REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4918 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 2140 OF 2017) HONDA SIEL CARS INDIA LTD. .....PETITIONER (S) APPELLANT(S) VERSUS COMMISSIONER OF INCOME TAX, .....RESPONDENT(S) GHAZIABAD WITH CIVIL APPEAL NO. 4919 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4261 OF 2017) CIVIL APPEAL NO. 4920 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4319 OF 2017) CIVIL APPEAL NO. 4921 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4356 OF 2017) AND CIVIL APPEAL NO. 4922 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4249 OF 2017) JUDGMENT Signature Not Verified Digitally signed by SATISH KUMAR YADAV Date: 2017.06.09 A.K. SIKRI, J. 18:47:18 TLT Reason: Assessee in all these appeals is Honda SIEL Cars Ltd. Civil Appeal No. 4918 of 2017 & Ors. Page 1 of 34 (hereinafter referred to as Assessee ). Question of law that is raised is also identical. Five appeals are filed only because of reason that same issue has occurred in different Assessment Years, i.e., for years 1999-2000, 2001-2002, 2002-2003, 2003-2004 and 2005-2006. 2) M/s. Honda Motors Company Limited, Japan (hereinafter referred to as HMCL, Japan ) had entered into joint venture dated September 12, 1995 with M/s. SEIL Ltd., company incorporated under Indian Companies Act. After getting necessary approval from Government of India, joint venture company in name of assessee was incorporated. After incorporation of assessee as joint venture, agreement dated May 21, 1996 between HMCL, Japan and assessee was entered into, known as Technical Collaboration Agreement (for short, TCA ). As per TCA, HMCL, Japan which is engaged in business of development, manufacture and sale of automobiles and their parts agreed to give license and technical assistance to assessee. TCA also stipulated different kinds of technical know-how and technical information which were to be provided by HMCL, Japan (as licensor) to assessee (as licensee). For providing aforesaid facilities, it was Civil Appeal No. 4918 of 2017 & Ors. Page 2 of 34 agreed that consideration/lump sum fee of 30.5 million US Dollar would be paid by assessee to HMCL, Japan in five continuous equal installments and payment thereof was to commence from third year after commencement of commercial production. Besides, assessee was also liable to pay royalty of 4%, both on internal and exports, subject to taxes. 3) dispute which has arisen is as to whether said technical fee of 30.5 million US Dollar payable in five equal installments on yearly basis is to be treated as revenue expenditure or capital expenditure. 4) assessee had filed its first return for Assessment Year 1999-2000 (in which year, first installment was paid) showing said expenditure as revenue expenditure. Though, in normal assessment, expenditure was allowed as such, thereafter notice was issued under Section 148 of Income Tax Act (hereinafter referred to as Act ) stating that said expenditure was capital in nature and, therefore, instalment towards royalty paid in sum of Rs. 79602000/-, by assessee to HMCL, Japan in that year had escaped assessment. Ultimately, orders were passed treating same as capital expenditure. In subsequent years, Assessing Officer again treated royalty Civil Appeal No. 4918 of 2017 & Ors. Page 3 of 34 paid as capital expenditure. assessee filed appeals before CIT(A) which were dismissed. However, further appeals before Income Tax Appellate Tribunal (ITAT) were allowed and ITAT held that expenditure is to be treated as revenue expenditure. Against order of ITAT, Department went in appeal before High Court of Allahabad which has allowed these appeals thereby reversing order of ITAT and agreeing with view taken by Assessing Officer payments of royalty expenditure in-question are to be treated as capital expenditure. In present appeals challenging impugned judgment dated December 21, 2016 passed by High Court is challenged. 5) With aforesaid preliminary remarks about nature of controversy, we now proceed to take note of facts in some detail. 6) As mentioned above, joint venture company, namely, assessee was incorporated by HMCL, Japan and SEIL, India. 8. Total share capital of HSCIL/Assessee was 36 crores shares out of which 35,63,99,995 shares were held by HMCL, Japan while remaining 3600005 shares held by M/s. Seil India. In other words, joint venture was almost owned by HMCL, Japan, having around 99% shares and Seil India (local Indian Civil Appeal No. 4918 of 2017 & Ors. Page 4 of 34 company) owned only 1% shares. 9. Thereafter, M/s. HMCL, Japan who held about 99% share of joint venture company/subsidiary company, i.e., Assessee, entered into agreement on 21.5.1996 with HSCIL/Assessee which is called as Technical Collaboration Agreement . Agreement stipulated and termed HMCL, Japan as licensor and HSCIL/Assessee as licensee. 