1998 (2) TMI 117 - HC - Income Tax

Summary

Issues Involved:
1. Accrual of liability to pay the entire amount.
2. Accrual of liability for payment of technical know-how fees.
3. Nature of payment for technical know-how fees as revenue or capital expenditure.

Summary:

Issue 1: Accrual of liability to pay the entire amount
The Tribunal held that the liability to pay the entire amount of DM 1.40 million did not arise on the execution of the agreement but only in the account period. The High Court affirmed this view, noting that the accrual of liability was dependent upon the approval and/or sanction of the RBI. The law, as settled by the Supreme Court in Nonsuch Tea Estate Ltd. vs. CIT, dictates that where accrual of liability is dependent on statutory approval, it accrues only upon such approval. The RBI's approval in this case was received in the relevant previous years, thus the liability accrued in those years.

Issue 2: Accrual of liability for payment of technical know-how fees
The Tribunal held that the liability for the payment of technical know-how fees accrued at the stated intervals as per clause (i) of the agreement and arose only when the permission of RBI was received. The High Court agreed, emphasizing that under s. 9 of the Foreign Exchange Regulation Act, 1973, payments to persons resident outside India required RBI approval. Therefore, the liability to pay the technical know-how fees arose only upon receipt of such approval.

Issue 3: Nature of payment for technical know-how fees as revenue or capital expenditure
The Tribunal concluded that the payment made by the assessee-company to Deutz for the use of the know-how was revenue in nature. The High Court upheld this decision, noting that the expenditure related to the carrying on of the business and was an integral part of the profit-making process. The agreement's conditions of non-partibility, confidentiality, and secrecy indicated that the assessee only obtained the right to use the know-how, not its acquisition. Citing various Supreme Court and High Court decisions, the High Court reaffirmed that the expenditure was revenue in nature and allowable as a deduction u/s 37 of the IT Act, 1961.

Conclusion:
The High Court answered all three questions in the affirmative and in favor of the assessee, confirming that the payments were revenue expenditures and allowable as deductions in the years the RBI approval was received. The reference was disposed of with no order as to costs.