRCUMSTA NCES. COMPENSATION WAS PAID TO THE CONTRACTING PARTY. ACCORDINGLY, IT WAS HELD THAT IT IS A CAPITAL RECEIPT. 6.2 IN THE CASE OF CIT V. REINZ TALBORS PVT. LTD. 252 ITR 637 AND RELIED ON BY THE LD. CIT(A) WE FIND AN AGREEMENT WAS ENTER ED INTO BY THE ASSESSEE WITH A FOREIGN CONCERN FOR PROVIDING TECHNICAL KNOW -HOW IN ITS MANUFACTURING ACTIVITY. THE FACTS OF THIS CASE ARE ENTIRELY DIFFERENT, BUT COMPARABLE WITH THE AMOUNT OF ` 5 LAKHS WHICH THE ASSESSEE IN THE INSTANT APPEAL HAS PAID FOR TECHNICAL KNOW-HOW ON WHICH IT HAS CLAIMED THE DEDUCTION 1/6 TH TO BE ALLOWED AS PER PROVISIONS OF SEC. 35B, BUT T HE SAME HAS NO APPLICATION ON THE AMOUNT OF ` 2.7 CRORES PAID FOR MARKETING KNOW- HOW. 21 ITA NO.4379/MUM/2005 6.3. WE FIND THE THE LD. CIT(A) HAS ALSO RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EIMCO K.C.P. LTD. V. C IT 242 ITR 659. IN THIS CASE, A NEW COMPANY WAS SET UP AND ENTERED INT O AN AGREEMENT FOR TECHNICAL KNOW-HOW TO MANUFACTURE EIMCO SEDIMENTATI ON AND FILTRATION EQUIPMENT AND AS PER THE AGREEMENT, COLLABORATOR HA S TO SUPPLY GENERAL TECHNICAL DATA INCLUDING MANUFACTURING DRAWING. IT CONFIRMED THE FINDING OF THE CIT(A) THAT THIS IS A CAPITAL EXPENDITURE U/S 3 5A AND THE ASSESSEE IS ENTITLED TO 1/4 TH OF THE SAME AS DEDUCTION. 6.4. IN SO FAR AS THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF JONAS WOODHEAD & SONS (INDIA) PVT. LTD. (SUPRA) AND RELIED ON BY THE LD. CIT(A), WE FIND THE SAME IS ALSO NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE, UNDER THE TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN THE PARTIES, IT WAS STIPULATED THAT THE FOR EIGN COMPANY WOULD GIVE THE APPELLANT THE TECHNICAL INFORMATION AND KNOW-HO W RELATING TO THE SETTING UP OF A PLANT SUITABLE FOR MANUFACTURE OF THE PRODU CTS AS WELL AS THE TECHNICAL KNOW-HOW RELATING TO THE SETTING UP OF TH E PLANT ITSELF, THE DRAWINGS, ESTIMATES, SPECIFICATIONS, MANUFACTURING METHODS, BLUE PRINTS OF PRODUCTION AND TESTING EQUIPMENT AND OTHER DATA AND INFORMATION NECESSARY TO MANUFACTURE THE PRODUCT AND TO SET UP PROPER AND EFFICIENT PLANTS. ON THESE FACTS, IT WAS HELD THAT THE COMPOSITE PAYMENT WAS PAYMENT FOR TECHNICAL KNOW-HOW AND SERVICES RENDERED FOR SETTIN G UP THE PLANT AND MANUFACTURE OF PRODUCTS. ACCORDINGLY, 1/4 TH OF THE PAYMENT WAS TREATED AS CAPITAL EXPENDITURE AND BALANCE WAS TREATED AS REVE NUE EXPENDITURE. IT WAS HELD THAT WHAT WAS SET UP BY THE APPELLANT WAS A NE W BUSINESS AND THE FOREIGN COMPANY HAD NOT ONLY FURNISHED INFORMATION AND TECHNICAL KNOW- HOW BUT RENDERED VALUABLE SERVICES IN THE SETTING U P OF THE FACTORY ITSELF AND EVEN AFTER THE