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2015 (10) TMI 2313 - HC - Income TaxPayment of technical know-how fee - revenue expenditure or capital in nature - Held that - in terms of Article 5.1(d) of the Agreement. These clauses viewed in the context of the intention of the parties would certainly point out that both the parties intended to benefit for a considerable period of time out of the relationship emanating from the agreement. Even though in the Bio-technology field changes are likely to happen in fast phase, the assessee still has the benefit of the same in view of the dynamic nature of the agreement entered into between the assessee and the technology provider. This in our considered view is a distinct and distinguishing factor, which would benefit the assessee giving an enduring benefit to the assessee. In that view of the matter, the judgment of the Supreme Court in Alembic Chemicals Case (1989 (3) TMI 5 - SUPREME Court ) is distinguishable. In that view of the matter, apportioning a part of the expenditure in the nature of a capital expenditure by the CIT Appeals cannot be termed as erroneous. This single distinguishing factor is sufficient to answer the Question in favour of the revenue and against the assessee. Expenditure on account of payment of royalty - revenue v/s capital expenditure - Held that - It is agreed to be paid by the assessee and the same needs to be treated as revenue expenditure particularly considering the fact that the same is linked to the percentage of consideration received on sale of the products produced by the assessee by use of the Germplasm and with the help of the technical know-how. - Decided against the revenue.
Issues Involved:
1. Whether the payment of technical know-how fee was revenue expenditure or capital in nature. 2. Whether the expenditure on account of payment of royalty was revenue in nature. Issue-wise Detailed Analysis: Issue 1: Technical Know-how Fee as Revenue or Capital Expenditure The assessee paid Rs. 2,75,85,300/- towards technical know-how fee and claimed it as revenue expenditure. The Assessing Officer (AO) allowed only 1/6th of the amount as a deduction under Section 35AB of the Income Tax Act, treating the rest as capital expenditure. The CIT (Appeals) modified this, treating 75% of the fee as revenue expenditure and 25% as capital. The Tribunal, however, allowed the entire expenditure as revenue, leading to the Revenue's appeal. The Tribunal analyzed the agreement and applied the six tests from the Jonas Woodhead & Sons (India) Limited vs. CIT case, concluding that there was no new business started based on the technical know-how. The Tribunal noted that the technical know-how and Germplasm were acquired after the commencement of business, and the agreement provided for mutual exchange of improvements and developments. The Tribunal found that the technical know-how did not provide an enduring benefit due to rapid advancements in biotechnology, aligning with the Supreme Court's guidance in Alembic Chemicals Works Company vs. CIT. However, the High Court disagreed, noting that the Germplasm and technical know-how provided enduring benefits, as they were crucial for the assessee's revenue generation. The agreement's terms, including the right to use, produce, and sell the Germplasm and technical know-how, indicated a long-term benefit. The court found the Tribunal's assumption that the Germplasm was returnable incorrect, as the agreement stipulated its return only upon termination. The court concluded that the CIT (Appeals) correctly apportioned the expenditure, treating a part as capital expenditure. Thus, the question of whether the technical know-how fee was revenue or capital expenditure was answered in favor of the Revenue. Issue 2: Royalty Payment as Revenue Expenditure The assessee paid Rs. 47,34,306/- as royalty and claimed it as revenue expenditure. The AO treated 1/4th of the royalty payment as capital expenditure. The CIT (Appeals) and the Tribunal treated the entire royalty payment as revenue expenditure. The High Court agreed with the Tribunal, noting that the royalty was linked to the percentage of consideration received from the sale of products produced using the Germplasm and technical know-how. This linkage to sales indicated that the royalty payment was a recurring expense directly related to the assessee's revenue generation. Thus, the question of whether the royalty payment was revenue expenditure was answered in favor of the assessee. Conclusion: The High Court disposed of the appeal, answering the first question in favor of the Revenue and the second in favor of the assessee. No order as to costs was made, and any pending miscellaneous petitions were closed.
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