SCIENTIFIC ENGLNEERING HOUSE (P) LTD.versusCOMISSIONER OF INCOME TAX, ANDHRA PRADESH

                                                                   701


                     SCIENTIFIC ENGlNEElUNG l!OUSE (P) LTD.               A
                                       v.
                  COltilSSIONER OF INCOME TAX, ANDllRA PRADESH

                                NOVEMBER 1, 1985

                 [V,D, TULZAPURKAR AND SABYASACHI MUKHARJI, JJ.]          B

          Income Tax Act, 1961 sectiona 32, 34 and 43 (3) - llefini-
I   tiona of ''Book", "Plant" - Whether the technical know-how in the
    shape of drawings and designs, charts, plants, processing litera-
    ture etc. comprised in "documentation service" falls within the
    definition of "Book", "Plant" - Whether the said "documentation       c
    service" not only "a capital asset" but also "a depreciable
    asset 11 •

          l'he appellant-asaessee manufactures scientific instruments
    and  apparatus like Dumpy levellers, levelling staves priamatic
    compass, etc. It entered into two separate collaboration agree-       D
    ments, 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 asse8see all the technical know-how           E
    required for the manufacture of tliese instruments. To ensble the
    assessee to manufacture these inatruments in India, the foreign
    collaborator inter alia agreed to render "documentation service"
    by supplying totiie"""'iiSseasee en up-to-date 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 clauae 3 of the              F
    agreements) and to render training and imparting of knowledge of
    the know-how technique of manufacturing these .inatruants.
    Pursuant to the agreements the appellant-assesaee lllBde full pay-
    ment 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, plallll and     G
    other literature as per clause 3, The sum of Rs. 1,60,000 waa
    debited by the asseasee under the head "Library".

          For the assessment year 1966-67 for which relevant account-
    ing year ended on 30th September, 1965 the aasessee claimed a aum
    of Rs. 12,000 by way of depreciation on "Library". The Income Tax
                                                                              H
    702             SUPREME COURT REPORTS      [1985] SUPP. 3 s.c.R.

A
    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
B
    Appellate Assistant.Commissioner held that what the assesse had
    done was to make an outright purchase of certain specimen
    drawings, charts, plans, etc. on special papers, that these docu-
    ments when collected together constituted a book on which depre-
    ciation 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
c   preferred by the Department the Tribunal took the view that
    clauses 2,3,4,S 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 collabora-
    tor covered a wide field and that the supply of designs, draw-
    ings, charts, etc. was incidental and only in furtherance of
D
    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 expres-
E
    sion '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 collabora-
    tor to depute their experts to correct any flaws or
F
    irregularities that might be encountered in the course of the
    production) and that therefore the payment of Rs, 1, 60, 000 was
    partly on capitalaccount 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
G
    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
    of the terms and conditions of the two collaboration agreements
H
    the High Court took the view that the payment of Rs.1,60,000 did
                 SCIENTIFIC ENGG. HOUSE v. c.I.T •.             703

                                                                       A
not mainly represent the purchase price of the deaigna, clrawinp,
charts, etc. that the rendering of "doc.-ntation service" vu
incidental, ~hat no part of the expenditure waa on r -
account but the whole of it was of a capital nature bringing into
existence an asset of enduring benefit to the asaeasee, but what
waa brought into existence was a non-depreciable a..et and,            B
therefore, the asseasee was not entitled to any relief in tha
case. Following the aforesaid decision rendered by the High Court
in relation to the assesllllll!nt year 1966-67 the uaesaee vu
denied aimilar relief claimed by it in the two subsequent aaaess-
ment years, 1968-69 and 1969-70. Hence the appeala by apecial
leave of the Court.                                                    C

