2012 (6) TMI 436 - HC - Income Tax

Expenses incurred for imparting technical know-how - whether entire expenditure is allowable instead of one-sixth - assessee had to directly bear the air fare and other travelling and living expenses of each such technician - assessee had to pay Molex, fees as was mutually agreed and as was permissible, per man for each day. The said payment was in addition to the air fare and other travelling living expenses of the technicians to be borne directly by the licensee. - held that - In the case of imparting this technical know-how, firstly, there is no lump sum payment. Imparting know-how to the assessee s personnel would arise only after acquiring the know-how and, therefore, this imparting is distinct from acquisition of know-how though both of them are for the use of the assessees business. As rightly held by the Tribunal, it is in the nature of a revenue expenditure incurred by the assessees in its business after acquiring the know-how for a lump sum consideration. Therefore, the entire amount has to be deducted under section 37(1) of the Act and it does not fall under section 35AB. - Decided in favor of assessee.

Summary

Issues:
1. Treatment of expenses incurred for imparting technical know-how as revenue expenditure under section 37(1) of the Income-tax Act, 1961.
2. Interpretation of agreements between the assessee and a foreign company for technical assistance.
3. Application of section 35AB of the Act in relation to payments made for technical know-how.

Analysis:

Issue 1: Treatment of expenses for technical know-how
The Tribunal held that the expenses incurred for imparting technical know-how to the assessee should be treated as revenue expenditure under section 37(1) of the Income-tax Act, 1961. The Tribunal differentiated between acquiring technical know-how and using technical expertise, stating that the payment was for the latter and not for acquiring any know-how. As per the Tribunal's interpretation, the expenses did not fall within the meaning of section 35AB but could be considered as revenue expenditure under section 37(1) of the Act. Therefore, the entire expenses were deemed allowable as a deduction under section 37(1), contrary to the Assessing Officer's decision to disallow a portion of the deduction.

Issue 2: Interpretation of agreements for technical assistance
The Tribunal analyzed the agreements entered into between the assessee and the foreign company to determine the nature of the payments made. It observed that under the agreements, the foreign company was providing technical assistance to the assessee for manufacturing operations and improving product quality. The Tribunal highlighted that the payments were made for imparting necessary know-how and expertise to the assessee's personnel, rather than for acquiring technical know-how. This distinction was crucial in determining the treatment of the expenses under the Income-tax Act.

Issue 3: Application of section 35AB in relation to payments
The dispute revolved around the applicability of section 35AB of the Act to the payments made for technical know-how. The Revenue argued that the payments should be treated as consideration for acquiring technical know-how, falling under section 35AB. Conversely, the assessee contended that the payments were for imparting technical expertise and should be considered as revenue expenditure under section 37(1). The Tribunal, after considering the terms of the agreements and relevant statutory provisions, concluded that the payments did not meet the criteria under section 35AB and were, therefore, eligible for deduction under section 37(1) of the Act.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and allowing the entire expenses incurred for imparting technical know-how as a revenue expenditure under section 37(1) of the Income-tax Act, 1961.