Technical know-how expenditure treated as capital cost and added to plant and machinery for depreciation.

Technical know-how expenditure incurred to establish and operate a manufacturing plant in India, coupled with an unlimited-term arrangement and provision for improvements and modifications to manufacturing methods, was treated as capital in nature. On that basis, the amount was required to be added to the cost of the plant and machinery for depreciation purposes, rather than being treated as a separate revenue item. The addition was held to relate specifically to plant and machinery, leaving the Assessing Officer to quantify the amount to be included in that asset's cost.

---

---

Issues: Whether the expenditure of Rs. 1 lakh incurred for technical know-how was capital expenditure attributable to the plant and machinery and was, therefore, required to be added to the cost of the capital asset for depreciation purposes.

Analysis: The technical know-how was acquired to enable the assessee to establish and operate a plant in India for manufacture of the relevant linings. The agreement also contemplated the making available of improvements and modifications in the manufacturing methods, and it operated for an unlimited period. These features supported the finding that the expenditure was capital in nature. The addition on a pro rata basis was held to relate to the plant and machinery and not to any other asset, leaving the Assessing Officer to determine the amount to be added to that cost.

Conclusion: The expenditure was held to be capital expenditure and was to be added to the cost of plant and machinery for depreciation purposes, in favour of the Revenue.

---