Full Judgment Text
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PETITIONER:
SCIENTIFIC ENGINEERING HOUSE (P) LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, ANDHRA PRADESH
DATE OF JUDGMENT01/11/1985
BENCH:
TULZAPURKAR, V.D.
BENCH:
TULZAPURKAR, V.D.
MUKHARJI, SABYASACHI (J)
CITATION:
1986 AIR 338 1985 SCR Supl. (3) 701
1986 SCC (1) 11 1985 SCALE (2)908
ACT:
Income Tax Act, 1961 sections 32,34 and 43 (3) -
Definitions of "Book", "Plant" - Whether the technical know-
how in the shape of drawings and designs, charts, plants,
processing literature etc. comprised in "documentation
service" falls within the definition of "Book", "Plant" -
Whether the said "documentation service" not only "a capital
asset" but also "a depreciable asset".
HEADNOTE:
The appellant-assessee manufactures scientific
instruments and apparatus like Dumpy levellers, levelling
staves prismatic compass, etc. It entered into two separate
collaboration agreements, one dated 15th March, 1961 and the
other dated 31st March 1961 with M/s. Metrimpex Hungarian
Trading Company, Budapest for undertaking the manufacture of
microscopes and theodolites, under which the said
collaborator, in consideration of payment of Rs.80,000 each
(Rs. 1,60,000 under both the agreements together), agreed to
supply to the assessee all the technical know-how required
for the manufacture of these instruments. To enable the
assessee to manufacture these instruments in India, the
foreign collaborator inter alia agreed to render
documentation service" by supplying to the assessee an
uptodate and correct complete set each of the five types of
documents (such as manufacturing drawings, processing
documents, designs, charts, plans and other literature more
specifically detailed in clause 3 of the agreements) and to
render training and imparting of knowledge of the know-how
technique of manufacturing these instruments. Pursuant to
the agreements the appellant-assessee made full Payment of
Rs. 1,60,000 to the foreign collaborator and the latter
rendered "documentation service" by supplying complete sets
of all the documents including designs, drawings charts,
plans and other literature as per clause 3. The sum of Rs.
1,60,000 was debited by the assessee under the head
"Library".
For the assessment year 1966-67 for which relevant
accounting year ended on 30th September, 1965 the assessee
claimed a sum of RS. 12,000 by way of deprecation on
"Library". The Income Tax
702
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Officer held that the sum of Rs. 1,60,000 did not represent
the value of books purchased by the assessee represented the
price paid for acquiring the technical know-how which
amounted to capital expenditure but since no tangible or
depreciable asset was brought into existence no depreciation
allowance could be claimed. On appeal preferred by the
assessee, however, the Appellate Assistant Commissioner held
that what the assessee had done was to make an outright
purchase of certain specimen drawings, charts, plans, etc.
On special papers, that these documents when collected
together constituted a book on which depreciation as in the
case of plant and machinery, would, be at the appropriate
rate be allowable and he directed the Income Tax Officer to
allow the depreciation claimed. In the further appeal
preferred by the department the Tribunal took the view that
clauses 2,3,4,5 and 10 of the agreements did not lend
support to the stand taken by the assessee that payments
(Rs. 80,000 each) had been made mainly for the supply of
designs, drawings, charts, etc., that the services to be
rendered by the foreign collaborator covered a wide field
and that the supply of designs, drawings, charts, etc. was
incidental and only in furtherance of other services which
the foreign collaborator was expected to render. And that
since the supply of designs, drawings, charts, etc. was only
incidental and the payment of Rs. 1,60,000 could not
entirely be held to represent the purchase price of those
documents it was unnecessary for them to go into the
question whether the said documents fell within the meaning
of the expression ’books’ and whether depreciation was,
therefore, admissible thereon. The Tribunal however, held
that the agreements showed that some of the services which
the foreign collaborator was required to render to the
assessee were on revenue account (as for example, the
provision which required the foreign collaborator to depute
their experts to correct any flaws or irregularities that
might be encountered in the course of the production) and
that therefore the payment of Rs. 1,60,000 was partly on
capital account and partly on revenue account and that even
if it were to hold that the part of the payment was
allowable as revenue expenditure the allowance could not
exceed Rs. 12,000, being the deduction allowed by the
Appellate Assistant Commissioner. Thus, the Tribunal
confirmed the deduction of Rs. 12,000 not as depreciation
allowance but as revenue expenditure and in this manner it
confirmed the order of the Appellate Assistant Commissioner.
