1. The Income-tax Appellate Tribunal has referred the following question for the opinion of this court :
" Whether, on the facts and circumstances of the case, the expenditure of Rs. 50,000 was a capital expenditure which could not be allowed as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ? "
2. The assessee, the British India Corporation Ltd., Kanpur, carries on the business of manufacture and sale of woollen goods, cotton textiles and hides and leather products. The activity of tanning hides and manufacturing leather products is carried on under the name and style of Cooper Alien and North West Tannery branches. For the assessment year 1959-60 (the relevant accounting year being the calendar year ending December 31, 1958), the assessee claimed a deduction of Rs. 50,000 paid to Messrs. Textile & General Supplies Private Ltd., Bombay, to whom we shall refer as" Textile & General Supplies ". The claim was made on the basis that the assessee was bound under an agreement with Messrs. Charles Walker & Co., London (referred to hereafter as "Charles Walker"), to pay that amount to Textile General Supplies for meeting the initial expenses of establishing it as distributor of the assessee's products. The Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner upheld the decision. The claim was pressed in second appeal before the Income-tax Appellate Tribunal and the Tribunal also rejected it. At the instance of the assessee, the Tribunal has now made this reference.
3. Section 10(2)(xv) of the Indian Income-tax Act, 1922, entitles an assessee to claim a deduction in the computation of its profits and gains of business in respect of an expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose of such business.
4. The agreement between the assessee and 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 would 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 salary, travelling expenses and maintenance to the personnel sent out by it to India, the agreement also provided that in the event of liberalisation of imports Charles Walker would limit its exports to India of certain products. The assessee undertook to pay to Charles Walker technical fees calculated at 5% on the selling price of the products produced by the processes disclosed to it. Then follows paragraph 7 of the agreement :
" The second participant (the assessee) agrees to appoint Textile and General Supplies Private Ltd., Army and Navy Building, Mahatma Gandhi Road, Bombay-1, India, a nominee of the first participant (Charles Walker) as distributors 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 consumers. In addition the second participant will pay Rs. 50,000 (Rs. fifty thousand only) to the distributors for meeting the initial expenses of establishing the distributorship of the second participant on the express understanding that the first participant will not part with his interest in Textile & General Supplies Private Ltd., without the prior approval in writing of the second participant."
5. The period of the agreement was seven years.
6. It is apparent that pursuant to paragraph 7 the assessee was bound 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 to pay Rs. 50,000 to the distributors for meeting the initial expenses of establishing the distributorship.
7. Contemporaneously, an agreement was entered into by the assessee with Textile and 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 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. It seems to us that 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. Paragraph 7 was an integral part of the agreement with Charles Walker and was as much a consideration for the receipt of the benefits from Charless Walker under the agreement as any other condition contained in the agreement. It will be noticed that paragraph 8 describes Textile & General Supplies as a nominee of Charier Walker. There is nothing on the record to show what were the reasons which persuaded Charles Walker to insist upon the appointment of Textile & General Supplies as distributors of the assessee. But, we have no doubt whatever that paragraph 7 constituted an important part of the agreement between the assessee and Charles Walker. We have already pointed out that no reference was made in the agreement with the distributors to the payment of Rs. 50,000 to them. It seems quite clear that payment of that amount was a condition not considered necessary in the distributorship agreement with Textile & General Supplies but necessary to the conclusion of the agreement with Charles Walker. Under that agreement the assessee was entitled to the use of the registered trade marks and the disclosure of technical know-how.
8. In Commissioner of Income-tax v. Ciba of India Ltd., [1968] 69 I.T.R. 692; [1968] 2 S.C.R. 696 (S.C.) the Supreme Court held that payment made by the assessee under an agreement with a Swiss company, Ciba Ltd. of Basle, was allowable as a business expenditure under Section 10(2)(xv). It was an agreement under which the assessee became entitled exclusively for a period of five years to the patents and trade marks of the Swiss company, and had access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The Supreme Court pointed out that under the agreement the Swiss company could not be said to have parted wholly with the technical know-how, and in particular as the licence was for a period of five years only it could not be said that any advantage or benefit of an enduring nature had accrued to the assessee.
9. We might point out that earlier in British Sugar Manufactures Ltd. v. Harris, [1938] 2 K.B. 220; 21 T.C. 528; [1939) 7 I.T.R. 101, 108 (C.A.) the Court of Appeal in England had held that payment made by a company carrying on manufacturing business under an agreement with two other companies in consideration of their giving to the assessee-company the full benefit of their technical and financial knowledge and experience was held to be a revenue expenditure. Romer L.J. observed :
" The payment is a payment necessary for the purpose of enabling the company or the trader to earn the profits of its trade, and, therefore, it is a legitimate deduction from its profits when ascertained for the purpose of assessment under Schedule D."
10. The case was applied by the Patna High Court in Badridas Bansidhar v. Commissioner of Income-tax, [1954] 25 I.T.R. 353 (Pat). Nothing has been shown to us to indicate that there has been any departure from the opinion expressed there.
11. It has been urged on behalf of the revenue that by the appointment of distributors the assessee derived an enduring advantage for the benefit of its business and that, therefore, the expenditure claimed by the assessee must be treated as of capital nature. Whether an expenditure brings into existence an advantage or benefit of an enduring nature is a question to be determined by reference to the facts of each case. In the case before us, the business of tanning hides and the manufacture of leather products was a business carried on even before the assessee entered into this agreement with Charles Walker and there is nothing on the record to indicate that, thereafter, business terminated with the agreement. The organisation set up by way of distributorship under the agreement was to endure for seven years only and upon the expiry of that period the assessee had no relationship left with that organisation. The period of agreement between the assessee and the distributors was coterminous with the agreement between the assessee and Charles Walker under which the assessee became entitled to the use of the registered trade marks and the disclosure of the know-how and techniques. It will be noticed that in Ciba of India Ltd. the period during which the know-how was made available by the Swiss company to the assessee there was five years, and the Supreme Court upheld the expenditure claimed as a revenue expenditure.
12. Considerable emphasis has been laid for the revenue on the fact that in paragraph 7 of the agreement with Charles Walker it is mentioned that Rs. 50,000 would be paid to the distributors for meeting the initial expenses for establishing the distributorship. No doubt, the payment was to be made for setting up the distributorship. That merely indicates the nature of the expenditure when the distributors made it. So far as the assessee is concerned, the payment was made because, it was bound to make it as a condition of the agreement with Charles Walker under which it was entitled to the benefit of using the trade marks and technical know-how.
13. In Motor Sales v. Commissioner of Income-tax, [1973] 87 I.T.R. 595 (All.) this court held upon somewhat similar facts that the expenditure incurred by the assessee for the construction of a hostel by Messrs. Tata Engineering Locomotive Works Co. Ltd. for the training of apprentices sent out by the assessee was revenue expenditure.
14. We are of opinion that the expenditure by the assessee of the amount of Rs. 50,000 should be considered as revenue expenditure admissible under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
15. The question referred is answered in the negative.
16. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.
Question answered in the negative.