      Allowing the appeal, the Court,

      lll!LD : 1.1 The expenditure incurred by the appellant aa and
by way of purchase price of drawings, designs, charts, pl.au,
processing data and other literature etc. comprised in                 D·
"dOCUlllentation service" specified in clause 3 of the AKr-ta,
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 te1'118 of the two agreements, it is
clear, that the "documentation service" undertaken to be rendered      E
by the foreign collaborator to the assessee was not incidental
and that the payment of Rs· 1,60,000_ could only be regarded aa
being mainly for and by way of purchase price of the drawinga,
designs, charts, plans and all the documents comprised in
"documentation' service" specified in clause 3 of the agree111111ts.
[710 &-CJ
                                                                       F
      1.3 Reading Clauses 3 and 6(a) of the agreements together,
it is clear, that the rendition of documentation services speci-
fied 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 (Ra,
1,60,000 under the two agreements) was for rendition of aucb           G
service. Clause S(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 services
mentioned in Clauses 4 and 5 appear to be incidental aa aome 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         H
the expenses separately. But the tenor of the agreements clearly
shows that the various documents such as drawings, designs,
     704              SUPREME COURT REPORTS         [1985] SUPP: 3 s.c.R.
A
     charts, plans, processing data and other literature included ir.
     documentation service, the supply whereof was undertaken by the
     foreign collaborator, more or less formed the tools by uaing
     which the business of manufacturing the instruments was to be
     done by the assessee and for acquiring such technical blow-how
B    through these documents lumpsum payment was made. [ 712 F-B;
     713 A-CJ

           2.1 Plant would include any article or object fixed or
     movable, live or dead, used by businessman for carrying on his
     businssa and it is not necessarily confined to an apparatus which
     ia used for mechanical operations or processes or is employed in
c    mechanical or industrial buaines1. In order to qualify aa plant
     the article must have some degree or durability. [714 B-c)

            Y&J:llDilth v. France, [1887) 19 Q.B.D, 647; Bf.ntoll v. !!eden
     ' Ireland Ltd., 39 I.T.R, 357; Jarrold v. JobD Good ad Sou
     Lbdted, 1962, 40 T,C, 681 C.A.; InlllDd lle¥enl1e t:mnfH1-ra V•
     llarclay, Cm:le ' Co. Ltd,, 76 I.T.R. 62 quoted with approval.
lJ
           Comiaaioner of Inccme Tu, ADdbra Phdmh Vo Taj llaba1
     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 answr in the
E    affirmative the functional test, namely does article fulfil the
     function of a plant in the assessee's trading activity? And is it
     a tool of his trade with which he carries on his businasa? [714
     G-B; 715 A]

             2.3 Applying the functional. test to the drawings, de1igna,
F    charts, plans, processing data and other literature compriaed in
     the "documentation service" as specified in clauae 3 of the
     Agreement, these documents as constituting a book would fall
     within the definition of "Plant", These doc.-nts regarded
     collectively will have to be treated alao es a "book", 'lbe
     purpose of rendering such documentation service by aupplying
G
     these documents to the essessee was to enable it to undertake ita
     trading activity of manufacturing the theodolites and microscope•
     end therefore, these documents had a. vital function to parfora in
     the lllll!IUfscture of these instruments. In fact it is with the aid
     of theae complete end upto-date sets of doc.-nts that the
     esseasee was able to commence its manufacturing activity and
H
     these documents really formed the basis of the buainssa 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
        SCIENTIFIC ENGG. HOUSE v. C.I.T. [TULZAPURKAR, J.]     705

                                                                      A
being a plant since they were in a senae 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]                                          B

      Conmissioner of lncOE Tax, Gujarat v. Elecon Engineering
Co. Ltd., 96 I.T.R. 672 (Gujarat) approved.

      CIVIL APPELLATE JUliISDICTION: Civil Appeals Nos. 262 (NT)
of 1974 etc.                                                          c
      From the Judgment and Order dated 17.1.1973 of the Andhra
Pradesh High Court in Case Referred No. 21 of 1971. ·

      G.C. 8harma and A. Subba Rao for the Appellant.
                                                                      D
      C.M. Lodha and Miss A. Subhashini for the Respondent.

      The Judgment of the Court was deli'·•red by

      'IULZAPlll!KAR, J. These three appeals relating to assessment
years 1966-67, 1968-69 and 1969-70 respectively (the accounting       E
period in respect whereof ended on 30. 9.1965, 30. 9.1967 and
30.9.1968 respeetively) raise a colDlllOn question of law for our
determination namely:

           Whether on the facts and in the circumstances of the
           case and on a true interpretati~n of the collaboration
           agreements between the assessee and M/ s Metrimpex         F
           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 acquisi-
           tion of a depreciable asset? ·

                                                                      G
     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 !Ximpy levellers, levelling staves, prismatic
compass, etc. It entered into two separate collaboration agree-
ments, one dated 15th March 1961 and the other dated 31st March
                                                                      H
         706             SUPREME COURT REPORTS      (1985] SUPP; 3 S.C.R.

