35. In the case before us, the Agreement between the assessee and DCIL/Distacorn and Modicorp is to assist the assessee by providing services in the manner set out in Schedule – 1 to the Agreement, [n the Agreement, it has been clearly provided that DCIL and Distacom have technical and operational know-how and capability which are necessary to the success of assessee’s business in providing cellular communications services in the states of Karnataka & Punjab (India) and the fulfillment of its obligations under the Agreement between assessee and the Department of Telecommunications, Ministry of Communication, Govt. of India, relating to Karnataka and Punjab telecom circle. In the Agreement with the Modicorp, it has been maintained that Modicorp has management know-how and capabilities which are necessary to the success of Modicom businesses in providing aforesaid cellular communication services, and the fulfillment of its obligation under the aforesaid license granted by the Department of Telecommunications. It is also mentioned in the agreement that the assessee needs to obtain the full transfer of Distacom know-how or Modicorp know-how and the right to use the Distacom Intellectual Property Rights, India or Modicorp Intellectual Properly Rights, in India and was desires of certain advice and assistance in order to enable the assessee to successfully provide cellular commercial services in the states of Punjab and Karnataka as per the license granted to it by the Department of Telecommunications. The nature of services provided by DCIL and Distacom and Modicorp, are to provide know-how for establishing or constructing and erecting of cellular telecommunications networks as per the obligations under the license granted to the assessee by the Department of Telecommunications. It is also equally true that these agreements provides for providing know-how and other information for carrying on the business of providing cellular telecommunication services. It is, thus, clear that the agreements of providing technical know-how, and rights to use Intellectual Property lights is a composite agreements for providing technical know-how, and Right to use Intellectual Property Rights and providing services for setting up of cellular telecommunication networks, and as well for carrying on successfully the business of providing cellular communication services to the assessee’s customers in the states of Punjab and Karnataka as per the license granted to the assessee by the Department of Telecommunications. It is well settled that know-how or establishing/ setting-up the business is prima-facie capital character.
36. In the present case, the assessee company is a joint venture company setup by Dr. B.K Modi Group of Companies in India along with Distacom Communications (India) Ltd., Hongkong, for providing cellular mobile services in the stated of Punjab and Kamataka pursuance to the licenses granted to it by the Department of Telecommunications, Govt, of India, and has intended to start a business of providing cellular communication services as per the license agreement granted by the Department of Telecommunications, and for that purpose Technical Services and Operating Agreement, and Management Services Agreement has been entered into with a foreign concern for providing know-how, and use of Intellectual Property Rights. This agreement was entered in the month of October 1999. The nature of services set out in the Schedule1 to the agreement arc also related to initial setup of the cellular telecommunication networks, such as, construction and erection of the cellular telecommunication networks, selection of appropriate computer hardware systems, platforms and associated technology, quality assurance of hardware and software chosen that data security and integrity is maintained, identification of suitable locations for installation of microwave towers and base stations and interfacing with them with the electronic equipment of the main switch center, erection of microwave stations, engineering lay out for microwave sites, and commissioning of generators and uninterrupted power supply systems/ATS, and various other initial activities on capital field necessary to setup the business of providing cellular telecommunication services. The payment for technical know-how obtained to establish or set-up the business of providing telecommunication services or to erect or install network, microwave sites, microwave stations, microwave towers and base stations etc. has to be held as capital expenditure the other services provided by DCIL/distacom and Modicorp are undoubtedly connected to the carrying on and operating efficiently, the business of providing cellular telecommunication services, and notwithstanding the fact that assessee might have derived some benefit of enduring nature, the payment on that account would be certainly on revenue account. It is, thus, a case where the payment made by the assessee is composite payment for supply of technical know-how services, and use of Intellectual Property Rights for setting up cellular telecommunication networks or business, and also for operating and carrying on efficiently and profitably the assessee’s business of providing cellular telecommunication services. In the present case, there exist no embargo on the assessee in carrying on business of providing telecommunication services even after expiry of agreement entered into with DCIL/Distacom and Modicorp. Thus, the payment lump-sum of Base fee specified in the agreement payable in installments is to “be allocated partly towards capital expenditure and partly towards revenue expenditure. The AO has treated whole of the payment to be of capital in nature as against which the CIT(A) has treated the whole of the payment as revenue expenditure. The present case, is a case whether entire payment made by the assessee could not either be held to be of revenue expenditure or, on the other hand as capital expenditure. The entire payment made by the assessee is to be considered as paid towards setup of the business as well as for efficiently carrying on the business after the same was being setup, and thus the payment is to be allocated towards capital as well as revenue expenditure.
37. The Hon’ble Supreme Court in the case of Jonas Wood head & Sons (supra) has treated 25% of the total payment on capital side. The said criterion of allocating 25% of payment towards capital has also been applied by the Hon’ble Madras high Court in the case of CIT vs. Southern Switch gear Ltd. 148 ITR 272, which has been affirmed by the Hon’ble Supreme Court as reported in 232 ITR 359. In the case of CIT vs. Southern Switch gear Ltd. (supra), the 25 % of the lump-sum amount payable in five equal installments to be spread over a period of time was held to be of capital in nature as on perusal of the various clauses of the agreements, it was found by the Hon’ble High Court that assessee derived the benefit or right of enduring nature, and in that situation on the entire technical fee paid could not be allowed as a revenue expenditure. Applying the same creiterion, we, therefore, hold that 25 % of the payment by way of installments spread over a period of time and paid in the year under consideration shall be allocated towards capital expenditure and the balance 75% of the payment is to be allowed as a revenue expenditure. Needless to say that the assessee shall be entitled to depreciation on the amount allocated towards capital field. The AO shall modify the assessment order accordingly.