Both the assessee and the revenue sought a reference to the
High Court. On a consideration h of the terms and conditions
of the two collaboration agreements the High Court took the
view that the payment of Rs.1,60,000 did
703
not mainly represent the purchase price of the design ,
drawings, charts, etc. that the rendering of "documentation
service" was incidental, that no part of the expenditure
was on revenue account but the whole of lt was of a capital
nature bringing into existence an asset of enduring benefit
to the assessee, but what was brought into existence was a
non-depreciable asset and, therefore, the assessee was not
entitled to any relief in the case. Following the aforesaid
decision rendered by the High Court in relation to the
assessment year 1966-67 the assessee denied similar relief
claimed by it in the two subsequent assessment years, 1968-
69 and 1969-70. Hence the appeals by special leave of the
Court.
Allowing the appeal, the Court,
^
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HELD : 1.1 The expenditure incurred by the appellant as
and by way of purchase price of drawings, designs, charts,
plans, processing data and other literature etc. comprised
in "documentation service" specified in clause 3 of the
Agreements, was of a capital nature as a result whereof a
capital asset of technical know-how was acquired by the
assessee. [713 B-C]
1.2 From the relevant terms of the two agreements, it
is clear, that the "documentation service" undertaken to be
rendered by the foreign collaborator to the assessee was not
incidental and that the payment of Rs. 1,60,000 could only
be regarded as being mainly for and by way of purchase price
of the drawings, designs, charts, plans and all the
documents comprised in "documentation service" specified in
clause 3 of the agreement-.
[710 B-C]
1.3 Reading Clauses 3 and 6(a) of the agreements
together, it is clear, that the rendition of documentation
services specified in Clause 3 was really the main service
to be rendered by the foreign collaborator to the assessee
and the Clause 6 (a) categorically states that the lumpsum
payment of Rs. 80,000 (Rs. 1,60,000 under the two
agreements) was for rendition of such service. Clause 5(c)
makes the position clear where it has been stated that the
purchaser is to pay the value of the full documentation in
question, namely Rs. 80,000 according to the stipulation of
the present agreement." In fact the other service mentioned
in Clauses 4 and 5 appear to be incidental as some of these
were undertaken to be rendered as and when desired by the
assessee and for which the assessee had agreed to bear and
pay the expenses separately. But the tenor of the agreements
clearly shows that the various documents such as drawings,
designs.
704
charts, plans, processing data and other literature included
in documentation service, the supply whereof was undertaken
by the foreign collaborator, more or less formed the tools
by using which the business of manufacturing the instruments
was to be done by the assessee and for acquiring such
technical know-how through these documents lumpsum payment
was made. [712 F-H; 713 A-C]
2.1 Plant would include any article or object fixed or
movable, live or dead, used by businessman for carrying on
his business and it is not necessarily confined to an
apparatus which is used for mechanical operations or
processes or is employed in
mechanical or industrial business. In order to qualify as
plant the article must have some degree or durability. [714
B-C]
Yarmouth v. France, [1887] 19 Q.B.D. 647; Hinton v.
Maden & Ireland Ltd., 39 I.T.R. 357; Jarrold v. John Good
and Sons Limited, 1962, 40 T.C. 681 C.A.; Inland Revenue
Commissioners v. Barclay, Curle & Co. Ltd., 76 I.T.R. 62
quoted with approval.
Commissioner of Income Tax, Andhra Pradesh v. Taj Mahal
Hotel, 82 I.T.R. 44 referred to.
