Technical know-how payments are revenue expenditure, and deduction arises when statutory approval triggers liability accrual.

Payments under a technical collaboration agreement for use of confidential know-how and related assistance were treated as revenue expenditure because the assessee acquired no capital asset or enduring advantage, and the expenditure was directed to efficient conduct of the existing manufacturing business. Where remittance to a non-resident was legally restricted until Reserve Bank of India approval, the liability did not accrue before such approval; once approval and remittance occurred in the relevant previous years, the amounts became deductible in those years. The ratio is that use of technical know-how in the profit-making process is revenue in nature, while statutory approval can determine the timing of accrual for deduction.

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Issues: (i) Whether the amounts paid under the technical collaboration agreement for use of know-how and related assistance were revenue expenditure or capital expenditure; (ii) Whether the liability to pay those amounts accrued only on receipt of Reserve Bank of India approval and was deductible in the relevant previous years.

Issue (i): Whether the amounts paid under the technical collaboration agreement for use of know-how and related assistance were revenue expenditure or capital expenditure

Analysis: The payment was made for the use of confidential technical know-how and assistance in carrying on the existing business of manufacturing tractors and engines. The agreement imposed secrecy and non-assignment restrictions, and the assessee did not acquire the know-how as a capital asset. The expenditure was directed to efficient running of the business and better profitability, and was part of the profit-making process rather than an acquisition of an enduring capital advantage.

Conclusion: The expenditure was revenue expenditure and allowable as a deduction in favour of the assessee.

Issue (ii): Whether the liability to pay those amounts accrued only on receipt of Reserve Bank of India approval and was deductible in the relevant previous years

Analysis: Where payment to a non-resident is restricted by law and prior approval is necessary, the liability does not accrue until such approval is obtained. The assessee received the Reserve Bank of India approval in the relevant previous years and made the remittances in those years. Accordingly, the liability arose and became deductible in those assessment years.

Conclusion: The liability accrued in the relevant years and the deduction was allowable in favour of the assessee.

Final Conclusion: The reference was answered by holding that the technical know-how payments were allowable revenue expenditure and that the corresponding liability accrued in the years in which the statutory approval and remittance occurred.

Ratio Decidendi: Expenditure incurred for the right to use confidential technical know-how in the course of an existing business, without acquisition of a capital asset or permanent advantage, is revenue expenditure; where payment to a non-resident is legally prohibited until statutory approval is obtained, the liability accrues only on such approval for purposes of deduction.

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