Scientific Engineering House (P) Ltd.
Vs. Commissioner of Income Tax, Andhra Pradesh [1985] INSC 237 (1 November
1985)
TULZAPURKAR, V.D. 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 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, ^
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 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.
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 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 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 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 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 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 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 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.
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.
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