2015 (2) TMI 368 - HC - Income Tax

Know how payment - revenue expense v/s partly or wholly capital expense - Power of the Commissioner under Section 263 - Held that - The respondent assessee during the course of hearing had drawn our attention that the question whether model fee paid was revenue or capital in nature had arisen for the first time in the assessment year 1996-97. The Tribunal had held that the fee was revenue expenditure and, therefore, deductible under Section 37(1) of the Act in their decision reported as (2005 (5) TMI 265 - ITAT DELHI-G) titled Hero Honda Motors Ltd versus Joint Commissioner of Income Tax, decided on 13th May, 2005. The Delhi High Court did not entertain and frame any question of law on the said aspect in the appeal of the Revenue on the said issue. Revenue had preferred a Special Leave Petition but the same was also dismissed. For the assessment years 1997-98 and 1999-2000, similar expenditure of model fee was allowed as revenue expenditure by the Tribunal. Appeals filed by the Revenue on the said issue were not entertained by the High Court. We would not like to decide the present appeal for this ground and reason, as the High Court orders do not set out and indicate any ground or reason. We do not comment or express an opinion on whether the High Court under Section 260A of the Act can at the time of hearing, frame any additional question of law. Tribunal has held that payments made by respondent to Honda were revenue expenditure and not capital. On the said finding on merit, the Tribunal observed that there was no error in the order passed by the Assessing Officer. Power under Section 263 can be invoked by the Commissioner only when the order passed by the Assessing Officer is erroneous and not otherwise. It is in these circumstances, that no specific question of law with reference to power under Section 263 of the Act, has been framed in the appeal relating to assessment year 2001-02. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the payment made to Honda Motors Limited under the "know-how" agreement dated 2.6.1995 is revenue expense or capital expense.
2. Whether the model fee payable under the agreement dated 2.6.1995 is capital expenditure.
3. Whether the technical guidance fee is capital expenditure.

Detailed Analysis:

Issue 1: Know-How Agreement as Revenue or Capital Expense

The primary issue was whether the payment made to Honda Motors Limited under the "know-how" agreement dated 2.6.1995 is a revenue expense or capital expense. The court elucidated the difference between capital and revenue expenditure with reference to the acquisition of technical information and know-how. The enduring nature test was applied to determine if the expenditure provided a lasting benefit in the capital field or merely facilitated trading operations. The court referenced multiple precedents, including the Supreme Court's judgment in Commissioner of Income Tax, Bombay City I versus Ciba India Limited, which established that payments for rights to use technical know-how, without transfer of ownership, are revenue expenditures. The court found that the payments in question were for the right to use technical know-how and information, not for acquiring ownership. The ownership rights were retained by Honda, and the respondent only had a limited right to use the know-how, making the expenditure revenue in nature.

Issue 2: Model Fee as Capital Expenditure

The second issue concerned the model fee payable under the agreement dated 2.6.1995 and whether it constitutes capital expenditure. The court noted that the model fee was a non-refundable, non-creditable payment made for model changes and new model agreements. The court referenced prior decisions, including CIT vs. Southern Switchgear Ltd., where similar payments were treated as revenue expenditures due to their nature of facilitating ongoing business operations rather than acquiring a capital asset. The court concluded that the model fee was a revenue expenditure, given its purpose of enabling the respondent to continue manufacturing and selling updated models without acquiring ownership of the underlying intellectual property.

Issue 3: Technical Guidance Fee as Capital Expenditure

The third issue was whether the technical guidance fee paid by the respondent was capital expenditure. The court noted that the Revenue did not provide the agreement or details regarding the nature and character of the fee. Without sufficient evidence, the court could not adjudicate this issue in favor of the Revenue. Consequently, the tax treatment given by the Tribunal, which considered the technical guidance fee as revenue expenditure, was upheld.

Conclusion:

The court held that the payments made under the "know-how" agreement, including the model fee and technical guidance fee, were revenue expenditures and not capital expenditures. The substantial questions of law were answered in favor of the respondent assessee and against the appellant Revenue. The appeals were disposed of without any order as to costs.