2008 (2) TMI 275 - HC - Income Tax

Technical support fee - assessee was supplied with technical support to enable it to manufacture the products - There was no transfer of technical knowhow in the setting up of the plant and machinery but the payment was only to enable the assessee to manufacture the products - technical support was in the form of technical advice rather than sharing of any technical knowhow designs drawings etc. allowable for deduction as revenue expenditure

Summary

Issues:
1. Characterization of payment made for technical support as capital or revenue expenditure.

Analysis:
The High Court addressed the issue of whether the payment made by the assessee for technical support should be treated as a capital or revenue expenditure. The assessee had entered into a joint venture agreement for manufacturing operations and paid a technical support fee to Tyco Asia Investment Ltd. and Elentec Co. Ltd. The Assessing Officer treated the amount as a capital expenditure due to the enduring nature of the benefit received. However, the Commissioner of Income Tax (Appeals) concluded that the payment was for technical support enabling manufacturing and not for transfer of technical knowhow, design, or drawings. The Tribunal upheld this finding, emphasizing that the technical assistance was related to the process of manufacture and did not involve transfer of technology. The High Court cited the case of Gannon Norton Metal Diamond Dies Ltd. where it was held that payments for knowhow related to the manufacturing process should be considered revenue expenditure as it is akin to consultancy payment.

The High Court further referred to the case of Empire Jute Co. Ltd. where it was established that not every enduring advantage amounts to a capital expenditure. Taking a pragmatic and commercial view, the court determined that the technical knowhow acquired by the assessee was more in the nature of information, guidance, or consultancy, rather than an asset of enduring nature. The court emphasized that the payment was for enabling the manufacturing process and not for setting up plant and machinery. Given the concurrent findings of fact by the CIT (A) and the Tribunal, the court declined to disturb the conclusion reached. The judgment concluded that no substantial question of law arose and dismissed the appeal.

In summary, the High Court ruled in favor of the assessee, holding that the payment made for technical support should be treated as a revenue expenditure rather than a capital expenditure. The court emphasized that the technical assistance received was related to the manufacturing process and did not involve the transfer of technology or knowhow of an enduring nature. The judgment highlighted the importance of taking a pragmatic and commercial view in determining the nature of expenditures and upheld the findings of the lower authorities based on a thorough review of the relevant documents.