14. In view of aforesaid licence, consideration/lump sum fee agreed between parties was 30.5 million U.S Dollar, payable in five continuous equal installments by licensee to licensor and payment thereof was to commence from third year after commencement of commercial production. Besides, licensee was also liable to pay royalty of 4%, both on internal and exports, subject to taxes. Article 14 of agreement which talks of lump sum fee and royalty reads as under: "14.1 In consideration of right and licence granted to licensee under Article 2 hereof and of furnishing of Technical Information under Article 4.2 hereof, licensee shall pay to LICENSOR following fees: 1. Lumpsum fee: amount of lumpsum fee payable by licensee to LICENSOR shall be USS 30.5 million. This fee shall be payable in 5 continuous equal annual installments, amount of each of which installments shall be six million one hundred thousand US dollars (USS6,100,000), beginning from 3rd year after commencement of Commercial Production. lump sum fees shall be payable by licensee in currency of US dollars by bank transfer remittance to bank account designated by LICENSOR, based on final government approval. 2. Royalty: rate of royalty payable by licensee to LICENSOR shall be Four (4) percent; both on internal sales and exports, subject to taxes. Civil Appeal No. 4918 of 2017 & Ors. Page 5 of 34 royalty shall calculated on basis of ex-factory sale price of product exclusive of excise duties, minus cost of standard bought out components and landed cost of imported components irrespective of source of procurement, including ocean-freight, insurance, custom duties, and other similar charges. royalty shall be payable for period of seven (7) years from date of commencement of Commercial Production. List of standard bought out items is as per exhibit II. 14.2 total amount of royalty specified in counter signed report and invoice under Article 13.1 hereof shall be payable by licensee in currency of US Dollars by bank transfer remittance to bank account designated by LICENSOR, so that such remittance shall reach LICENSOR not later than 10th day of month next following month in which such countersigned report and invoice reach licensee. In event currency in which amount of running royalty is calculated differs from currency in which payment of running royalty is to be made, then conversion shall be made in accordance with final quotation of telegraphic transfer selling rate of exchange prevailing at time of remittance by Delhi office of any international bank, mutually agreed separately. 14.3 All payments and remittances by licensee will be subject to Tax Deduction at Source (TDS)/levy of CESS (under Research and Development Cess Act, 1986). Receipt by LICENSOR of any payment tendered hereunder shall not constitute LICENSOR'S acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by licensee to LICENSOR hereunder shall not be refundable to licensee, in any facts or circumstances whatsoever. If licensee fails to make any payment here under on due date, licensee agrees to pay late payment fee in amount equivalent to LIBOR +TWO (X) percent per annum in Civil Appeal No. 4918 of 2017 & Ors. Page 6 of 34 payment currency, calculated on basis of 365 day year, subject to Government of India/RBI approvals/guidelines prevailing at that time. 14.4 It is understood and confirmed that it should be separately agreed to by parties hereof in "Memorandum on Exchange of Technicians" referred to in Article 4 hereof any and all fees, costs, expenses and other consideration for and in connection with technical guidance provided by LICENSOR by dispatching to licensee technical experts (s) of LICENSOR and technical training of licensee's engineers) at factory or factories of LICENSOR or any of its designers, including but not limited to technical guidance fees, per dien allowances, traveling expenses, staying or living expenses and other incidental expenses, shall be payable by licensee to LICENSOR in accordance with such" Memorandum on Exchange of Technicians", separate from and in addition to payments under this Article 14, and that no amount of any such fees, costs, expenses or other consideration is included in payments under this Article 14." (emphasis added) 15. Article 19 provides term/tenure of agreement and reads as under: Article 19. TERMS OF AGREEMENT : This Agreement shall become effective on Effective Date, and shall continues in full force and effect for period of ten(10) years from date of agreement or seven (7) years from date of commencement of commercial production, and shall thereafter be renewed subject to prevailing laws in India; provided, however, that this Agreement may be terminated by either party at end of initial period as mentioned above or at end of any subsequent renewed period by written notice to that effect given to other party at least three (3) months prior to expiration of initial period or any Civil Appeal No. 4918 of 2017 & Ors. Page 7 of 34 subsequent renewed period. Notwithstanding foregoing, in event of termination of Joint Venture Agreement, this Agreement shall accordingly terminate forthwith." (emphasis added) 16. Agreement can be terminated by either of parties by giving sixty days' notice, in case of default in performance of obligations under agreement, as contemplated in Clause 20.1. Consequence of termination of agreement is provided in Article 21 and reads as under: "21.1 In event of expiration or any other termination of this Agreement for any reason whatsoever, (except where parties have taken steps for renewal of agreement) and unless otherwise agreed upon by parties hereto, 1. licensee shall, within 90 days, discontinue (I) manufacture, sale and other disposition of Products and Parts, and (ii) use of Intellectual Property Rights, Technical Information licensed or furnished by LICENSOR under this Agreement. 