2.2 An Article to be treated as a "Plant" within the
meaning of section 43(3) of the Act must answer in the
affirmative the functional test, namely does article fulfil
the function of a plant in the assessee’s trading activity?
Ant is it a tool of his trade with which he carries on his
business? [714 G-H; 715 A]
2.3 Applying the functional test to the drawings,
designs, charts, plans, processing data and other literature
comprised in the "documentation service" as specified in
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clause 3 of the Agreement, these documents as constituting a
book would fall within the definition of "Plant". These
documents regarded collectively will have to be treated also
as a "book". The purpose of rendering such documentation
service by supplying these documents to the assessee was to
enable it to undertake its trading activity of manufacturing
the theodolites and microscopes therefore, these documents
had a vital function to perform in the Manufacture of these
instruments. In fact it is with the aid of these complete
and upto-date sets of documents that the assessee was able
to commence its manufacturing activity and these documents
really formed the basis of the business of manufacturing the
instruments in question. It is true, by themselves these
documents did not perform any mechanical operations or
processes but that cannot militate against their
705
being a plant since they were in a sense the basic tools of
the assessee’s trade having a fairly enduring utility,
though owing to technological advances they might or would
in course of time become obsolete. Therefore, the capital
asset acquired by the assessee falls within the definition
of "Plant" and therefore a depreciable asset. [715 B-G]
Commissioner of Income Tax, Gujarat v. Elecon
Engineering Co. Ltd., 96 I.T.R. 672 (Gujarat) approved.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 262
(NT) of 1974 etc.
From the Judgment and Order dated 17.1.1973 of the
Andhra Pradesh High Court in Case Referred No. 21 of 1971.
G.C. Sharma and A. Subba Rao for the Appellant.
C.M. Lodha and Miss A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
TULZAPURKAR, J. These three appeals relating to
assessment years 1966-67, 1968-69 and 1969-70 respectively
(the accounting period in respect whereof ended on
30.9.1965, 30.9.1967 and 30.9.1968 respectively) raise a
common question of law for our determination namely:
Whether on the facts and in the circumstances of
the case and on a true interpretation of the
collaboration agreements between the assessee and
M/s Metrimpex Hungarian Trading Company, Budapest
the payment of RS... 1,60,000 by the assessee to
the foreign collaborator was attributable partly
or wholly towards the acquisition of a depreciable
asset?
Briefly stated the facts giving rise to the question
are these. M/s Scientific Engineering House (P) Ltd.
(hereinafter called the assessee) manufactures scientific
instruments and apparatus like Dumpy levellers, levelling
staves, prismatic compass, etc. It entered into two separate
collaboration agreements, one dated 15th March 1961 and the
other dated 31st March
706
1961 with M/s Metrimpex Hungarian Trading Company, Budapest
for undertaking the manufacture of microscopes and
theodolites, under which the said foreign collaborator, in
consideration of payment of Rs. 80,000 each (Rs. 1,60,000
under both the agreements together), agreed to supply to the
assessee all the technical know-how required for the
manufacture of these instruments. The object of both the
agreements was to enable the assessee to manufacture the
said instruments of certain specifications and the assessee
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thereunder acquired the right to manufacture in India under
its own trade mark and name but under the licence MOM
Hungary - of the foreign supplier the said instruments and
the right to sell the same in India. To enable the assessee
to manufacture these instruments in India in the manner just
indicated the foreign collaborator, inter alia, agreed to
render ’documentation service’ by supplying to the assessee
an uptodate and correct complete set each of the five types
of documents (such as manufacturing drawings, processing
documents, designs, charts, plans and other literature more
specifically detailed in clause 3 of the agreements). There
was also a provision enjoining the foreign collaborator to
render training and imparting of knowledge of the know-how
technique of manufacturing these instruments. Pursuant to
the agreements the assessee made full payment of Rs.
1,60,000 (Rs. 80,000 under each of the agreements) to the
foreign collaborator and the latter rendered ’documentation
service’ by supplying complete sets of all the documents
including designs, drawings, charts, plans and other
literature as per clause 3. The sum of Rs. 1,60,000 was
debited by the assessee under the head ’Library’.
