2006 (5) TMI 57 - HC - Income Tax

Section 35AB is applicable only if payment are made in lump sum consideration for acquiring any know-how but in impugned case payment made is not lump sum payment for acquiring of know-how; rather the same was payable periodically on the basis of percentage of invoiced price depending upon the number of engines manufactured It is not a case of outright sale of technical know-how so it will not fall within the domain of sec. 35AB deduction allowed for royalty paid

Summary

Issues:
Interpretation of section 35AB of the Income-tax Act, 1961 regarding payments made for acquiring technical know-how.

Analysis:
1. The appeal by the Revenue challenged the order passed by the Income-tax Appellate Tribunal regarding the deductibility of payments made to M/s. Kirloskar Oil Engines Ltd. under an agreement dated October 19, 1989. The main issue was whether these payments fall within the ambit of section 35AB of the Income-tax Act, 1961.

2. The assessee claimed deduction for the amount paid as royalty for acquiring technical know-how. The Assessing Officer contended that the expenditure was covered under section 35AB and allowed only a portion as a deduction. The assessee argued that the payment was based on sales and not a lump sum, making it allowable as business expenditure under section 28/37(1) of the Act.

3. The Commissioner of Income-tax (Appeals) concluded that the payment made to M/s. Kirloskar Oil Engines Ltd. was not a lump sum payment under section 35AB but a revenue expenditure based on sales as per the agreement terms. The Commissioner granted relief by treating the amount as a revenue expenditure.

4. The Tribunal upheld the Commissioner's decision, emphasizing that the payment was for improving existing products and not for acquiring new technical know-how outright. The Tribunal considered the past allowance of similar expenditures by the Department for other assessment years and applied the principle of res judicata.

5. The Tribunal found that the payment did not meet the criteria of section 35AB as it was not a lump sum consideration for acquiring know-how but rather periodic payments based on sales. Citing the Supreme Court judgment in CIT v. Wavin (India) Ltd., the Tribunal determined the expenditure to be revenue in nature, not capital, and ruled in favor of the assessee.

6. In conclusion, the Tribunal rejected the Revenue's appeal, answering the substantial question against the Revenue and in favor of the assessee. The judgment highlighted that the payments made were not a lump sum for acquiring know-how, making them eligible as revenue expenditure under the Income-tax Act, 1961.