2. licensee shall promptly return to LICENSOR all particular documents and tangible property supplied by LICENSOR in connection with this Agreement and belonging to LICENSOR and shall keep all Information received by licensee hereunder secret and confidential in accordance with Article 7 hereof; 3. licensee shall not be entitled to demand from LICENSOR, for reason of expiration or termination of this Agreement or failure to renew or extend it, any damages, reimbursements or other payments on account of current or prospective profits on licensee's sale or anticipated sale of Products and Parts, or on account of establishment, development or maintenance of goodwill or other business of licensee, or on account of any other cause of thing whatsoever, except as provided in this Agreement; Civil Appeal No. 4918 of 2017 & Ors. Page 8 of 34 4. Even after expiration or termination of this Agreement for any reason whatsoever, licensee permits LICENSOR or its agents to have access to licensee's factories and other facilities and to make necessary inspection to confirm whether licensee is observing its obligations under this Article 21.1; 5. LICENSOR may at its option, but without obligation to do so, repurchase or cause to be repurchased at fair price agreed upon by parties hereto, all or any portion of Products and Parts which licensee then has on hand and which remain unsold and unused at time of expiration or termination of this Agreement; 6. LICENSOR may at its option sell, directly or indirectly, Products and Parts repurchased by it under paragraph (5) above in Territory or any other country, without any liability on part of LICENSOR, to account to licensee for any part of proceeds of such sale or any other sums whatsoever; 7. If LICENSOR does not exercise its option referred to in Paragraph (6) above within reasonable period of time after expiration or termination of this Agreement, then licensee may, notwithstanding provision set forth in Paragraph (1) above, sell on non-exclusive basis, Products and Parts which licensee has on hand at time of expiration or termination of this Agreement within such reasonable period of time as may be agreed upon by parties hereto; provided, however, that such sale shall be made in accordance with this Agreement and without impairing LICENSOR's reputation, provided further that said sale shall be so executed without using Trade mark of LICENSOR in full or in part, and provided further, that running royalties thereon shall be paid to LICENSOR on same terms and conditions as provided herein. (emphasis added) 21.2 This expiration or any other termination of this Agreement here under shall be without prejudice to Civil Appeal No. 4918 of 2017 & Ors. Page 9 of 34 any right which shall have accrued to either party here under prior to such expiration or termination." (emphasis added) 7) As is clear from reading of Article 14 of Agreement, aforesaid royalty in 5 equal installments was to be paid for right in license that was granted by HMCL, Japan to assessee under Article 2 as well as for furnishing of technical information under Article 4.2. Under aforesaid articles, HMCL, Japan had to provide manufacturing facilities, know-how, technical information and it also gave information regarding intellectual property rights to assessee which assessee was entitled to exploit only as licensee and without getting any rights in said intellectual property belonging to HMCL, Japan. terms manufacturing facilities, intellectual property rights, know-how and technical information were defined in clauses 3, 5, 6 and 7 of Agreement which reads as under: 3. term Manufacturing Facilities shall mean jigs, tools, dies, machinery and equipment which licensee for manufacture, assembly, testing of inspection of products. 5. terms Intellectual Property Rights shall mean those patents, utility models design patents and other intellectual property rights directly relating to Products or licensed parts themselves relating to manufacture of products or licenced parts (including many pending applications thereof, but excluding trademarks, and excluding patents utility Civil Appeal No. 4918 of 2017 & Ors. Page 10 of 34 models design patents and other intellectual property rights relating to Manufacturing Facilities and manufacture thereof) which Licensor owns at time of execution of this Agreement or may own from time to time during term of this Agreement or under which Licensor is entitled to grant licence to licensee. 6. term know-Hose shall mean any and all secret technical information (except for Intellectual Property Right), whether in writing or not, including but not limited to drawings, standards, specifications, material lists, process manuals and direction maps, which directly relates to products or licenced parts themselves or is necessary for manufacture of products or licenced parts and which Licensor owns at time of execution of this Agreement or under which Licensor is entitled to grant licence to licensee. 