SETHURAMAN J.


The following common questions have been referred by the Tribunal under s. 256(1) of the I.T. Act for the assessment years 1966-67 to 1969-70

"(1) whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the entire technical aid fees paid by the assessee to M/s. Clayton Dewandre Company Ltd., U.K., and the royalty paid to M/s. Bendix Westinghouse Automotive Airbrake Company, USA, under the collaboration agreements should be allowed as a deduction ?


(2) Whether the Tribunal was justified in holding that the cross objections of the assessee would fall to be technically allowed as the Tribunal had upheld the finding of the Appellate Assistant Commissioner ?" *


The assessee, is a company which was incorporated some time in 1962. Its business is in the manufacture and sale of air-compressor equipments for automotive vehicles and industrial equipment. It entered into technical collaboration agreement with M/s. Clayton Dewandre Company Ltd., U.K., on 1st July, 1962, and another agreement with M/s. Bendix Westinghouse Automotive Air Brake Company Ltd., USA, on 9th January, 1964. The assessee claimed that the payments made to the respective foreign companies in accordance with the terms of the two agreements should be allowed as deduction in arriving at the taxable income for the years mentioned above. Taking the assessment years 1966-67 as typical, the amounts paid to M/s. Clayton Dewandre Co. Ltd. fall in two parts: (1) royalty, and (2) technical aid fees. Royalty came to Rs. 9, 965 and technical aid fees to Rs. 7, 473. Similarly, in the case of M/s. Bendix Westinghouse Automotive Airbrake Co., the amount paid as royalty was Rs. 31, 302. For the other years, the figures vary, but the nature of the payments is the sameThe ITO allowed the royalty paid to M/s. Clayton Dewandre Co. Ltd. as revenue expenditure in each of the assessment years under consideration. However, in respect of payments of technical aid fees, he disallowed 50% as being in the nature of capital expenditure on the ground that the assessee derived an enduring benefit therefrom. In the case of payments to M/s. Bendix Westinghouse Automotive Air Brake Co., he disallowed 20% of the royalty as constituting capital expenditure. The assessee appealed to the AAC who after referring to some decided cases and observing that the assessee was expressly prohibited from divulging confidential information obtained under the agreement to third parties, came to the conclusion that the entire expenditure was admissible as deduction since the foreign companies had not parted with any assets. In his view, the assessee had also not acquired any benefit or advantage of an enduring value. The revenue appealed to the Tribunal and the assessee filed what was called "cross-objections". The Tribunal had disposed of similar matters and after referring to the submission that the collaboration agreements in the matters already disposed of were similar to the agreements before them on the present occasion, came to the conclusion that the payment was made for using the knowledge and using the licences and patents of the collaborators for a short duration, that it related to the production and the turnover of the company and that, therefore, it would be of a revenue nature. It is as against the orders of the Tribunal that the reference applications were made by the Commissioner of Income-tax, and the questions already extracted were got referred


Mr. Jayaraman, the learned counsel for the Commissioner, contended that the agreements in the present case had been entered into for starting or initiating the business and that the payments could be taken only as capital in nature. His further submission was that there was no provision in the agreement prohibiting the user of the knowledge after the agreement came to an end and that, therefore, the assessee had acquired an enduring benefit so as to bring the expenditure within the scope of capital expenditure. Agreements of a similar nature have been considered on a number of occasions. The Tribunal has in its order referred to the decision in I.T.A. Nos. 514 to 517 of 1969-70, dated December 31, 1971. That order has been annexed to the statement of the case., The said order was. the subject-matter of a reference to this court and the decision of this court is reported as CIT v. Lucas-TVS Ltd. (No. 1). The cases proceeded before the Tribunal on the basis that the agreements in the present case were substantially similar to the one considered in the reported decision. It was pointed out by this court in CIT v. Lucas-TVS Ltd. (No. 1) as follows

"It is not disputed before us that ultimately the question has to be decided on the basis of the terms of the particular agreement and the only general principle that can be derived from the decisions referred to above is that under the terms of the agreement if the assessee acquired a benefit of enduring nature that will constitute 'acquisition of an asset' and any amount paid for the same would constitute 'capital expenditure' and on the other hand if the assessee had acquired merely technical knowledge or knowledge for the manufacture of any particular item for a specified duration then he had acquired only a licence to use the other party's patent and knowledge and the amount would constitute 'revenue expenditure'." *