For the assessment year 1966-67 for which relevant
accounting year ended on 30th September 1965 the assessee
claimed a sum of Rs. 12,000 by way of depreciation on
’Library’. Such depreciation was claimed on the ground that
the payment of Rs. 1,60,000 had been made really for the
outright purchase of designs drawings, charts and o her
literature which were voluminous occupying almirah-full of
storage space and these collectively constituted the pages
of a book and the assessee had claimed depreciation at the
appropriate rate. The Income-Tax Officer held that the sum
of Rs. 1,60,000 did not represent the value of books
purchased by the assessee but represented the price paid for
acquiring the technical know-how which amounted to capital
expenditure but since no tangible or depreciable asset was
brought into existence no depreciation allowance could be
claimed- On appeal preferred by the assessee, however, the
Appellate Assistant Commissioner held that what the assessee
has done
707
was to make an outright purchase of certain specimen
drawings, charts, plans, etc. On special papers, that these
documents when collected together constituted a book on
which depreciation, as in the case of plant and machinery,
would, at the appropriate rate be allowable and he directed
the Income Tax Officer to allow the depreciation claimed. In
the further appeal preferred by the Department the Tribunal
took the view that clauses 2,3,4,5 and 10 of the agreements
did not lend support to the stand taken by the assessee that
payments (Rs. 80,000 each) had been made mainly for the
supply of designs, drawings, charts, etc., that the services
to be rendered by the foreign collaborator covered a wide
field and that the supply of designs drawings, charts, etc.
was incidental and only in furtherance of other services
which the foreign collaborator was expected to render. It
further took the view that since the supply of designs,
drawings, charts, etc. was only incidental and the payment
of Rs. 1,60,000 could not entirely be held to represent the
purchase price of those documents it was unnecessary for
them to go into the question whether the said documents fell
within the meaning of the expression ’books’ and whether
depreciation was, therefore, admissible thereon. The
Tribunal, however, held that the agreements showed that some
of the services which the foreign collaborator was required
to render to the assessee were on revenue account (as, for
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example, the provision which required the foreign
collaborator to depute their experts to correct any flaws or
irregularities that might be encountered in the course of
production) and that therefore the payment of Rs. 1,60,000
was partly on capital account and partly on revenue account.
As the appeal was by the Department and not by’ the assessee
and the Department could not be in a worse position then
what it was when it came up in appeal, the Tribunal held
that even if it were to hold that the part of the payment
was allowable as revenue expenditure the allowance could not
exceed Rs. 12,000 being the deduction allowed by the
Appellate Assistant Commissioner. In other words the
Tribunal confirmed the deduction of Rs. 12,000 not as
depreciation allowance but as revenue expenditure and in
this manner it confirmed the order of the Appellate
Assistant Commissioner. G
Both the assessee and the revenue sought a reference to
the High Court. In the reference applications preferred by
each before the Tribunal the assessee urged a two-fold
contentions : (a) that the assessee was entitled to claim
depreciation at the rate applicable to library (books) on
the entire sum of Rs. 1,60,000 paid to the foreign
collaborator; and (b) that the Tribunal ought to have given
a specific finding as to what would
708
be the amount representing the capital expenditure which was
entitled to depreciation, and the assessee sought to raise
appropriate questions covering these contentions. On the
other hand the revenue urged two contentions: (1) that
having come to the conclusion that the payment of Rs.
1,60,000 did not bring into existence any depreciable asset
the Tribunal ought to have allowed its appeals fully and no
relief could be granted to the assessee; and (ll) that the
Tribunal was not justified in allowing the sum of Rs. 12,000
as revenue expenditure while disposing of its appeal
particularly when no point was urged before lt that the same
was an item of revenue expenditure and sought to raise
proper questions covering these contentions. The Tribunal,
however, referred the following question as appropriately
arising from its order to the High Court:
"Whether on the facts and in the circumstances of
the case and on true interpretation of the
collaboration agreements between the assessee and
M/s Metrimpex Hungarian Trading Company, Budapest,
the payment of Rs. 1,60,000 was attributable
partly to the acquisition of depreciable asset and
partly to revenue expenditure or wholly towards
the acquisition of a depreciable asset?"
