COMMISSIONER OF INCOME-TAX, U.P., LUCKNOWversusBRITISH INDIA CORPN. LTD., KANPUR

                       COMMISSIONER OF INCOME-TAX,
                                                                                  A
                             U.P., LUCKNOW.
                                           v.
                   BRITISH INDIA CORPN. LTD., KANPUR.

                                 FEBRUARY 3, 1987
                                                                                   B
           [SABYASACHI MUKHARJI AND S. NATARAJAN, JJ.]

              Income Tax Act, 1922-s.10(2)(XV)-Assessee Company-
··t-i   Entering into agreement with another company appointing its nominee
        as distributors of assessee's products-In lieu of benefit of technical
        knowledge assessee paid to the distributors for meeting initial expenses of C
        establishment of distributorship-Assessee claiming deduction-
        Payment whether capital expenditure or revenue expenditure.

               The assessee-company entered into an agreement with M/s.
        Charles Walker and Company, London which, inter alia, stipnlated
        that the latter wonld permit the nse by the assessee of a number of D
        registered trade marks specified in the agreement and disclose to the
        approved officers of the assessee the technique, practices and applica- ·
        tion of specialised tanning processes. Paragraph 7 of the agreement
        provided that the assessee wonld appoint Textile and General Supplies,
        nominee of the Charles Walker, as its distributors for the sale of indus-
        trial leather manufactured by it in India and the assessee would pay E
        Rs.50,000 to the distributors for meeting the initial expenses of
        establishing the distributorship. This agreement was to be in force for a
        period of seven years. Simultaneously, another agreement was entered
        into between the assessee and Textile and General Supplies for a period
        of seven years, bnt no reference was made therein to the obligation of
        the assessee to pay Rs.50,000 to the distributors.                        F

              For the assessment year 1959-60 the assessee claimed the payment
        of Rs.50,000 to Textile and General Supplies as a deduction permissible
        nnder s.10(2)(XV) of the Income Tax Act, 1922, which was rejected by
        the Income Tax Officer, Appellate Assistant Commissioner and the
        Tribnnal on the ground that the said payment was in the nature of a G
        capital expenditure.

             In the Reference, the High Court allowed the claim of the assessee
        holding that the payment in question was a revenue exenditure.

              Dismissing the Appeal of the Revenue,                                H

                                           133
    134                     SUPREME COURT REPORTS              [1987] 2 S.C.R.

           HELD: 1. The real question is whether the payment that had
A
    been made by the assessee under the contract in question is a mere
    division of profits with another party or is it a payment to the other party,
    the amount of which is ascer1tained by reference to the profits. [138A-B]

        2; No test of Universal application can be laid down. The aim and
B object of the expenditure was one of the guiding factors. The aim and
  object of incurring the expenditure in this case was the acquisition of
  the know-bow. Rs.50,000 was really part of the price paid by the asses-
  see to obtain the know-how. Pursuant to Paragraph 7 of the said agree-
  ment the assessee was bound to appoint Textile and General Supplies,
  nominee of Charles Walkeir, as its distributor for the sale of leather
C manufactured by it in India. Paragraph 7 was an integral part of the
  agreement with Charles WaJker and was a part of the consideration for
  the receipt of the benefit. It was necessary condition of the agreement
  with Charles Walker to appoint Textile and General Supplies as dis-
  tributors of the assessee. It was perhaps done to protect the technical
  know-how which Charles Walker was parting so that the distributors
D would be a nominee of Charles Walker. [1380; H; l39C-D]
         3. Having regard to lthe nature of the agreement and having re-
   gard to ahe facts that the organisational set up under the distributorship
   agreement was to endure for seven years and upon the expiry of the
   period, the assessee had no relationship with the orgaisation and that           f
E the period of agreement between the assessee and the distributors was
   contemporaneous with the agreement between the assessee and Charles
   Walker under which the assessee became entitled to use the registered
   trade marks, it must be c9nsidered to be a revenue expenditure, be·
  .cause it. was part of the price for the acquisition of technical know-how
   and the condition of appointment ,was a stipulation mentioned by
   Charles Walker. [1390-F]
F
         British Sugar Manufacturers, Ltd. v. Harris (Inspector of Taxes),
   7 I.T.R. 101; Countess Warwick Steampship Co. Ltd. v. Ogg, [1924] 2
   K.B. 292 at 298; Assam Bengal Cement Co. Ltd. v. Commissioner of
   Income-Tax, West Bengal, 27 I. T.R. 34; Commissioner of Income-Tax,
   Bombay City Iv. Ciba of India Ltd., (and vice versa), 69 I.T.R. 692;
G Travancore Sugar and Chemicals Ltd. v. Commissioner of Income-
   Tax, Kera/a, 62 I.T.R. 566; Commissioner of Income-Tax, West Bengal
   II v. Coal Shipments P. Ltd., 82 I.T.R. 902; Empire Jute Co. Ltd. v.
   Commissioner of Income-Tax, U4 I.T.R. l;'L.H. Sugar Factory and
   Oil Mills (P) Ltd., v. Commissioner of Income-Tax, U.P., US I.T.R.
   293 and Commentry of Kanga and Palkhivala's Income Tax, Seventh
   Edition, Volume 1page484 to 488, referred to.
               COMM. OF L TAX v. BRITISH INDIA CORPN. [MUKHARJ!, J.l          135

               CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1163                  A
          (NT) of 1974.

               From the Judgment and Order dated 25.11.1971 of the Allahabad
          High Court in Income Tax Reference No. 310 of 1968

               S. C. Manchanda, M.N. Tandon and Miss A. Subhashini for the B
          Appellant.
    ·-t
     '
                B. P. Singh and Ranjit Kumar for the Respondent.

                The Judgment of the Court was delivered by
                                                                                    c
                SABY ASACHI MUKHARJI, J. This is an appeal from the judg-
    ,.    ment and order of the High Court of Allahabad dated 25th November,
          1971.

               The Income-Tax Appellate Tribunal had referred to the High           D
          Court the following question for its opinion:

                     "Whether, on the facts and in the circumstances of the
                     case, the expenditure of Rs.50,000 was a capital expendi-
                     ture which could not be allowed as a deduction under sec-
                     tion 10(2)(xv) of the Income-tax Act, 1922?"                   E

-               The assessee carried on the business of manufacture and sale of
          woolen goods, cotton textiles and hides and leather products. The
          activity of tanning hides and manufacturing leather products was
    /1    carried on under the name and style of Cooper Allen and North West
          Tannery branches. For the assessment year 1959-60, under the F
          Income-tax Act, the relevant accounting of which being the calender
          year ending on 31st December, 1958, the assessee had claimed a
          deduction of Rs.50,000 paid to Messrs Textile & General Supplies
          Private Ltd. Bombay (hereinafter referred to as "Textile & General
          Supplies"). The assessee's claim was made on the basis that the asses-
          see was bound under an agreement with Messrs Charles Walker & G
          Co., London to pay that amount to Textile General Supplies for meet-
          ing the initial expenditure for establishing it as distributor of the asses-
          see's products. The Income-tax Officer rejected the claim, and the
          Appellate Assistant Commissionerupheld that decision. The assessee
          went up in appeal before the Income-tax Appellate Tribunal. The
          Tribunal also rejected the claim of the assessee. At the instance of the H
    136                   SUPREME COURT REPORTS            [1987] 2 S.C.R.

A assessee, the Tribunal made a reference on the aforesaid question to
  the High Court.

         The question is whether the assessee was entitled to claim deduc-
   tion in the computation of its profits and gains of business in respect of
   the expenditure in question, not being in the nature of capital expendi-
B ture, laid ont or expended wholly or exclusively for the purpose of
   such business. In other words, on the background of the facts in con-
   troversy in this case whether it was revenue expenditure or capital
 · expenditure.