In CIT v. Lucas-TVS Ltd. (No. 1) [1977] l 1942 (10) ITR 338 (Mad), by the agreement similar to the one under consideration, the assessee was granted exclusive right and licence to make use, exercise and vend various items of electrical equipment for vehicles and engines. The payments made in accordance with the terms of the agreement were claimed as deductible expenditure. It was pointed out by this court in answering the reference that in view of the clause which provided that even the stock which remained in the bands of the assessee after the expiry of the period of the licence should be sold within a period of one year and the royalties payable therefor, should be paid, it would follow that the assessee had no right to manufacture fresh articles on the basis of the know-how which it obtained from the foreign company and that the entire payments made by the assessee to the foreign company will, therefore, be in the nature of licence fee and constitute an item of expenditure in the computation of its profits and gains. We have also examined this question in T.C. Nos. 665 to 667 of 1975 CIT v. Brakes India Ltd. disposed of on February 21, 1979 One of the orders referred to by the Tribunal and annexed to the statement of the case was the subject-matter of the reference. In disposing of the claim for deduction of the amounts paid in the said case, we observed

"........ we do not consider that there is any capital element in the payment with which we are now concerned. The payment made in the present case is for specific purposes and not for acquisition of any knowledge of a permanent nature with which the assessee could carry on its business and any person who enters into a collaboration agreement would necessarily acquire some knowledge during the process of manufacture carried on with the help of the collaboration agreement. Knowledge acquired can not be disgorged and ordinarily forms part of the equipment of the person concerned. It is not for the acquisition of the knowledge, but for application thereof, that the consideration is paid. The real test that has to be applied to cases like this is to find out whether the consideration was statedly for any such enduring purposes or merely for the help rendered during the period of the agreement." *


The agreement in the present case with M/s. Clayton Dewandre Company Ltd. grants a licence for the entire territory of India. The licence is exclusive and non-transferable and is for the purpose of using and selling in India the licensed devices, and parts thereof, but there is no right to import or export or sell for import or export into other countries such licensed devices. Article IV required the foreign company upon the written request of the Indian company to supply blue prints of assembly and detailed drawings and the results of technical investigations, tests and research. The information has to be kept confidential and has not to be disclosed to any other person at any time. In consideration of the technical services rendered, the foreign company was entitled to be paid a fee amounting to one and a half per cent. of the factory cost of all licensed devices and spare parts for such devices sold by the assessee-company. In consideration of the licence and other rights granted under the agreement in respect of the licensed patents and licensed devices, a royalty amount of 2% of the factory cost of all licensed devices and spare parts was also to be paid to the foreign company. The agreement was to be in force for a period of 10 years, subject to extension for a further period of five years, unless notice was given by either party by registered notice of its intention to terminate the agreement. The notice had to be given at least one year prior to such termination date. In the event of the termination of the agreement, all future and continuing rights and obligations were to cease and terminate. The Indian company will also have the right during the ensuing year subsequent to the termination of the agreement to dispose of any stock on hand. The nature of the agreement appears to us to be purely for the purpose of obtaining the relevant know-how for manufacturing and selling the materials manufactured. The agreement is for the purpose of running the business. Though the agreement may have been entered into soon after the formation of the company, it cannot be stated that the payments under the agreement are liable to be treated as capital expenditure merely because the agreement came into existence at the commencement of the company's career. Even at the initial stages after the formation of the company, it may enter into agreements for the purpose of enabling it to manufacture the proposed goods. Just as it enters into agreements with its employees, engineers, technicians, etc., it enters into agreements for the purpose of obtaining the know-how. The nature of the expenditure is not dependent upon the time at which the relevant agreement came into existence. The quality of the expenditure will have to be tested with reference to the object for which it was incurred. judged by this test, we do not find that there is any capital element in the expenditureMr. Jayaraman contended that as the assessee was starting its business, it is quite conceivable that the foreign company had assisted the assessee company in establishing the factory and that, therefore, a part of the expenditure at least should be attributed to capital. There is nothing in the agreement to show that the foreign company was called upon to render any assistance for giving the blue print 'of the factory or for procuring any machinery. In the absence of any such clause, it is possible that, if at all the foreign company had rendered any assistance in the procurement of the machinery or in giving the plan for the factory, it did so without any consideration being stipulated therefor. Even a hardheaded businessman sometimes enter into business agreements without any economic return Having regard to the terms of the agreement before us, we do not find that there is any capital element in it Mr. Jayaraman invited our attention to an unreported decision in T.C. No. 254 of 1975 dated July 8, 1981 (M. R. Electronic Components Ltd. v. CIT). In that case, cl. 9(a) of the agreement provided for assistance in the, construction of the factory. Though no separate consideration was provided for in the agreement for such assistance, it was held that a part of the consideration was liable to be ascribed to capital. The significant feature in the present case is that there is no such clause similar to cl. 9(a) in the case mentioned above. We do not, therefore, find any scope for ascribing any portion of the consideration in the present case to capital. Further, in T.C. No. 254 of 1975 (M.R. Electronic Components Ltd. v. CIT) there was also an obligation on the part of the foreign company to give the know-how in relation to the fresh products manufactured by it so as to enable the Indian company to manufacture the said items if it considered it expedient. There is no such clause in the present case. Therefore, it is not possible to attribute any capital element in the consideration. As earlier pointed out, each case has to be decided in accordance with the terms of the agreement concerned, and the agreement considered in T.C. No. 254 of 1975 M.R. Electronic Components Ltd. v. CIT) is so different from the one before us that we do not think it proper to take any assistance from the said decisionAs far as the other agreement is concerned, the terms are admittedly more or less identical and, therefore, we do not think it necessary to cover the same ground again. Whatever we have said as regards the quality of the consideration with reference to the agreement dated July 1, 1962, would equally apply to the consideration paid under the agreement dated January 9, 1964