EXPIRY OF THE AGREEMENT, THERE WAS N O EMBARGO ON THE APPELLANT TO CONTINUE TO MANUFACTURE THE PRODUCT IN QUESTION. HENCE, ENTIRE PAYMENT COULD NOT BE HELD TO BE REVENUE EXPENDITURE , MERELY BECAUSE THE PAYMENT WAS REQUIRED TO BE MADE AT A CERTAIN PERCEN TAGE RATE OF THE GROSS TURNOVER OF THE PRODUCTS AS ROYALTY AND ACCORDINGLY , 25% OF THE SUM PAID AS 22 ITA NO.4379/MUM/2005 ROYALTY BY THE APPELLANT COMPANY WAS TREATED AS CAP ITAL EXPENDITURE AND 75% OF THE AMOUNT WAS HELD TO BE REVENUE IN NATURE. HOWEVER, THE FACTS OF THE CASE ARE ENTIRELY DIFFERENT. THE ASSESSEE IN T HE INSTANT CASE AS PER THE TERMS OF THE AGREEMENT HAS PAID ` 2.70 CRORES FOR TRANSFER OF GENERIC BUSINESS, MARKET KNOW-HOW AND NON COMPETE FEE. 6.5. THE LD. CIT(A) ALSO RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. W.S. INSULATORS OF IND IA LTD. 243 ITR 348 ACCORDING TO WHICH IF A NEW TECHNOLOGY IS ACQUIRED FOR MANUFACTURING OF NEW PRODUCTS, IT WOULD BE A CAPITAL EXPENDITURE. HOWEVE R, THE ABOVE DECISION, IN OUR OPINION, IS ALSO NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AND DISTINGUISHABLE IN VIEW OF THE VARIOUS DECISIONS OF THE HONBLE SUPREME COURT AND OF OTHER HIGH COURTS CITED ABOVE IN FAVOU R OF THE ASSESSEE. 7. CONSIDERING THE TOTALITY OF THE FACTS OF THE PRE SENT CASE AND IN THE LIGHT OF THE DISCUSSIONS ABOVE, WE HOLD THAT THE AMOUNT O F ` 270 LAKHS INCURRED AS PER AGREEMENT FOR TRANSFER OF GENERIC BUSINESS, MARKETING KNOW-HOW AND NON-COMPETITION FEE FOR 5 YEARS IS REVENUE IN NATUR E BEING OUT OF COMMERCIAL EXPEDIENCY. ACCORDINGLY, THE ORDER OF THE LD. CIT(A ) ON THIS ISSUE IS SET ASIDE AND THE A.O. IS DIRECTED TO ALLOW THE EXPENDITURE A S REVENUE IN NATURE. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWE D. 8. IN THE RESULT, GROUND NO. 2 OF ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED ON THE 29 TH DAY OF APRIL 2011. SD/- SD/- ( (( (ASHA VIJAYARAGHAVAN ASHA VIJAYARAGHAVAN ASHA VIJAYARAGHAVAN ASHA VIJAYARAGHAVAN) )) ) JUDICIAL MEMBER ( (( ( R K PANDA R K PANDA R K PANDA R K PANDA ) )) ) ACCOUNTANT MEMBER PLACE: MUMBAI : DATED: 29 TH APRIL 2011 RAJ* 23 ITA NO.4379/MUM/2005 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI 24 ITA NO.4379/MUM/2005 1 DRAFT DICTATED ON 25.4.2011 SR PS 2 DRAFT PLACED BEFORE AUTHOR ON 27.4.2011 SR PS 3 DRAFT PROPOSED & PLACE BEFORE THE 2 ND MEMBER JM / AM 4 DRAFT DISCU SSED/APPROVED BY 2 ND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR PS SR.PS 6 KEPT FOR PRONOUNCEMENT ON SR PS 7 FILE SENT TO THE BENCH CLERK SR PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE ON WHICH FILE GOES TO THE AR 10 DATE OF DESPATCH SR PS