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1998 Supreme(Mad) 26
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE N. V. BALASUBRAMANIAN & THE HONOURABLE MRS. JUSTICE A. SUBBULAKSHMY
Commissioner of Income Tax - Appellant
Versus
Southern Pressings Private Limited - Respondents
Tax Case Nos. 982, 983, 1465 & 1536 of 1986
Decided On : 09 January 1998
Payment made for the use of technical knowledge during an agreement period is revenue expenditure, not capital expenditure.
Headnote:
INCOME TAX - Deduction - Technical know-how fees - Allowability as revenue expenditure - Payment made for use of technical knowledge during agreement period - Not capital expenditure.
Fact of the Case:
The assessee claimed a deduction for technical know-how fees paid to M/s India Radiators Ltd. under a collaboration agreement for the manufacture of automobile air-cleaners. The ITO disallowed the claim, treating it as capital expenditure. The CIT(A) and the Tribunal allowed the deduction as revenue expenditure.
Finding of the Court:
The Court held that the payment made by the assessee was for the use of the technical knowledge during the period of the agreement and not for the acquisition of capital assets. The Court also held that the assessee did not obtain an enduring benefit from the agreement, as the technical knowledge was subject to rapid technological change in the automobile field.
Issues: Whether the payment made by the assessee under the collaboration agreement should be allowed as revenue expenditure.
Ratio Decidendi: The Court applied the test laid down by the Supreme Court in Jonas Woodhead & Sons (India) Ltd. vs. CIT to determine whether the payment was capital or revenue expenditure. The Court held that the payment was revenue expenditure because: (i) the assessee obtained technical know-how for the betterment of an existing product, not a new technology; (ii) the improvisation was part and parcel of the existing business; (iii) the assessee was not required to give back the plans and designs after the agreement expired; and (iv) the cumulative effect of the agreement terms indicated that the payment was for the use of capital assets during the agreement period.
Final Decision: The Court answered the questions of law referred to it in the affirmative, holding that the payment made under the collaboration agreement should be allowed as revenue expenditure.
N.V. BALASUBRAMANIAN, J.
In the batch of tax cases, the common question involved is with regard to the allowability of certain sum paid by the assessee under the collaboration agreement dt. 10th December, 1975, as revenue expenditure. The assessment years with which we are concerned in the above tax cases are 1977-78, 1978-79, 1980-81 and 1981-82. Since there is no dispute with regard to the facts and the facts are common, we refer to the facts in T.C. No. 1465 of 1986, and it is unnecessary to repeat the facts in all other tax cases.
2. The assessee during the asst. yr. 1977-78 claimed a deduction of a sum of Rs. 21, 490 paid as royalty to M/s India Radiators Ltd. for providing technical know-now for the manufacture of automobile air-cleaners. The agreement was for a period of 5 years. The assessee under the agreement was obliged to pay a royalty of Rs. 2 per air-cleaner manufactured with the assistance received from M/s India Radiators Ltd. The claim of the assessee was that the sum paid was revenue expenditure and allowable in the computation of business income. The ITO, however, rejected the claim of the assessee on the ground that the assessee obtained an enduring benefit and hence, the amount paid by way of royalty cannot be regarded as revenue expenditure.
3. The assessee went on appeal before the CIT(A) against the view of the ITO that the amount should be treated as capital expenditure. The CIT(A) held that the period of 5 years cannot be regarded as a long one to confer an enduring benefit on the assessee and that the designs and drawings furnished by M/s India Radiators Ltd. may not be of much use after the period of five years and in this view of the matter, he held that the amount paid as royalty should be regarded as revenue expenditure.
4. The Revenue carried the matter on appeal before the Tribunal. The Tribunal perused the terms of the agreement and came to the conclusion that the payment made by the assessee was towards the licence to use the technical information received by the assessee from M/s India Radiators Ltd. and there was no outright purchase of the drawings and as such, the amount paid should be regarded as revenue expenditure and dismissed the appeal preferred by the Revenue.
5. The Revenue has challenged the order of the Tribunal and on the basis of the directions of this Court, the Tribunal has referred the following questions of law in T.C. No. 1465 of 1986 and T.C. No. 1536 of 1986 for our consideration.
T.C. No. 1465 of 1986:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 21, 490 paid to M/s India Radiators Ltd., under the collaboration agreement dt. 10th December, 1975, should be allowed as a revenue expenditure ?"
T.C. No. 1536 of 1986:
" Whether, on the facts, and in the circumstances of the case, the Tribunal was right in holding that the technical know-how fees paid to M/s India Radiators (P) Ltd., is an admissible deduction while computing the income of the assessee ?"
In T.C. Nos. 982 and 983 of 1986, the Tribunal has referred the following common question of law under s. 256(1) of the IT Act, 1961, for our consideration:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the technical know-how fees paid to M/s India Radiators Ltd., is an admissible deduction while computing the income of the assessee?"
6. Mr. R. V. Rajan, learned counsel for the Revenue forcibly submitted that the Tribunal was not correct in holding that the amount paid to M/s India Radiators Ltd. should be allowed as revenue expenditure as the assessee had obtained an enduring benefit by virtue of the technical collaboration agreement. He submitted that the knowledge obtained by the assessee would enure even after the period of the agreement and, therefore, the amount was rightly disallowed by the ITO as capital expenditure.
7. Mr. Sampathkumar, learned counsel for the assessee on the other han