The result is that the first question has to be and is answered, in the affirmative and in favour of the assessee


The assessee had wholly succeeded before the AAC and the Tribunal as far as the claim for deduction of this expenditure is concerned. It is, therefore, somewhat curious to find that the assessee has chosen to file ", cross-objections" before the Tribunal, which the Tribunal disposed of at the end of the order under reference. In dealing with the cross-objections, the Tribunal observed


"The cross-objections preferred by the assessee are not really effective cross-objections. The only contention in them is that the order of the Appellate Assistant Commissioner should be upheld and the appeals preferred by the Income-tax Officer dismissed. Since we have held that the departmental appeals should fail, these cross-objections are technically allowed." *


When it was pointed out by the Tribunal itself that the cross-objections were not effective, the only course open to it was to dismiss the same. Allowing the cross-objections would mean interfering with the order of the AAC which it ultimately did not do. just as in the case of an appeal, if it is allowed to interfere with the order of the appellate authority either i

n part or in whole, similarly allowing the cross-objections would have the consequence of interfering with the appellate order to some extent. As in the present case, the Tribunal has confirmed the order of the AAC, there is no question of allowing the cross-objections. It is the unfortunate wording in para. 14 of the Tribunal's order that has given rise to the second questionA cross-objection is only in the nature of an appeal. A person who has substantially succeeded in a forum may not think it necessary to file an appeal ; but when an appeal is actually filed, he may take advantage of the filing of the appeal by the other side so as to file cross-objections to get rid of the order in so far as it is adverse to him, as the period of limitation for the filing of the cross-objections is calculated from the date of the service of the appellate grounds. Ire effect, in such a case, a party who did not file an appeal, gets an extended period of limitation for filing what is in effect an appeal. When the assessee has succeeded wholly before the AAC and the Tribunal, there was no scope for filing an appeal or cross-objections. The Tribunal should have dismissed the cross-objections in limine as not being entertainable. The procedure of filing cross-objections is not to be gone through merely for the purpose of putting forward arguments in support of an order which is in favour of the cross-objector. In these circumstances, the second question has to be answered in the negative and in favour of the revenue. As the assessee has substantially succeeded in the reference, it will be entitled to costs-counsel's fee Rs. 500.