1989 (7) TMI 138 - AT - Income Tax

Summary

Issues:
1. Disallowance of depreciation and investment allowance on capitalised expenditure for technical fees.
2. Treatment of royalty payment as capital expenditure.

Issue 1: Disallowance of depreciation and investment allowance on capitalised expenditure for technical fees:
- The assessee entered into a collaboration agreement with a foreign corporation for product manufacture and sale.
- The agreement involved payment of $18,000 as technical fees, with instalments for licence and know-how.
- The Income-tax Officer disallowed depreciation on the payment following IAC's directions under section 144B.
- The disagreement arose on whether the payment was for licence or know-how.
- The ITAT held that the payment was for both licence and know-how, not separable.
- The agreement's terms indicated the payment stages were for obtaining payment, not for separate elements.
- The ITAT concluded the entire payment of $12,000 was for licence and allowed depreciation.

Issue 2: Treatment of royalty payment as capital expenditure:
- The dispute arose regarding the treatment of royalty payment of Rs. 15,353 to the foreign corporation.
- The agreement defined "know-how" comprehensively, including various technical aspects.
- The agreement specified the return of know-how to the corporation at the agreement's end.
- The agreement's duration was limited to 5 years from production commencement.
- The ITAT analyzed a previous Tribunal decision on the nature of royalty payments for know-how.
- The ITAT distinguished the present case from the previous decision based on the agreement's terms.
- The ITAT concluded that the royalty payment was for services of current use and, thus, of revenue nature.
- Consequently, the ITAT allowed both appeals, considering the nature of the payments.

In conclusion, the ITAT ruled in favor of the assessee, allowing the depreciation and investment allowance on the capitalised expenditure for technical fees and treating the royalty payment as revenue expenditure. The judgment emphasized the integral nature of the licence and know-how in the collaboration agreement and analyzed the specifics of the agreement to determine the nature of the payments involved.