1981 (4) TMI 81 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of the payment made for technical know-how and assistance.
2. Classification of the payment as capital or revenue expenditure.

Summary:

Issue 1: Deductibility of the payment made for technical know-how and assistance

The Tribunal referred the question for the court's opinion u/s 256(1) of the I.T. Act, 1961: "Whether, on the facts and in the circumstances of the case, in computing the income of the assessee a moiety of the sum of Rs. 35,984 was rightly held to be deductible?" The assessee, a company established in 1963, entered into a collaboration agreement with Stewart Warner Corporation on 1st July 1964 to manufacture automotive lubrication equipment in India. The agreement included an initial payment of $7,500 and a recurring royalty payment of 5% on net factory sales. The assessee claimed the payment of $7,500 (Rs. 35,984) as a deduction, allocating it towards services connected with plant and machinery, patents and trade marks, and technical assistance.

Issue 2: Classification of the payment as capital or revenue expenditure

The ITO disallowed the deduction, viewing the payment as capital expenditure for acquiring technical know-how. The AAC upheld this view, distinguishing between payments for technical know-how (capital) and royalty payments (revenue). The Tribunal, however, found that the agreement was for access to technical knowledge and did not create any capital asset. It held that 50% of the payment was for services related to plant and machinery (capital expenditure), and the remaining 50% was revenue expenditure. The Tribunal's decision was based on the precedent set in CIT v. Ciba Pharma Private Ltd. [1965] 57 ITR 428, which was affirmed by the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692.

The court agreed with the Tribunal, stating that the agreement was for acquiring technical know-how and assistance, not for creating any capital asset. The payment was thus rightly held to be deductible as revenue expenditure. The question was answered in the affirmative and in favor of the assessee, with the revenue directed to pay the costs of the assessee.