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Issues Involved:
1. Nature of royalty payment (capital or revenue expenditure). Summary: Issue 1: Nature of Royalty Payment (Capital or Revenue Expenditure) The primary question referred to the court was whether a portion of the royalty paid to the foreign company under the technical aid agreement was capital in nature. The assessee, a company engaged in the manufacture and sale of Morganite Volume Controls, entered into a technical aid agreement with a foreign company for technical advice, assistance, and supply of machinery. The agreement included provisions for the foreign company to render technical aid, supply plant and machinery, and provide training and technical information to the Indian company. The Indian company claimed deductions for the royalty payments made to the foreign company. The ITO disallowed 50% of the royalty as capital expenditure, reasoning that the payment pertained to both the use of trade marks and technical know-how, which provided an enduring advantage. The AAC, who reviewed the assessments, had differing views: one allowed the entire payment as revenue expenditure, while the other disallowed 25% as capital expenditure. The Tribunal, upon appeal, upheld the disallowance of 25% as capital expenditure. The court analyzed the terms of the technical aid agreement, noting that the foreign company provided advice on the construction and equipment of the works and processes, and enabled the Indian company to manufacture additional products. The court concluded that the object of the expenditure included setting up the factory and acquiring rights for future exploitation, which constituted capital expenditure. The Tribunal's allocation of 25% of the royalty as capital expenditure was deemed justified. The court referenced several precedents, including Jonas Woodhead & Sons (India) Ltd. v. CIT [1979] 117 ITR 55 (Mad) [FB], CIT v. Lucas-TVS Ltd. (No. 1) [1977] 110 ITR 338 (Mad), CIT v. I.A.E.C. (Pumps) Ltd. [1977] 110 ITR 353 (Mad), and Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad), to illustrate the principles governing the classification of expenditure as capital or revenue. The court emphasized that the determination depends on the terms of the agreement and the nature of the benefit derived. Ultimately, the court affirmed the Tribunal's decision, holding that the allocation of the royalty payment between capital and revenue expenditure was justified. The question was answered in the affirmative, in favor of the revenue, with costs awarded to the revenue.
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