         This question has been discussed in the various decisions. It is
C settled that the question must be viewed from the practical point of
  view. There are deluge of cases and no principle can be laid out with
  substantial accnracy which will be applicable in all the cases. The
  answer to the question must depend on the facts' and circumstances of
  each case on the application of the principles of law as laid down by the
  courts. The agreement in question in this case between the assessee
D with Charles Walker stipulated that Charles Walker would permit the
  use by the assessee of a number of registered trade marks specified in
  the agreement and further disclose and make known to the approved
  officers of the assessee the technique, practices and application of
  specialised tanning processes. Besides providing for the provision of
  technical supervision by Charles Walker and payment by way of
E salary, travelling expenses and maintenance to the personnel sent out
  by it to India, the agreement also provided that in the event of liberali-
  sation of imports Charles Walker would limit its export to India of
  certain products. The asses.see undertook to pay to Charles Walker
  technical fees calculated at 5% on the selling price of the products by
  the processes disclose to it. Paragraph 7 of the agreement was to the
F following offect:

               "The Second participant (the assessee) agrees to appoint
               Textile and General Supplies Private Ltd., Army and Navy
               Buildings, Mahatma Gandhi Road, Bombay-1, India a
               nominee of the.first participant (Charles Walker) as dis-
G              tributors of the second participant for the sale of industrial
               leather manufactured by the second participant in India for
               the period of this agreement at a discount of 15% (fifteen
               per cent) on the prices at which Industrial Leather covered
               by this agreement are sold to textile mills and other con-
               sumers. In addition the second participant will pay
H              Rs.50,000 (Rs. fifty thousand only\ to the distributors for
         COMM. OF I. TAX v. BRITISH INDIA CORPN. [MUKHARJI, J.]         137

               meeting the initial expenses of establishing the distribu!o- A
               ship of the second participant on the express under-
               standing that the first participant will not part with his in-.
               terest in Textile & General Supplies Private Ltd. without
               the prior approval in writing of the second participant."

         Seven years was the period of the agreement as agreed.                B

          It is clear from paragraph 7 as aforesaid read in the background
    of the entire facts that the assessee was obliged to appoint Textile &
    General Supplies, nominee of Charles Walker, as its distributors for
    the sale of industrial leather manufactured by it in India. The assessee
    was obliged by the aforesaid agreement to pay Rs.50,000 to the             C
    distributorship.                          •

          An agreement was entered into by the assessee with Textile &
    General Supplies in which after referring to the agreement with
    Charles Walkar it was stipulated that the distributors would receive a
    discount of 15% of the sale price fixed by the assessee and that the       D
    agreement would extend for the peiod of seven years. Significantly, no
    reference was made to the obligation of the assessee to pay Rs.50,000
    to the distributors, a condition which was mentioned in the agreement
    with Charles Walker alone. The obligation to pay Rs.50,000 to the
    distributors was one of the conditions subject to which the assessee

-   became entitled to the use of the registered trade marks and to the
    disclosure of the technical practices and application of the specialised
    processes to be supplied by Charles Walker. This clause regarding
                                                                               E


    appointment contained in paragraph 7 formed part and integral part of
    the agreement and was a consideration for the receipt of the benefit
    from Charles Walker under the agreement.
                                                                               F
          It was a condition to get the technical knowledge of the know-
    how that their nominee should be appointed as distributor and for the
    setting up of the distributor's business rupees fifty thousand was re-
    quired to be paid. This was in essence an integral part of the bargain
    for the acquisition of the technical knowledge to have this particular
    distributor.                                                           G

         Numerous decisions have dealt with this question. In British
    Sugar Manufacturers, Ltd. v. Harris (Inspector of Taxes), 71. T.R. 101
    the Court of Appeal in England dealt with this question and Romer,
    L.J. at page 108 of the report observed in dealing with the question
    which was similar to the present one that the real question is, is the     H
    138                   SUPREME COURT REPORTS            [1987] 2 S.C.R.

A payment that has to be ·made by the trader under the contract in
  question a mere division of profits with another party or it is a payment
  to the other party, the amount of which is ascertained by reference to
  the profits'? The Lord Justice observed that it was a difficult question.
  In that case the Lord Justice held that the payment was made to earn
  the profit. It was condition precedent to the acquisition of the know-
B how that the payment had to be made for installation of the set up of
  the distribution arrangement. Rowlatt, J. in the case of Countess
  Warwick Steampship Co. Ltd. v. Ogg, [1924i 2 K.B. 292 at 298
  observed that it is very difficult to lay down any general rule which is
  both sufficiently accurate and sufficiently exhaustive to cover all or
  even a great number of possible cases. Only broad tests could be laid
C down. Some of such tests were laid down by this Court in Assam
  Bengal Cement Co. Ltd. 1'. Commissioner of Income-Tax, West
  Bengal, 27 I.T.R. 34. This Court discussed the broad principles at page
  45 of the report. It is not necessary to reiterate all these principles but
  one of the tests was that the aim and object of the expenditure was one
  of the guiding factors. The aim and object of incurring the expenditure
D in this case was the acquisition of the know-how.