7. term Technical Information shall mean () KnowHow, and (II) any technical information, not included in KnowHow, such as service materials and Japanese Industrial Standard (JIS), whether in writing or not, which directly relates to products or licenced parts or is necessary for manufacture of products or licenced parts and which Licensor owns at time of execution of this Agreement or may own from time to time during term of this Agreement or under which Licensor is entitled to grant licence to licensee, and Technical Information shall include Technical Materials (emphasis added) 13. Licence was granted by HMCL, Japan to indivisible, non-transferable and exclusive right and licence to manufacture, use and sell products and licensed parts within territory under intellectual property rights by using knowhow, and technical information. It also provided that licensee, i.e., HSCIL/Assessee may grant sub-licenses with prior written consent of licensor. It also provided that to sale or export any products and parts, to any place outside territory of India, prior consent of licensor would be required. Civil Appeal No. 4918 of 2017 & Ors. Page 11 of 34 8) It may also be pointed out, at this stage, that as part of Agreement, certain memoranda were also executed between parties, viz.: (a) Memorandum on exchange of technician (b) Memorandum on supply of parts (c) Memorandum on supply of manufacturing facilities 9) It is on analysis of aforesaid clauses of Agreement that issue needs to be decided. As per Revenue, technical know-how and royalty payments are of enduring nature and, therefore, they would qualify as capital expenditure. On other hand, assessee maintains that it had acquired mere right to use technical information provided by HMCL, Japan and, thus, it did not lead to creation of any asset of enduring nature. Therefore, it was to be treated as revenue expenditure. 10) High Court, after taking note of various judgments on subject and principles laid down in those judgments, came to conclusion that royalty was for enduing benefit of business. It was not only for running business but for bringing business into existence and then for running and sustaining it. In other words, main reason which persuaded High Court to Civil Appeal No. 4918 of 2017 & Ors. Page 12 of 34 come to aforesaid conclusion was that there was no existing business which needed to be improvised with aid of technical know-how. This TCA was executed with aim and objective to establish new unit for manufacture of automobiles and parts thereof. Therefore, new unit was brought into existence in form of assessee on which HMCL, Japan, foreign company, had absolute control as it held 99% shares in joint venture. Further, technical know-how agreement for technical collaboration which not only included transfer of technical information, but, complete assistance, actual, factual and on sport, for establishment of plant and machinery etc. so as to bring into existence manufacturing unit for products. Agreement also provided for continuous assistance at every stage. High Court was of opinion that in aforesaid circumstances, test laid down by Full Bench of Madras High Court in M/s. Jonas Woodhead and Sons (India) vs. Commissioner of Income Tax1 becomes applicable which is to effect that whenever complete new plant with complete new process, with new technology for manufacture of product is brought into existence, payment for such technical know-how is to be treated as capital expenditure. High Court also remarked that 1 1979 (117) ITR 55 Civil Appeal No. 4918 of 2017 & Ors. Page 13 of 34 expenditure in form of technical know-how fee and royalty was not only for running business but for bringing business into existence and, therefore, could not be treated as revenue expenditure. 11) Mr. Tripathi, learned senior counsel appearing for assessee submitted at outset that on identical issue pertaining to this very assessee, Delhi High Court has taken contrary view in case of CIT vs. Hero Honda Motors [(2015) 327 ITR 481(Delhi)] holding that payment of technical know-how fee and royalty was in nature of revenue expenditure. His further submission was that very premise on which Allahabad High Court had given impugned judgment, was contrary to record. In this behalf his submission was that High Court had proceeded on premise that technical know-how fee and royalty was paid for setting up plant for manufacture of automobiles which are contrary to factual finding recorded by Tribunal in this case. According to him, know-how was provided to assessee for purpose of manufacturing of products in India. He also argued that High Court was influenced by irrelevant factors like extent of share holding of HMCL, Japan in assessee which was of no relevance. learned counsel laid Civil Appeal No. 4918 of 2017 & Ors. Page 14 of 34 much emphasis that in terms of TCA, appellant had only acquired right to use technical know-how provided by HMCL for manufacture of products, during currency of TCA, which was for initial period of ten years from date of agreement or seven years from date of commercial production. ownership rights in know-how continued to remain with HMCL, Japan and appellant was not authorized to transfer know-how license to any other person or assign or convey same to any third party. Thus, what appellant acquired was only limited right to use and exploit know-how for manufacture of products and parts. 