A
         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 a•sessee all the technical
li       know-how required for the manufacture of these instruments. The
         object of both the agreem~nts 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 r.iark 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
c        manufacture these instruments in India in the manner just
         indicated the foreign collaborator, inter alia, agreed to render
         'documentation setv:f ce' by supplying to the assessee an up-to-
         date 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
D         the foreign collaoorator to render training and imparting of
         knowledge of the know-how technique of manufacturing these
         irtstruments. 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 'documen-
          tation service' by supplying complete sets of all the documents
 E       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 account-
         ing year ended on 30th September 1965 the assessee claimed a sum
    F    of Rs· 12,000 by way of depreciation on 'Library'. Such deprecia-
         tion was claimed on the ground that the payment of Rs. 1,60,000
         had been made really for the outright p~rchase of designs
         drawings, charts and other literature which were voluminous occu-
         pying almirah-full of storage space and these collectively
         constituted the pages of a book and the assessee had claimed
    G    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 ~" .:pital
         expenditure but since no tangible or depreciable ass          was
         brought into existence no depreciation allowance er i be
     H   claimed. On appeal preferred by the assessee, however, the Appel-
         late Assistant Commissioner held that what the assessee had done
                                                                             1
       SCIENTIFIC ENGG. HOUSE v. C.I.T, [TULZAPURKAR, J.]      707

                                                                     A
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     B
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            c
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 docu-
ments it was unnecessary for them to-go into the question whether
                                                                         D
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 re!1'1er to the assessee were on revenue account (as,
for example, the provision which required the foreign colla-             E
borator to depute their experts to correct any flaws or irregu-
larities 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. AB 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           F
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 deprecia-
tion 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 twq-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              H
Tribunal ought to have given a specific finding as to what would
    708             SUPREME COURT REPORTS       (1985] SUPP. 3 S.C.R.


    be the amount representing the capital expenditure which was
A   entitled to depreciation, and the assessee sought to raise appro-
    priate 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 appeal fully and no relief could be granted to the
B   assessee; and (ii) that the Tri.bunal 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 it 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 appro-
    priately arising from its order to the High Court:
c
               "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 acquisi-
               tion of depreciable asset and partly to revenue
D              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
E   price of the designs, drawings, charts, etc. as 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,
F   therefore, the assessee was not entitled to any relief in the
    case. In other words by its judgment 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.

G        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. lnatant appeals are
    preferred by the assessee challenging the High Courts view.

H
          SCIENTIFIC ENGG. HOUSE v. C.I.T. [TULZAPORI<AR, J.]   709
                                                                       A
       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
                                                                       ll
 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 caluses 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        c
  the assessee for which mainly the payment of Rs. t,60,000 was
 made as a result whereof the assessee acquired all the technical
 know-how requisite for the purpose of manufacturing the instru-
 ments 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          D
  existence was a non-depreciable asset, inasmuch as the acquisi-
  tion of a capital asset like the technical know-how in the shape
  of drawings, designs, charts, plans. Ftocessing data and other
· literature should have been regarded as constituting a book
  falling within the inclusive definition of 'plant' given in Sec.
                                                                       E
  43 (3) of the Income Tax Act, 1961. In this behalf counsel relied
  on Comnissioner of lncome-talt, Andhra Ptadesh v. Taj Mahsl Hotel,
   82 I.T.R. 44 and Comnissioner of Ineome-tsx, Gujarat v. Elecon
  Engineering r.ompany 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.                                                                 F

      Having regard to the rival contentions that were urged
 before us it is clear that two questions really arise for deter-
 mination 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      G
 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 instru-
 ments in question? And secondly whether the said expenditure,
                                                                        H
 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              SUPREME COURT REPORTS       [1985] SUPP; 3 s.c.R.