On a consideration of the terms and conditions of the
two collaboration agreements the High Court took the view
that the payment of Rs. 1,60,000 did not mainly represent
the purchase price of the designs, drawings, charts, etc. a-
contended by the assessee, that the rendering of
’documentation service’ was incidental, that no part of the
expenditure was on revenue account but the whole of it was
of a capital nature bringing into existence an asset of
enduring benefit to the assessee, but what was brought into
existence was a non-depreciable asset and, therefore, the
assessee was not entitled to any relief in the case. In
other words by its judgement dated 7th January 1973 the High
Court held that the assessee was not entitled to any relief
either by way of depreciation allowance or on account of
revenue expenditure.
Following the aforesaid decision rendered by the High
Court in relation to the assessment year 1966-67 the
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assessee was denied similar relief claimed by it in the two
subsequent assessment years, 1968-69 and 1969-70. Instant
appeals are preferred by the assessee challenging the High
Courts view.
709
In support of the appeals counsel for the assessee
accepted the High Court’s view that no part of the
expenditure (Rs. 80,000 under each of the two agreements)
was on revenue account and the whole of it was of a capital
nature but contended that both the Tribunal and the High
Court had, on a misreading of the terms of the two
agreements, held that rendering of the documentation service
was incidental and that the payment of Rs. 1,60,000 did not
mainly represent the purchase price of drawings, designs,
charts, plans and other literature, etc. According to
counsel on a fair reading of the relevant clauses in the two
agreements it was clear that the ’documentation service’ was
the principal or the main service to be rendered by the
foreign collaborator to the assessee for which mainly the
payment of Rs. 1,60,000 was made as a result whereof the
assessee acquired all the technical know-how requisite for
the purpose of manufacturing the instruments in question and
in this behalf reliance was placed on clause 6 of both the
arguments. Counsel further urged that the High Court
erroneously concluded that what was brought into existence
was a non-depreciable asset, inasmuch as the acquisition of
a capital asset like the technical know-how in the shape of
drawings, designs, charts, plans. Processing data and other
literature should have been regarded as constituting a book
falling within the inclusive definition of ’plant’ given in
Sec. 43 (3) of the Income Tax Act, 1961. In this behalf
counsel relied on Commissioner of Income Tax, Andhra Pradesh
v. Taj Mahal Hotel, 82 I.T.R. 44 and Commissioner of Income
Tax, Gujarat v. Elecon Engineering Company Ltd., 96 I.T.R.
672. On the other hand, counsel for the revenue pressed for
our acceptance the view taken by the High Court that though
the entire expenditure was of a capital nature it had
brought into existence a non-depreciable asset .
Having regard to the rival contentions that were urged
before us it is clear that two questions really arise for
determination in the case. The first is whether the
’documentation service’ (supply of 5 complete sets of
documents) agreed to be and actually rendered by the foreign
collaborator to the assessee under the two agreements was
incidental to the other services contemplated therein or
whether it was the principal service for which mainly the
payment of Rs. 1,60,000 was made by the assessee as a result
whereof the assessee acquired all the technical know-how
requisite for the purpose of manufacturing the instruments
in question? And secondly whether the said expenditure,
which was entirely of a capital nature, brought into
existence a depreciable asset? The answer to the former
question depends upon the proper interpretation of the terms
and conditions of the two
710
agreements while the answer to the latter depends upon
whether a capital asset like the technical know-how acquired
in the shape of drawings, designs, charts, plans, processing
data and other literature which formed the basis for the
business of manufacturing the instruments in question would
fall within the wide and inclusive definition of ’plant’
given in s. 43(3) of the Income Tax Act, 1961.