12) learned counsel for Revenue refuted aforesaid submissions of Mr. Tripathi. His contention was that finding of fact was arrived at by Assessing Officer, which was confirmed by CIT(A) as well that new asset in form of setting up of new company had come into existence with aid of technical know-how and, therefore, expenditure in-question was capital expenditure. He further submitted that view which was taken by ITAT was un-sustainable and, therefore, rejected by High Court. Referring to reasoning given by High Court in impugned judgment which is already taken note of above, his Civil Appeal No. 4918 of 2017 & Ors. Page 15 of 34 submission was that same should be accepted. 13) We have considered respective submissions of counsel for parties on either side. First thing which is discernible in impugned judgment of High Court is that High Court has proceeded entirely on basis that technical know-how was used for setting up of plant for manufacture of automobiles. Judgment of ITAT, on other hand, reveals that it had arrived at contrary conclusion. 14) Record reveals that simultaneously with signing of TCA, certain other agreements were also entered into between HMCL, Japan and assessee on May 21, 1996. 15) Nomenclature of these three agreements is already taken note of above. These are Memorandum on Exchange of Technicians , Memorandum on Supply of Parts and Memorandum on Supply of Manufacturing Facilities . Tribunal went into nature of these agreements. Engineers and technicians were sent by HMCL, Japan to India for providing necessary guidance for setting up of plant. Likewise, Memorandum on Supply of Parts related to supply by HMCL, Japan of parts required for manufacture of Honda cars. This Agreement basically provided each sale and purchase of pats shall be effected in accordance Civil Appeal No. 4918 of 2017 & Ors. Page 16 of 34 with terms and conditions of individual purchased contract for parts, which means that supply of parts is governed by separate contracts. Third Agreement known as Memorandum on Supply of Manufacturing Facilities stipulated specification of manufacturing facilities to be sold by Japanese company to assessee, their sale prices and time of delivery which was to be separately decided by parties from time to time. It contained detailed provisions in respect of specifications and changes thereto, terms of payment, inspection before delivery, functional testing of materials, packing, insurance, on-sight inspection, warranty title risk, patents, trademarks etc. Undoubtedly, payments made in respect of facilities given under aforesaid Memoranda are capitalised by assessee, showing same to be capital expenditure. Contrasting these three Memoranda with TCA, ITAT returned finding to effect that for setting up manufacturing facilities and for tax, separate agreements had been entered into by parties and separate payments were made by assessee as consideration therefor. This makes it clear that payment of technical know-how and royalty are not part of payments for setting up plant which manufactures Honda cars in India Civil Appeal No. 4918 of 2017 & Ors. Page 17 of 34 but, were made to enable assessee to manufacture Honda cars in India which are its stock and trade. Tribunal was conscious of fact that this TCA was also entered into at time of setting up of fact and since know-how was being obtained for first time and was crucial to setting up of business of assessee. It posed question as to whether this could make difference and expenditure was to be treated as capital expenditure. However, after noticing that no such distinction was drawn by Delhi High Court in Shriram Refrigeration Industries Vs. Commissioner of Income Tax 2 and Triveni Engineering Works Ltd. Vs. CIT 3 and test applied was as to whether expenditure, whether incurred at time of setting up of business or later, acquisition of technical know-how or was only for use of know-how for particular period. Applying aforesaid test, Tribunal found that TCA in-question gave limited right to assessee to use technology with no ownership or proprietary rights therein. 16) aforesaid conclusion recorded by ITAT has been upset by High Court in impugned judgment. It would be pertinent to point out that even High Court has not interpreted clauses 2 1981 (127) ITR 746 3 1981 (136) ITR 340 Civil Appeal No. 4918 of 2017 & Ors. Page 18 of 34 of TAC to conclude that proprietary rights in technical know-how stood acquired by assessee. It has proceeded on basis that it was only right to use technical know-how which was given. Its conclusion rests entirely on basis that technical know-how was given for setting up of new plant. It is this difference of opinion which is to be settled here. 17) reading of TCA would bring out following pertinent aspects: (a) appellant was granted indivisible and non-transferable right to manufacture in India range of products using know how/technology licensed by HMCL; (b) appellant had during currency of agreement only right to access manufacturing know-how/technology owned by HMCL; (c) there was no transfer of know-how/technology in favour of appellant and proprietary rights therein always vested in HMCL; (d) appellant was to keep know-how/technology confidential and was barred from assigning same to any third party. (e) agreement was for period of 10 years and was renewable at option of parties; and (f) on expiry of agreement, appellant was prohibited from using know-how/technology and as duty bound to return all copies of drawings, designs, etc. made available by HMCL under agreement 18) If aforesaid factors are taken