A
    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 manufactur-
    ing the instruments in question would fall within the wide and
B   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
c   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
D   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 1 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 specifica-
    tions" and in that behalf under clause 2 the foreign collaborator
    was "to grant" 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
F   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 asses see 'documentation service' by supplying
    complete set of documents specified therein. Clause 4 enjoined
    the foreign collaborator to train and impart the knowledge of the
G   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
H   the assessee, as also to depute to the assessee's works suitable
    e"l'ert technicians not exceeding two in number for such period as
        SCIENTIFIC ENGG. HOUSE v. c.I.T. [TULZAPURKAR, J.]          711


may be desired by the assessee up to half a year, the expenses in          A
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          B
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 comnencing from a          C
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 :                                                 D


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 tDPnufacturing drawings and full           E
           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           F
           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          G
           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,              H
           details and know-how for the economic production of
           the components.
    712                SUPREME COURT REPORTS     [1985] SUPP; 3 s.c.R.

A
                 (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.

B                (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 doc1DD2ntation will be
                 six months after the payment of Rs. 10,000 according
c                to clause 6/a has been effected in favour of vendor."

          .. 6. P4ymen.t :

         In consideration of the grant of these manufacturing and
    sales rights and the training and imparting of thorough and
    up-to-date total know-how techniques of manufacturing theodolites
o   type 17-S purchaser shall make the following payments to vendor.

                 (a) LumpslDD of Rs. 80,000 (Rupees eithty thousand
                 only) for giviag aerv1ces defined as doci1MOtation
                 listed as per clause 3 in the follow:lng ll!lllller.·

E                (Emphasis supplied).

                 (Here follow sub-clauses indicating various instal-
                 ments and the manner of their payment, etc.)

    Reading clauses 3 and 6(a) together it will appear clear that the
F   rendition of documentation services specified in Clause 3 was
    really the main service to be rendered by the foreign colla-
    borator to the assessee and the Clause 6(a) categorically states
    that the llDDpS\DD 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
G   S(c) where it has been stated that thP. "purchaser is to pay the
    value of the full uocumentation 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 BOD>! of these were undertaken to be rendered as and
    when desired by the assessee and for which the assessee had
H   agreed to bear and pay the expenses separately. The tenor of the
    agreements clearly shows that the various documents such •s
          SCIENIIFIC ENGG, HOUSE v. C.I.T. [TULZAPURKAR, J,]    713

                                                                          A
'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         B
 '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
  Uterature, etc. comprised in 'documentation service' specified      c
  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
 asses see.
                                                                      D
      The next question is whether the acquioition 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 purpo~e of business while          E
 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',
                                                                      F
     Counsel for the asses see 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.    G
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 (l} 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    H
              its ordinary sense, it includes whatever apparatus is
              used by a business man for carrying on his business-
    714            SUPREME COURT REPORTS        [1985] SUPP; 3 s.c.R.

A
              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".

B   In other words, plant would include ariy 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
C   lasts having an average life of three years used in manufacturing
    shoes were held to be plant. In C.I.T. Andbra Ptadesh 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
D   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.
E
         In Inland Revl!lllle Coomissioner 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 rust be held to be a plant.
    Lord Reid considered the part which a dry dock played in the
    assessee company's operations and observed :
F
               "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."

G   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 h8.s to be
               made as to what operation it performs. The functional
               test is, therefore, essential at any rate as a
H              preliminary".
        SCIENTIFIC ENGG. HOUSE v. C.I.T. [TULZAPURKAR, J.]    715

                                                                     A
In other words the test would be: Does the article fulfil the
function of a plant in the assessee's trading activity? ls 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,      B
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,      c
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            D
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      E
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       F
since they were in a sense the basic tools of the asses see' 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,            G
processing data and other literature falls within the definition
of 'plant' and therefore a depreciable asset.

     Counsel invited our attention to the decision in Comnis-
eioner of Income TaJ<, Gujarat v. E1econ l!ngineering 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          H
patterns which constitute 'know-how and are fundamental to the
assessee's manufacturing business are     'plant'.   We agree and
approve the said view.
    716             SUPREME COURT REPORTS      [1985) SUPP. 3 s.c.a.

         Having regard the aforesaid discussion the question framed
A   at the conmencement 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.
B



                                                      Appeal allowed.