Turning to the first question, having regard to the
relevant terms of the two agreements we find it very
difficult to accept the view concurrently expressed by the
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Tribunal and the High Court that the ’documentation service’
undertaken to be rendered by the foreign collaborator to the
assessee was incidental or that the payment of Rs. 1,60,000
could not be regarded as being mainly for and by way of
purchase price of the drawings, designs, charts, plans and
all the documents comprised in ’documentation service’
specified in clause 3 of the agreements. Such a view as will
be shown presently runs counter to the express language
contained in clauses 3 and 6 of the agreements. The
agreement dated 15.3.1961 relates to theodolites while the
other dated 31.3.1961 relates to microscopes and it was not
disputed before us that the terms and conditions of both are
almost identical. Clauses l and 2 thereof clearly set out
the object and intendment of the two agreements; the object
was to enable the purchaser (assessee) to manufacture the
instruments of certain specifications and in that behalf
under clause 2 the foreign collaborator was to grand to the
assessee and the assessee was to acquire from the foreign
collaborator the right to manufacture in India under the
purchaser’s (assessee’s) trade mark and name, yet with
indication of the Hungarian collaboration name S.E.H. under
licence MOM Hungary the instruments of certain
specifications and design and subsequent changes and
modifications to this design introduced during the validity
of the agreement and the right to sell these in India. Under
Clause 3 the foreign collaborator had to render to the
assessee ’documentation service’ by supplying complete set
of documents specified therein. Clause 4 enjoined the
foreign collaborator to train and impart the knowledge of
the know-how technique of the manufacturing of the
instruments and for that purpose to accept two employees of
the assessee at any one time for such period as may be
desired by the assessee at the MOM Works at Budapest and
give them full instructions concerning the manufacturing
processes of the instruments covered by the agreements, the
expenses in respect whereof were to be borne by the
assessee, as also to depute to the assessee’s works suitable
expert technicians not exceeding two in number for such
period as
711
may be desired by the assessee up to half a year, the
expenses in respect whereof (inclusive their travelling
cost, salaries, lodging, boarding, etc.) were to be borne by
the assessee. Clause 5 provided for imparting technical
assistance to the assessee relating to all matters falling
within the scope of the agreement and in sub-clause (c)
thereof it was provided that if the assessee designed any
new model or type of the instrument to suit the
circumstances in India the assessee was entitled to have the
supply of components being manufactured in Hungary and
suiting the purpose on such terms and conditions as may be
mutually agreed upon. Clause 6 dealt with payment to be made
by the assessee and the manner thereof to which we will
refer in detail later. Clause 10 indicated a five year’s
period commencing from a certain date during which the
agreements were to remain in force. The rest of the Clauses
dealing with assignability and other topics are not
material. On the issue under consideration Clauses 3 and
6(a) are very material and they run thus :
"3. Supplies :
Vendor shall supply to Purchaser in accordance with the
terms laid down in Clause 6 hereunder :
(a) One complete set of up-to-date, correct and
legibly reproducible manufacturing drawings and
full processing documents of all components of the
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instrument and lists of parts in metric system in
English language, this full documentation will
comprise of; - one complete list of up-to-date,
correct and legibly- reproducible drawings in
metric system and English language of all jigs,
fixtures, special tools, special guage and special
machine used and built by MOM for manufacture,
assembly inspection and testing of the component
parts of the theodolites.
(b) One complete and up-to-date list, including
complete specifications of raw material, required
for the component parts of the theodolites covered
by this agreement.
(c) One complete set of up-to-date layouts of all
manufacturing operations and inspection performed
by MOM works in Budapest during the manufacture
and assembly of all components parts of the above
Theodolite and containing all operational timings,
details and know-how for the economic production
of the components.
712
(d) One complete set of up-to-date, correct and
legibly reproducible assembly drawings with one
set of the assembly instruction of the theodolites
giving all tolerance for the final adjustment
during assembly.
(e) One complete set of up-to-date, correct and
legibly reproducible castings drawings for all
cast component parts for the theodolites covered
by this agreement.
(f) Delivery term of the above documentation will
be six months after the payment of Rs. 10,000
according to clause 6/a has been effected in
favour of vendor."
