Business expenditure under section 37(1) sustained for licence fee supported by technical utility and prior case law

The Tribunal treated the licence-fee disallowance as covered by earlier decisions in the assessee's own case and held that the assessee had discharged the initial burden under section 37(1) by producing material showing technical assistance and business utility. It found no concrete evidence that the payment was a colourable device for profit diversion, and no workable basis had been established to test ordinary profit or excessive remuneration. Later authorities cited by the revenue did not override the binding effect of the prior rulings, so the addition was deleted.

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Issues: Whether the addition representing 40% of the licence fee paid to the parent company was liable to be sustained, and whether the assessee's claim stood disallowable on the footing of excessive or unreasonable payment, colourable device, or failure to justify the business expenditure.

Analysis: The dispute was held to be covered by earlier Tribunal and High Court decisions in the assessee's own case. The Tribunal accepted that the assessee had discharged the initial burden under section 37(1) of the Income-tax Act, 1961 by producing substantial material regarding the technical assistance and business utility of the arrangement. It was found that the revenue had not brought any concrete material to show that the licence fee was a camouflage for diversion of profits or that any workable basis had been established to determine what constituted ordinary profit. The reliance placed by the revenue on later case law was held not to displace the binding effect of the earlier decisions, and the deletion of the addition was accordingly upheld.

Conclusion: The addition was not sustainable and the assessee succeeded on the issue.

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