1993 (4) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 13,28,450 was capital or revenue expenditure.
2. The nature of the technical know-how and its impact on the classification of the expenditure.
3. The relevance of exclusivity and the right to use technical know-how post-agreement.

Summary:

Issue 1: Nature of Expenditure
The Tribunal held that the payment of Rs. 13,28,450 was revenue expenditure. The assessee-company, engaged in manufacturing weighing and testing machines, entered into an agreement with Revere Corporation for the use of trademarks, patents, and copyrights. The Assessing Officer and Commissioner of Income-tax (Appeals) considered the payment as capital expenditure. However, the Tribunal concluded it was revenue expenditure, citing that the technical know-how and information provided did not create a tangible asset or enduring benefit.

Issue 2: Technical Know-How as Revenue Expenditure
The Tribunal referenced several cases, including Praga Tools Ltd. v. CIT [1980] 123 ITR 773 and CIT v. Tata Engineering and Locomotive Co. Pvt. Ltd. [1980] 123 ITR 538, to support its decision. It was noted that technical know-how is not a tangible asset and does not create a capital asset. The Tribunal emphasized that the payment was for the use of technical information and know-how, which is akin to a teacher imparting knowledge to a pupil, and thus should be treated as revenue expenditure.

Issue 3: Exclusivity and Post-Agreement Use
The Tribunal addressed the exclusivity clause in the agreement, which prohibited the disclosure of technical information to others and allowed the assessee to use the know-how even after the agreement's termination. The Tribunal cited decisions from various High Courts, including the Andhra Pradesh High Court in Praga Tools Ltd. and the Bombay High Court in Tata Engineering and Locomotive Co. Pvt. Ltd., which held that such exclusivity does not alter the nature of the expenditure from revenue to capital.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the payment of Rs. 13,28,450 was revenue expenditure. The Court reiterated that the acquisition of technical know-how, even with the right to use it post-agreement, does not create a capital asset or enduring benefit. The Court referenced the Supreme Court's decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 and other relevant cases to support its conclusion. The question was answered in the affirmative, in favor of the assessee, with no order as to costs.