6. Payment :
In consideration of the grand of these manufacturing
and sales rights and the training and imparting of thorough
and up-to-date total know-how techniques of manufacturing
theodolites type 17-S purchaser shall make the following
payments to vendor.
(a) Lumpsum of Rs. 80,000 (Rupees eighty thousand
only) for giving services defined as documentation
listed as per clause 3 In the following manner.
(Emphasis supplied).
(Here follow sub-clauses indicating various
instalments and the manner of their payment, etc.)
Reading clauses 3 and 6(a) together lt will appear clear
that the rendition of documentation services specified in
Clause 3 was really the main service to be rendered by the
foreign collaborator to the assessee and the Clause 6(a)
categorically states that the lumpsum payment of Rs. 80,000
(Rs. 1,60,000 under the two agreements) was for rendition of
such service. There is also a reference to this aspect of
the matter at the end of Clause 5(c) where it has been
stated that the purchaser is to pay the value of the full
documentation in question namely Rs. 80,000 according to the
stipulation of the present agreement.’ In fact the other
services mentioned in clauses 4 and 5 appear to be
incidental as some of these were undertaken to be rendered
as and when desired by the assessee and for which the
assessee had agreed to bear and pay the expenses separately.
The tenor of the agreements clearly shows that the various
documents such as
713
drawings, designs, charts, plans, processing data and other
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literature included in documentation service, the supply
whereof was undertaken by the foreign collaborator, more or
less formed the tools by using which the business of
manufacturing the instruments was to be done by the assessee
and for acquiring such technical know-how through these
documents lump sum payment was made. In other words, the
payment of Rs. 80,000 under each of the agreements was
principally for rendition of ’documentation service’. It is,
therefore, clear that this expenditure was incurred by the
assessee as and by way of purchase price of the drawings,
designs, charts, plans, processing data and other
literature, etc. comprised in ’documentation service’
specified in Clause 3. The expenditure, therefore, was
undoubtedly of a capital nature as a result whereof a
capital asset of technical know-how in the shape of
drawings, designs, charts, plans, processing data and other
literature, etc. was acquired by the assessee.
The next question is whether the acquisition of such a
capital asset is depreciable asset or not? Under section 32
depreciation allowance is, subject to the provisions of
section 34, permissible only in respect of certain assets
specified therein, namely, buildings, machinery, plant and
furniture owned by the assessee and used for the purpose of
business while section 43(3) defines ’plant’ in very wide
terms saying "plant includes ships, vehicles, books,
scientific apparatus and surgical equipments used for the
purpose of the business". The question is whether technical
know-how in the shape of drawings, designs, charts, plans,
processing data and other literature falls within the
definition of ’plant’.
Counsel for the assessee urged that the expression
’plant’ should be given a very wide meaning and reference
was made to a number of decisions for the purpose of showing
how quite a variety of articles, objects or things have been
held to be ’plant’. But it is unnecessary to deal with all
those cases and a reference to three or four decisions, in
our view, would suffice. The classic definition of ’plant’
was given by Lindley, L.J. in Yarmouth v. France, [1887] 19
Q.B.D. 647, a case in which it was decided that a cart-horse
was plant within the meaning of section 1(1) of Employers’
Liability Act, 1880. The relevant passage occurring at page
658 of the Report runs thus :-
"There is no definition of plant in the Act: but,
in Hits ordinary sense, it includes whatever
apparatus is used by a business man for carrying
on his business".
714
not his stock-in-trade which he buys or makes for
sale; but all goods and chattels, fixed or
movable, live or dead, which he keeps for
permanent employment in his business .
In other words, plant would include any article or object
fixed or movable, live or dead, used by businessman for
carrying on his business and it is not necessarily confined
to an apparatus which is used for mechanical operations or
processes or is employed in mechanical or industrial
business. In order to qualify as plant the article must have
some degree of durability, as for instance, in Hinton v.
