2001 (3) TMI 26 - HC - Income Tax

Technical know-how acquired from foreign collaborator by issuing equity shares held capital spend; only depreciation allowed, not s.37 deduction.

The dominant issue was whether consideration paid to a foreign collaborator for technical know-how, discharged by issue of equity shares, constituted ... Collaboration Agreement - Capital or Revenue Expenditure - technical know-how in its manufacturing activities - Whether, the amount paid to the foreign collaborator Reinz in the form of equity shares be treated as revenue expenditure spread over a period of ten years or as capital expenditure over which the permissible depreciation allowance may be allowed? - HELD THAT:- There is no appearance on behalf of the assessee in spite of notice. According to learned counsel for the Revenue, the issue is whether the expenditure, as claimed, was of capital nature or revenue in character. According to him, the judicial Officer's view was the correct one and should have been adopted. A similar question came up before the apex court in Eimco K. C. P. Ltd. [2000 (2) TMI 7 - SUPREME COURT]. It was held that where a foreign company gives a technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under section 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character. In other words, if it being of capital nature, depreciation as available in law has to be granted. The question is accordingly answered. These income-tax references are disposed of. Issues Involved: The issue involves determining whether a payment made to a foreign collaborator in the form of equity shares should be treated as revenue expenditure spread over a period of ten years or as capital expenditure over which permissible depreciation allowance may be allowed.Judgment Details:Factual Background: The assessee, a private limited company engaged in manufacturing compressed asbestos fibre sheets, entered into a collaboration agreement with a foreign concern for technical know-how. The agreement involved payment of Rs.1 lakh in equity shares, royalty payments, and training of staff. The dispute arose when the assessee claimed the payment as revenue expenditure, which was rejected by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner.Tribunal Proceedings: The Tribunal, upon hearing, had a difference of opinion between the Accountant Member and the judicial Member. The Accountant Member viewed the amount as allowable revenue expenditure annually, while the judicial Member considered it as 'plant' eligible for depreciation. The matter was referred to the Third Member, who sided with the Accountant Member, deeming the expenditure as revenue in nature.Court's Decision: The High Court, after considering the arguments, referred to a similar case in Eimco K. C. P. Ltd. v. CIT, where it was held that technical know-how amount was of capital nature when equity shares were obtained. As the expenditure was related to technical know-how and the assessee was a new company, the Court concluded that the expenditure was of capital nature, entitling the assessee to depreciation allowance. Therefore, the Court answered the question in favor of treating the expenditure as capital in nature.Conclusion: The High Court disposed of the income-tax references, affirming that the expenditure in question should be treated as capital in nature, making the assessee eligible for depreciation allowance as per the law.