in isolation, probably claim of Civil Appeal No. 4918 of 2017 & Ors. Page 19 of 34 assessee may be justified. Distinction between capital and revenue expenditure with reference to acquisition of technical information and know-how has been spelled out by this Court as well as High Courts in series of cases. Primary test which is adopted to differentiate between capital and revenue expenditure remains same, namely, enduring nature test. It means where expenditure is incurred which gives enduring benefit, it will be treated as capital expenditure. In contradistinction to cases where expenditure of concurrent and reoccurring nature is incurred and later would belong to revenue field. Technical information and know-how are intangible. They have different and distinct character from tangible assets. When expenditure is incurred to acquire tangible asset, determination as to whether said acquisition of tangible asset is of capital nature or expenditure is of revenue nature, may not pose problem. However, in case of technical information and know-how, having regard to their unique characteristic, questions that need to be posed for determining nature of such expenditure are also of different nature. In case where there is transfer of ownership in intellectual property rights or in licences, it would clearly be capital expenditure. Civil Appeal No. 4918 of 2017 & Ors. Page 20 of 34 However, when no such rights are transferred but arrangement facilitates grant of licence to use those rights for limited purpose or limited period, Courts have held that in such situation, royalty paid for use of such technical information or know-how would be in nature of revenue expenditure as no enduring benefits is acquired thereby. This was so held in classic case, entitled Commissioner of Income Tax, Bombay City I v. Ciba India Limited4. In said case, assessee company had procured know-how in form of processes, formulae, scientific data, working, prescription and other intellectual property rights developed by Swiss Company, to produce licensed preparations and to promote their sale in India. Inspite of fact that Swiss Company had granted to Indian assessee full and sole right and licence in territory of India under patents listed in Schedule-I, to make use, exercise and vend inventions referred to therein and to use trade marks set out in Schedule-II in territory of India, this Court held that what was conferred was mere right to use. Indian assessee, it was observed, was not entitled to exclusive rights to patents, trademarks etc. As per agreement, proprietary information was not to be divulged to third parties 4 (1968) 69 ITR 692 (SC) Civil Appeal No. 4918 of 2017 & Ors. Page 21 of 34 without consent. rights granted enabled access to technical knowledge and experience with right to use patents and trademarks for limited period. Swiss Company did not part with any asset of its business, nor did Indian assessee acquire any asset or advantage of enduring nature. right empowered Indian assessee to draw for purpose of carrying on its business as manufacturer and rely upon technical knowledge of Swiss Company. There was no attempt to part with technical knowledge absolutely in favour of Indian assessee. It was not case of transfer of intellectual rights once for all. Thus, expenditure incurred was revenue in nature. 19) Likewise, in Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, Gujarat5, assessee was engaged in manufacture of antibiotics and pharmaceuticals on basis of licence which was granted to it by Government for manufacture of antibiotic, penicillin etc. It entered into agreement with Japanese Company for supply of requisite technical know-how so as to achieve substantially high level of performance or production with aid of better technology and 5 (1989) 177 ITR 377 Civil Appeal No. 4918 of 2017 & Ors. Page 22 of 34 process of fermentation and with better yielding penicillin strains that was developed by foreign company. Under agreement, royalty was to be paid. This royalty payment was treated as capital expenditure till stage of High Court. This Court reversed judgment of Courts below by holding expenditure would be revenue in nature. In its judgment, Court culled out certain principles laid down therein to determine, whether expenditure of assessee was Capital Expenditure or Revenue Expenditure and said: (i) When expenditure is made, not only once and for all, but with view to bringing into existence asset or advantage for enduring benefit of trade, I think that there is very good reason (in absence of special circumstances leading to opposite conclusion) for treating such expenditure as properly attributable not to revenue but to capital (referred to British Insulated Helsby Cables Ltd. v. Atherton, [1926] AC 205). (ii) If expenditure is made for acquiring or bringing into existence asset or advantage for enduring benefit of business it is properly attributable to capital and is of Civil Appeal No. 4918 of 2017 & Ors. Page 23 of 34 nature of capital expenditure. If on other hand it is made not for purpose of bringing into existence any such asset or advantage but for running business or working it with view to produce profits, it is revenue expenditure. (iii) aim and object of expenditure would determine character of expenditure whether it is capital expenditure or revenue expenditure. 