2008 (5) TMI 257 - SC - Income Tax

Agreement of transfer of technology know-how and trade mark - royalty was paid by the assessee as a percentage of net selling price of the licensed goods products expenditure on know-how question, whether the expenditure incurred is revenue expenditure or whether it is an expenditure which is capital in nature , are substantial question of law impugned judgment of the High Court is set aside and the matter is remitted for fresh consideration - appeal is allowed

Summary

Issues:
1. Applicability of Section 35AB of Income Tax Act, 1961.
2. Determination of whether the expenditure is revenue or capital in nature.

Analysis:
1. Applicability of Section 35AB:
The Civil Appeal before the Supreme Court stemmed from an order by the Punjab and Haryana High Court in relation to M/s. Swaraj Engines Ltd.'s claim for deduction of royalty payment made under a technology transfer agreement. The primary issue was whether Section 35AB of the Income Tax Act, 1961 was raised by the Assessing Officer. The respondent contended that the High Court rightly dismissed the Department's appeal, citing a previous judgment. The Court noted the confusion regarding the applicability of Section 35AB, emphasizing the need to determine the nature of the expenditure as either revenue or capital. The Court highlighted that if the expenditure is revenue in nature, Section 35AB may not apply, but if it is capital, then amortization and spread over would be relevant. The Court remitted the matter to the High Court for authoritative consideration, given the importance of the question post the insertion of Section 35AB.

2. Nature of Expenditure - Revenue or Capital:
The second issue revolved around whether the expenditure in question was revenue or capital in nature. The Supreme Court refrained from expressing an opinion on this matter, leaving it for the High Court to decide after analyzing the agreement between the parties. Based on this determination, the High Court would then assess the applicability of Section 35AB of the Income Tax Act. The Court kept all contentions on both sides open for the High Court's consideration. Ultimately, the Supreme Court set aside the High Court's judgment and remitted the case for fresh consideration in accordance with the law, allowing the appeal with no order as to costs.