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Issues Involved:
1. Whether the lump sum consideration of Rs. 1,74,27,386 paid under the technical collaboration agreement is a revenue expenditure allowable under section 37(1). 2. Whether the payment for technical know-how constitutes capital expenditure or revenue expenditure. Issue-wise Detailed Analysis: 1. Whether the lump sum consideration of Rs. 1,74,27,386 paid under the technical collaboration agreement is a revenue expenditure allowable under section 37(1): The assessee, a manufacturer of light commercial vehicles and diesel engines, entered into an agreement with M/s Daimler Benz A.G. on 27-9-1978 for the exclusive right to assemble and manufacture specific diesel engines in India. The agreement stipulated a lump sum payment of DM 4.2 million (equivalent to Rs. 1,74,27,386) in three instalments, subject to the approval of the Government of India. The assessee claimed this amount as a deduction under section 37(1), treating it as revenue expenditure. The Assessing Officer (A.O.) rejected the claim, considering the liability as contingent and the payment as capital expenditure. The A.O. relied on precedents such as Addl. CIT v. Southern Structurals Ltd. and Ramkumar Pharmaceutical Works v. CIT, which classified similar payments as capital expenditure. Upon appeal, the CIT(A) reversed the A.O.'s decision, treating the payment as revenue expenditure. The CIT(A) relied on various judgments, including CIT v. Tata Engg. & Locomotive Co. (P.) Ltd., CIT v. S.L.M. Maneklal Industries Ltd., and CIT v. Caltex Oil Refining (India) Ltd., which supported the view that payments for technical know-how for existing businesses constitute revenue expenditure. The Tribunal upheld the CIT(A)'s decision, emphasizing that the technical know-how was for upgrading technology and improving efficiency, not for setting up a new business. The Tribunal noted that the agreement was for a limited period of 10 years, and the assessee was required to return all data and documentation upon its expiry. The Tribunal also referenced the Supreme Court's decision in Ciba of India Ltd., where similar payments were deemed revenue expenditure. 2. Whether the payment for technical know-how constitutes capital expenditure or revenue expenditure: The revenue appealed against the CIT(A)'s decision, arguing that the payment for technical know-how constituted capital expenditure. The revenue emphasized that the agreement granted the assessee sole and exclusive rights to manufacture the diesel engines, which they argued was an asset of enduring nature. The Tribunal, however, disagreed with the revenue's contention. It referred to the jurisdictional High Court's decision in Tata Engg. & Locomotive Co. (P.) Ltd., which dissented from the Madras High Court's view in Fenner Woodroffe & Co. Ltd. and Southern Structurals Ltd. The Tribunal highlighted that the Bombay High Court had consciously dissented from the view that technical know-how payments constituted capital expenditure, emphasizing that the know-how did not remain stagnant and was for improving existing business operations. The Tribunal also drew parallels with the Supreme Court's decision in Alembic Chemical Works Ltd., which held that payments for technical know-how to improve existing production processes constituted revenue expenditure. The Tribunal noted that the agreement's terms, including the requirement to return all documentation and the prohibition on divulging confidential information, indicated that the payment was for temporary use of technical know-how, not for acquiring an enduring asset. In conclusion, the Tribunal upheld the CIT(A)'s decision, affirming that the lump sum consideration paid under the technical collaboration agreement was revenue expenditure allowable under section 37(1). The Tribunal emphasized the binding nature of the jurisdictional High Court's decision and the Supreme Court's precedents, which supported the view that such payments for technical know-how in existing businesses are revenue in nature.
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