Maden & Ireland Ltd., 39 I.T.R. 357, knives and lasts having
an average life of three years used in manufacturing shoes
were held to be plant. In C.I.T. Andhra Pradesh v. Taj Mahal
Hotel, 82 I.T.R. 44, the respondent, which ran a hotel
installed sanitary and pipeline fittings in one of its
branches in respect whereof it claimed development rebate
and the question was whether the sanitary and pipe-line
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fittings installed fell within the definition of plant given
in sec. 10(5) of the 1922 Act which was similar to the
definition given in Sec. 43(3) of the 1961 Act and this
Court after approving the definition of plant given by
Lindley L.J. in Yarmouth v. France as expounded in Jarrold
v. John Good and sons Limited, 1962, 40 T.C. 681 C.A. , held
that sanitary and pipe-line fittings fell within the
definition of plant.
In Inland Revenue Commissioner v. Barly Curle & Co.
Ltd., 76 I.T.R. 62, the House of Lords held that a dry dock
since it fulfilled the function of a plant must be held to
be a plant. Lord Reid considered the part which a dry dock
played in the assessee company’s operations and observed :
It seems to me that every part of this dry dock
plays an essential part....The whole of the dock
is I think, the means by which, or plant with
which, the operation is performed.
Lord Guest indicated a functional test in these words:
In order to decide whether a particular subject is
an ’apparatus’ it seems obvious that an enquiry
has to be made as to what operation it performs.
The functional test is, therefore, essential at
any rate as a preliminary -
715
In other words the test would be: Does the article fulfil
the function of a plant in the assessee’s trading activity
Is it a tool of his trade with which he carries on his
business? If the answer is in the affirmative it will be a
plant.
If the aforesaid test is applied to the drawings,
designs, charts, plans, processing data and other literature
comprised in the ’documentation service’ as specified in
Clause 3 of the agreement it will be difficult to resist the
conclusion that these documents as constituting a book would
fall within the definition of ’plant’. It cannot be disputed
that these documents regarded collectively will have to be
treated as a ’book’, for, the dictionary meaning of that
word is nothing but a a number of sheets of paper,
parchment, etc. with writing or printing on them, fastened
together along one edge, usually between protective covers;
literary or scientific work, anthology, etc., distinguished
by length and form from a magazine, tract, etc. (vide
Webster’s New World Dictionary). But apart from its physical
form the question is whether these documents satisfy the
functional test indicated above. Obviously the purpose of
rendering such documentation service by supplying these
documents to the assessee was to enable it to undertake its
trading activity of manufacturing the theodolites and
microscopes and there can be no doubt that these documents
had a vital function to perform in the manufacture of these
instruments; in fact it is with the aid of these complete
and upto date sets of documents that the assessee was able
to commence its manufacturing activity and these documents
really formed the basis of the business of manufacturing the
instruments in question. True, by themselves these documents
did not perform any mechanical operations or processes but
that cannot militate against their being a plant since they
were in a sense the basic tools of the assessee’s trade
having a fairly enduring utility, though owing to
technological advances they might or would in course of time
become obsolete. We are, therefore, clearly of the view that
the capital asset acquired by the assessee, namely, the
technical know-how in the shape of drawings, designs charts,
plans, processing data and other literature falls within the
definition of ’plant’ and therefore a depreciable asset.
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Counsel invited our attention to the decision in
Commissioner of Income Tax, Gujarat v. Elecon Engineering
Co. Ltd., 96 I.T.R. 672, where the Gujarat High Court has,
after exhaustively reviewing the case law on the topic, held
that drawings and patterns which constitute know-how and are
fundamental to the assessee’s manufacturing business are
’plant’. We agree and approve the said view.
716
Having regard the aforesaid discussion the question
framed A at the commencement of this judgment is answered in
favour of the assessee to the effect that the payment of Rs.
1,60,000 made by the assessee to the foreign collaborator
was attributable wholly towards the acquisition of a
depreciable asset. We allow the appeals but in the
circumstances direct the parties to bear and pay their
respective costs.
S.R. Appeal allowed.
717