2010 (9) TMI 121 - HC - Income Tax

Design and drawing fees, fees paid to the foreign technician for imparting training to Indian technician as Revenue expenditure or capital expenditure - Held that - drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the goods, namely, the shock absorbers - change the design of such shock absorbers from time to time for which new drawings and designs were required - there was no sale of technical know-how to the assessee and therefore, the payment made by the assessee was a revenue expenditure - Appeal is dismissed

Summary

Issues Involved:
1. Whether the expenditure incurred by the Assessee on account of design and drawing fees should be treated as Revenue expenditure or Capital expenditure.
2. Whether the fees paid to the foreign technician for imparting training to Indian technicians should be treated as Revenue expenditure or Capital expenditure.

Issue-wise Detailed Analysis:

1. Design and Drawing Fees as Revenue or Capital Expenditure:
The core issue revolves around whether the expenditure on design and drawing fees should be categorized as revenue or capital expenditure. The assessee, engaged in manufacturing shock absorbers, incurred expenses on design and drawing charges payable to a foreign corporation. Initially, the assessing officer allowed the claim as revenue expenditure based on the entries in the books of accounts. However, the CIT(A) later treated it as capital expenditure. The tribunal, upon examining the technical collaboration contract, concluded that the assessee was granted a license to manufacture products using the provided designs and drawings. The tribunal emphasized that the designs and drawings merely enabled the manufacturing process without transferring proprietary rights to the assessee. Consequently, the tribunal held that the expenses were for facilitating the manufacturing process and did not constitute capital expenditure.

2. Training Fees Paid to Foreign Technicians as Revenue or Capital Expenditure:
The second issue pertains to the fees paid for training provided by foreign technicians. The tribunal noted that the training was essential for the personnel to utilize the new designs and drawings for manufacturing shock absorbers. The tribunal, referencing previous decisions, including those in DCIT v. Bharat Seats Ltd. and ACIT v. TEI Technologies P. Ltd., concluded that the expenses were incurred for training personnel and availing designs for manufacturing, not for acquiring the technology itself. Thus, the tribunal deemed the training fees as revenue expenditure.

Relevant Legal Precedents and Analysis:
The judgment extensively references several Supreme Court and High Court decisions to substantiate its conclusions. In Alembic Chemical Works Co. Ltd. v. CIT, the Supreme Court emphasized the need to consider the rapid advances in technology and the nature of technical know-how, suggesting that not all technical know-how constitutes a capital asset. Similarly, in Jonas Woodhead And Sons (India) Limited v. CIT, the Court highlighted various tests to determine whether an expenditure is capital or revenue, emphasizing the need to examine the agreement's clauses and the nature of the acquired asset.

The judgment also draws from T.E.I. Technologies P. Ltd., where the Delhi High Court held that payments for technical support facilitating manufacturing processes are revenue expenditures. In Shriram Pistons And Rings Ltd. v. CIT, the Court reiterated that payments for technical know-how, which do not result in the acquisition of an enduring asset, should be treated as revenue expenditures.

Conclusion:
The High Court concluded that the know-how and technical assistance provided under the agreement were solely for manufacturing purposes during the contract term. The designs and drawings facilitated the manufacturing process without transferring proprietary rights. Hence, the expenses on design and drawing fees and training fees were deemed revenue expenditures. The appeals were dismissed, affirming the tribunal's decision that the expenditures in question were revenue in nature.