2008 (12) TMI 21 - HC - Income Tax

Licence and Technical Assistance Agreement which include training of personnel in Italy etc. - expenditure incurred by the assessee on know-how during the year, under consideration, was in respect of, a business which was already in existence and hence, the payments were made for user of licence hence money paid was required to be treated as revenue expenditure consequently, any interest paid in relation to delayed payments will also, have to be treated, as one, which is, on revenue account

Issues Involved:
1. Whether the third installment of know-how fee and interest paid thereon for belated payment was allowable as revenue expenditure.
2. Whether payments made to M/s Technimont and M/s IWKA were allowable as revenue expenditure and not as capital expenditure.

Detailed Analysis:

Issue 1: Third Installment of Know-How Fee and Interest as Revenue Expenditure

The court examined whether the third installment of the know-how fee and the interest paid for delayed payment should be considered revenue expenditure. The key points considered were:
- The assessee entered into agreements for technical assistance and know-how with M/s Technimont and M/s IWKA.
- The total fee of 623 million Italian Liras was divided into three parts: process and know-how license, basic design engineering, and technical assistance.
- The assessee treated the fee for basic design engineering as capital expenditure but claimed the remaining as revenue expenditure.
- The Assessing Officer disallowed this claim, treating the entire expenditure as capital, arguing it provided an enduring benefit and was incurred for setting up the plant.
- The CIT(A) and the Tribunal found that the expenditure was for accessing technical knowledge and did not result in acquiring an asset of an enduring nature. The technical know-how was non-exclusive, non-transferable, and did not involve any secret process or patent rights.
- The court upheld that the third installment of the know-how fee and interest for delayed payment were revenue expenditures, emphasizing that the expenditure was for running the business and not for acquiring a capital asset.

Issue 2: Payments to M/s Technimont and M/s IWKA as Revenue Expenditure

The court analyzed whether the payments to M/s Technimont and M/s IWKA should be treated as revenue or capital expenditure:
- The agreements with M/s Technimont and M/s IWKA involved technical assistance, training, and know-how for manufacturing processes.
- The assessee capitalized the basic design engineering fee but claimed the fees for process and know-how license, technical assistance, and training as revenue expenditure.
- The Assessing Officer treated the entire expenditure as capital, arguing it provided an enduring benefit and was for setting up the plant.
- The CIT(A) and the Tribunal found that the payments were for accessing technical knowledge and did not result in acquiring an asset of an enduring nature. The technical know-how was non-exclusive, non-transferable, and did not involve any secret process or patent rights.
- The court upheld that the payments to M/s Technimont and M/s IWKA were revenue expenditures, emphasizing that the expenditure was for running the business and not for acquiring a capital asset.

Broad Principles:

The court reiterated the principles for distinguishing between capital and revenue expenditure:
1. Expenditure for initial outlay or extension of business is capital; for running the business, it is revenue.
2. The aim and object of expenditure determine its character.
3. The test of "once and for all" payment is inconclusive; the nature of the asset acquired is crucial.
4. Expenditure for acquiring a source of profit is capital; for running the business efficiently, it is revenue.
5. License fees for accessing technical knowledge are generally revenue unless they involve absolute transfer of rights.
6. The enduring nature of the benefit is not decisive; the business context and purpose are crucial.

Conclusion:

The court concluded that the third installment of the know-how fee, interest for delayed payment, and payments to M/s Technimont and M/s IWKA were revenue expenditures. The questions were answered in favor of the assessee and against the Revenue.

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