20) It was also held that three aspects should be considered, (a) character of advantage sought, and in this, its lasting qualities may play part, (b) manner in which it is to be used, relied upon or enjoyed, and in this and under former head recurrence may play its part and (c) means adopted to obtain it. 21) decision went in favour of assessee primarily on ground that assessee in that case was already engaged in preparation of antibiotic since long. Therefore, it could not be said that area of improvisation by obtaining know-how from foreign collaboration was not part of improvisation of existing business or that entire gamut of existing manufacturing operation for Civil Appeal No. 4918 of 2017 & Ors. Page 24 of 34 commercial production of penicillin in assessee s existing plant had become obsolete or inappropriate in relation to exploitation of new sub-cultures of high yielding strains of penicillin. Court also emphasised that it cannot be said that mere introduction of new bio-synthetic source required erection and commissioning of totally new and different type of plant and machinery. To this, added factors were that agreement placed limitations on right of assessee in dealing with know-how and conditions as to non-partibility, confidentiality and secrecy of know-how inclined towards inference that right pertained more to use of know-how than to its exclusive acquisition. This case is significant for our purposes in two respects: (i) If technical know-how obtained under agreement for which technical fee/royalty is paid is for limited period and only right to use technical know-how is there during agreement with no right of acquisition, coupled with fact that said technical know-how is utilised for improvising existing business, expenditure would be treated as revenue expenditure. This case, thus, gives indication that if such technical know-how is for purpose of Civil Appeal No. 4918 of 2017 & Ors. Page 25 of 34 setting up new business, position may be different. (ii) Another aspect which needs to be noted is that while rendering aforesaid decision, this Court observed that there is no single test or principle or rule of thumb which is paramount. It is ultimately question of law, but question which must be answered in light of all circumstances which are reasonable to take into account, and weight which must be given to particular circumstance in particular case, must depend on common sense rather than on strict application of any single legal principle. It was also observed that solution to problem is not to be found by any rigid test or description. It has to be derived from many aspects of whole set of circumstances, some of which may point in one direction, some in other. One consideration may point so clearly that it dominates other and vaguer indications in contrary direction. It is common sense appreciation of all guiding features which must provide ultimate answer. This Court also said that idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are notions of "Capital" or "Revenue" judicial Civil Appeal No. 4918 of 2017 & Ors. Page 26 of 34 fetish. What is 'Capital Expenditure' and what is 'Revenue' are not eternal varieties but must need be flexible so as to respond to changing economic realities of business. expression "asset or advantage of enduring nature" was evolved to emphasize element of sufficient degree of durability, appropriate to context. 22) When we apply aforesaid parameters to facts of present case, conclusion drawn by High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising existing technical know-how by borrowing technical know-how of HMCL, Japan did not arise. assessee was not in existence at all and it was result of joint venture of HMCL, Japan and M/s. HSCIL, India. very purpose of Agreement between two companies was to set up joint venture company with aim and objective to establish unit for manufacture of automobiles and part thereof. As result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, Civil Appeal No. 4918 of 2017 & Ors. Page 27 of 34 factual and on spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for products. Thus, new business was set up with technical know-how provided by HMCL, Japan and lumpsum royalty, though in five instalments, was paid therefor. 23) No doubt, this technical know-how is for limited period i.e. for tenure of agreement. However, it is important to note that in case of termination of Agreement, joint venture itself would come to end and there may not be any further continuation of manufacture of product with technical know-how of foreign collaborator. High Court has, thus, rightly observed that virtually life of manufacture of product in plant and machinery, establishes with assistance of foreign company, is co-extensive with agreement. Agreement is framed in manner so as to given colour of licence for limited period having no enduring nature but when close scrutiny into said Agreement is undertaken, it shows otherwise. It is significant to note in this behalf that Agreement provides that in event of expiration or otherwise termination, whatsoever, licensee, i.e., joint venture company/ Assessee shall discontinue manufacture, sale and other disposition of products, parts and residuary products. All Civil Appeal No. 4918 of 2017 & Ors. Page 28 of 34 these things then shall be