2014 (7) TMI 1120 - HC - Income Tax

One-time lump sum payment made for acquiring technical know-how for a period of six years - capital or revenue expenditure - Held that - The payment made by the assessee is on account of licence fee. By making such payment the assessee has got a permission to use the technology. The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped no benefit from such payment is likely to accrue to the assessee. The licence is not transferable. Therefore it cannot be said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case the assessee continues to do business and continues to exploit the technology for the agreed period of time the assessee will be entitled to take the benefit thereof. But in case it does not do so the payment made is irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex court in the case of CIT v. I. A. E. C. (Pumps) Ltd. (1997 (4) TMI 14 - SUPREME Court ). The point as a matter of fact is covered by the aforesaid judgment wherein concluded that the entire payment constitutes revenue expenditure . Nothing really is left for us to do in the matter. - Decided in favour of the assessee.

Summary

Issues:
1. Whether the one-time lump sum payment made by the assessee for acquiring technical know-how for a period of six years constitutes a capital expenditure or a revenue expenditure?

Analysis:
The High Court of Calcutta heard an appeal against a Tribunal's judgment that deemed a lump sum payment made by the assessee for acquiring technical know-how as a capital expenditure. The dispute arose from an agreement between the assessee and a foreign company for technological assistance, involving a lump sum payment of USD 300,000 and additional royalties. The assessee argued for the expenditure to be considered as revenue, citing precedents like Alembic Chemical Works Co. Ltd. v. CIT and CIT v. I. A. E. C. (Pumps) Ltd. The Revenue, represented by Ms. Gutgutia, relied on the judgment in Jonas Woodhead and Sons (India) Ltd. v. CIT, emphasizing that if the payment accretes to the capital asset, it should be treated as a capital expenditure.

In the case, the Court considered the nature of the payment and its impact on the assessee's capital asset. The appellant's advocate argued that the payment was a license fee, not leading to an enduring benefit or accretion to the capital asset. The Court noted that the payment was for permission to use technology, irrecoverable in case of business cessation, and non-transferable. Referring to CIT v. I. A. E. C. (Pumps) Ltd., the Court concluded that if the assessee ceased business, no benefit from the payment would accrue, indicating no accretion to the capital asset. Therefore, the Court ruled in favor of the assessee, considering the payment as a revenue expenditure, not a capital one.

The Court's decision to allow the appeal was based on the assessment that the payment for technical know-how was akin to a license fee, lacking characteristics of a capital expenditure. By analyzing the nature of the payment and its impact on the assessee's business, the Court distinguished it from a capital investment, ultimately ruling in favor of treating it as a revenue expenditure.