        This Court again in the case of Commissioner of Income-Tax,
  Bombay City Iv. Ciba of India Ltd. (and vice versa), 69 I.T.R. 692
  discussed the principles application in determining whether the expen-
  diture in such circumstances was a capital or a revenue in nature. See
E also Travancore Sugar and Chemicals Ltd. v. Commissioner of
  Income-Tax, Kera/a, 62 I.T.R. 566; Commissioner of Income-Tax,
  West Bengal II v. Coal Shipments P. Ltd., 82 I.T.R. 902; Empire Jute
  Co. Ltd. v. Commissioner of Income-Tax, 124 I.T.R. 1. This Court
  observed what was material to consider was the nature and the
  advantage in obtaining the asset in a commercial sense. Also see L.H.
F Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of Income-Tax,
  U.P., 125 I. T.R. 293.

       These principles have been summarised in the Commentary of
  Kanga and Palkhivala's Income Tax, Seventh Edition, Volume 1 page
  484 to 488. But the cases referred emphasise that no test of universal
G application can be laid down.

        The question posed in this appeal has to be decided b<aring the
  aforesaid priciples in mind. It is clear that Rs.50,000 was really part of
  the price paid by the assessee to obtain the know-how. It is clear that
  pursuant to paragraph 7, the assessee was bound to appoint Textile and
H General Supplies, nominee of Charles Walker, as its distributor for the
           COMM. OF I. TAX v. BRITISH INDIA CORPN. iMUf<HARJI, J.]            139

      sale of leather manufactured by it in India. Contemporaneously, an A
      agreement was entered into by the assessee with Textile & General
      Supplies in which after referring to the agreement with Charles Walker
      it was stipulated that the distributors would receive a discount of 15%
      of the sale price fixed by the assessee and that the agreement would
      extend for a period of seven years. Significantly, no reference was
                                                                              B
      made to the obligation of the assessee to pay Rs.50,000 to the dis-
 I    tributors, a condition which was in the agreement with Charles Walker
-~·
 I
  I
      alone.

           It is clear that paragraph 7 referred to hereinbefore was an integral
      part of the agreement with Charles Walker and was a part of the
      consideration for the receipt of the benefit. It is.not possible to find out   c
      the reasons which persuaded Charles Walker to insist upon the
      appointment of Textile & General Supplies as distributors of the asses-
      see. It was a necessary condition of the agreement with Charles
      Walker. It was perhaps done to protect the technical know-how which
      Charles Walker was parting so that the distributors would be a
                                                                                     D
      nominee of Charles Walker.

             Having regard to the nature of the agreement and having regard
      to the facts that the organisation set up under the distributorship
      agreement was to endure for seven years and upon the expiry of the
      period, the assessee had no relationship with the organisation and that
                                                                              E
      the period of agreement between the assessee and distributors was
      contemporaneous with the agreement between the assessee and
      Charles Walker under which the assessee became entitled to use the
      registered trade marks, it must be considered to be a revenue expendi-
      ture. Considerable emphasis has been laid by the revenue on the facts
      that in paragraph 7 of the agreement with Charles Walker, it was
                                                                              F
      mentioned that Rs. 50,000 would be paid to the distributors for meet-
      ing the initial expenses. We are of the opinion that in the facts and
      circumstances of the case, this was a revenue expenditure because it
      was part of the price for the acquisition of technical know-how and the
      condition of the appointment was a stipulation mentioned by Charles
      Walker. In the premises we are of the opinion that the High Court was G
      right in the view it took.

               The appeal therefore fails and is accordingly dismissed with
      costs.

      A.P.J.                                                  Appeal dismissed.      H