1995 (7) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of technical know-how fees u/s 35AB.
2. Determination of whether the payment for technical know-how is capital or revenue expenditure.

Summary:

Issue 1: Disallowance of Technical Know-How Fees u/s 35AB
The primary issue was the disallowance of Rs. 1,38,71,285 out of the total Rs. 1,66,45,542 claimed by the assessee as fees for technical know-how and design engineering. The Income Tax Officer (ITO) allowed only 1/6th of the claim u/s 35AB, disallowing the balance. The CIT(A) upheld this disallowance, stating that the payment was covered by the provisions of section 35AB and could not be allowed under section 37 of the Act.

Issue 2: Determination of Capital or Revenue Expenditure
The Tribunal examined whether the payment for technical know-how was a capital expenditure or a revenue expenditure. Section 35AB, introduced by the Finance Act, 1985, allows for the deduction of one-sixth of the lump sum consideration paid for acquiring know-how in the relevant accounting year, with the balance spread over the next five years. Prior to this section, judicial consensus held that payments for acquiring technical know-how were capital expenditures, while payments for the mere use of know-how were revenue expenditures.

The Tribunal referred to several Supreme Court and High Court decisions, including CIT v. CIBA of India Ltd, CIT v. British India Corp. Ltd, and Alembic Chemical Works Co. Ltd v. CIT, which distinguished between acquiring technical know-how (capital expenditure) and using it (revenue expenditure).

The Tribunal analyzed the agreement between the assessee and the Italian company, noting that the technical information was specific to the furnace to be installed at TISCO, Jamshedpur, and not for the general business of the assessee. Clauses in the agreement restricted the use of the technical information to the specific project and imposed confidentiality obligations, indicating that the assessee did not acquire the know-how outright but only obtained the right to use it.

Applying judicial tests, the Tribunal concluded that the payment was for the use of technical know-how, making it a revenue expenditure deductible u/s 37(1) of the Act. Consequently, the provisions of section 35AB did not apply, and the assessee was entitled to the deduction of the entire fees paid.

Conclusion:
The Tribunal allowed the assessee's claim for the deduction of the entire technical know-how fees of Rs. 1,66,45,542, treating it as revenue expenditure under section 37(1) and not subject to the provisions of section 35AB.