at option of licensor. In other words, licensee in such contingency would hand over unsold product and parts to licensor for sale by him. In case licensor does not exercise such option and product is allowed to be sold by licensee, it would continue to pay royalty as per rates agreed under agreement. Clauses 19 and 21, in our view, make Agreement in question, i.e., establishment of plant, machinery and manufacture of product with help of technical know-how, co-extensive, in continuance of Agreement. Agreement also has clause of renewal which, in our view, in totality of terms and conditions, will make unit continue so long as manufacture of product in plant and machinery, established with aid and assistance of foreign company, will continue. Since, it is found that Agreement in question was crucial for setting up of plant project in question for manufacturing of goods, expenditure in form of royalty paid would be in nature of capital expenditure and not revenue expenditure. Tribunal is conclusion that it is only other three memoranda which were necessary for setting up manufacturing facilities and payment thereunder would qualify as capital expenditure, and not payment of technical fees/royalty on ground that this Civil Appeal No. 4918 of 2017 & Ors. Page 29 of 34 Agreement was not in connection with setting up of plant or manufacturing facilities, is not correct. It would be interesting to note that even Tribunal had nurtured doubt on nature of this expenditure as TCA was signed simultaneously with other memoranda to facilitate setting up of new factory and not improvising earlier set up. This doubt has expressed by ITAT itself in following words: Our doubt was why payment, at least of lump sum technical know-how fees, cannot be considered as being connected to initial starting up of business and hence not allowable since know-how was bring obtained for first time and was crucial to setting up of business of assessee which undisputedly was to manufacture Honda cars in India. It may be recalled that this was also view taken by Assessing Officer. Further, assessee was not already in manufacture of cars and was commencing such activity for first time. It was not case of business already in existence. payment was once for all payment, though staggered over period of years. 24) However, discussion that follows thereafter suggests that ITAT was satisfied with explanation of assessee that High Courts have always applied test as to whether expenditure, whether incurred at time of setting up of business or later, was for acquisition of technical know-how or was only for use of know-how for particular period. ITAT felt satisfied with said explanation and held that expenditure was Civil Appeal No. 4918 of 2017 & Ors. Page 30 of 34 revenue in nature. It is at this stage that Tribunal erred in not approaching issue in right perspective. 25) Coming to judgment of Delhi High Court in case of this very assessee, it would be noticed that in that case, technical know-how was obtained for improvising scooter segment, which unit was already in existence. On contrary, in present case, TCA was for setting up of new plant for first time to manufacture cars. Delhi High Court specifically noted this fact in para 14 of judgment. While analysing agreement in that case which was for providing technical know-how in relation to product i.e. two wheelers and three wheelers and purpose was to introduce new models of said product developed by Japanese Company, High Court noted that agreement specifically recorded that respondent assessee was already engaged in business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as joint venture. It referred to earlier collaboration agreement dated January 24, 1984 and subsequent amendment thereto which conferred and had granted to respondent assessee right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. Civil Appeal No. 4918 of 2017 & Ors. Page 31 of 34 aforesaid distinction between two Agreements has made all difference in results. As consequence, we find no merit in these appeals which are dismissed with cost. .............................................J. (A.K. SIKRI) .............................................J. (ASHOK BHUSHAN) NEW DELHI; JUNE 09, 2017 Civil Appeal No. 4918 of 2017 & Ors. Page 32 of 34 ITEM NO.6 COURT NO.4 SECTION - XI (For judgment) S U P R E M E C O U R T O F I N D I RECORD OF PROCEEDINGS CIVIL APPEAL NO.4918 OF 2017 HONDA SIEL CARS INDIA LTD. Appellant(s) VERSUS COMMISSIONER OF INCOME TAX, GHAZIABAD Respondent(s) With C.A.No.4922/2017 C.A.No.4921/2017 C.A.No.4920/2017 C.A.No.4919/2017 Date : 09/06/2017 These appeals were called on for judgment today. For Petitioner(s) Ms.Manasvini Bajpai, Adv. Mr. R.Chandrachud, Adv. For Respondent(s) Ms.Sadhna Sandhu, Adv. Ms.Nivedita Nair, Adv. Ms.Gargi Khanna, Adv. Mr.Natkarni Nisha Bagchi, Adv. Ms.Anil Katiyar, Adv. Ms.Sangita Rai, Adv. Hon'ble Mr.Justice A.K.Sikri pronounced judgment of Bench comprising His Lordship and Hon'ble Mr.Justice Ashok Bhushan. appeals are dismissed with cost in terms of signed judgment. (SATISH KUMAR YADAV) (H.S.PARASHER) AR-CUM-PS COURT MASTER (Signed reportable judgment is placed on file) Civil Appeal No. 4918 of 2017 & Ors. Page 33 of 34 Civil Appeal No. 4918 of 2017 & Ors. Page 34 of 34 Honda Siel Cars India Ltd. v. Commissioner of Income-tax, Ghaziabad