2003 (12) TMI 32 - HC - Income Tax

Amount paid by assessee to its collaborator for acquiring know-how Held that assessee in this case was clearly not entitled to have the amount paid by it to its collaborator for acquiring know-how as an item of revenue expenditure allowable as a deduction under section 37. That payment was required to be considered only under section 35AB and the deduction that was allowable was one-sixth of the amount as provided in that section

Summary

Issues: Claim for deduction of payment to foreign collaborator under section 37 vs. section 35AB of the Income-tax Act.

Analysis:
The judgment by the High Court of MADRAS dealt with the issue of deduction claimed by the assessee for a payment made to its foreign collaborator under an agreement for transfer of technical know-how. The payment was made during the relevant assessment year, and the collaborator failed to provide the complete technical information as per the agreement. The assessee contended that the amount paid should be considered as a revenue expenditure under section 37 of the Income-tax Act. However, the assessing authority and the appellate authority rejected this plea.

The Revenue argued that with the introduction of section 35AB in the Act, expenditures related to know-how are governed by this section, and deductions are only allowable in accordance with it, not under section 37. On the other hand, the assessee claimed that since the collaborator did not provide the know-how as intended, the payment should be treated as revenue expenditure.

Referring to a previous case, the court emphasized that expenditures for acquiring know-how must be treated in accordance with section 35AB, regardless of whether they are capital or revenue in nature. The deduction allowable under this section is specifically calculated as one-sixth of the amount paid for acquiring the know-how. The court clarified that the entitlement of the assessee for deduction is based on the previous year in which the payment was made, not on subsequent events like project abandonment or non-availability of necessary inputs.

Ultimately, the court held that the amount paid by the assessee to its collaborator for acquiring know-how cannot be treated as a revenue expenditure under section 37. Instead, it should be considered only under section 35AB, with the allowable deduction being one-sixth of the payment amount. As a result, the appeal was allowed in favor of the Revenue.