Court affirms ITAT decision on Section 35AB deduction, allows technical knowhow expenditure

The court upheld the ITAT's decision regarding the deduction under Section 35AB, emphasizing that technical knowhow expenditure is allowable even if goods are manufactured through a third party under direct supervision. The court did not entertain the issue of trademark expenditure under Section 35A, leaving it open for future consideration. The question on the allowability of interest paid on borrowed funds under Section 36(1)(iii) was not entertained as it was settled by a Supreme Court decision, leading to the appeal being disposed of with no costs.

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Issues:
1. Deduction under Section 35AB for technical knowhow expenditure
2. Allowability of expenditure on acquisition of trade-mark under Section 35A
3. Allowability of interest paid on borrowed funds as revenue expenditure under Section 36(1)(iii)

Analysis:
1. The first issue revolves around the deduction under Section 35AB of the Income Tax Act, 1961 for expenditure on technical knowhow. The assessing officer disallowed the claim as the assessee got its products manufactured from a third party under its control. However, the CIT(A) and ITAT held in favor of the assessee. The ITAT emphasized that the deduction under Section 35AB is allowable if the technical knowhow is used in manufacturing goods, even if done through a third party under direct supervision. The court upheld the ITAT's decision, stating that the deduction is not contingent on the assessee owning the manufacturing facilities directly.

2. The second issue pertains to the allowance of expenditure on acquiring a trade-mark under Section 35A of the Act. The assessing officer disallowed the claim, citing that Section 35A only covers patents and copyrights, not trademarks. However, the ITAT allowed the claim, highlighting the intrinsic link between trade-marks and patent rights in the pharmaceutical field. The ITAT also considered an alternate argument, allowing relief under Section 37 of the Act based on a precedent. The revenue did not challenge the ITAT's decision on the alternate claim, leading to the court not entertaining the second question. The court kept open the possibility of deciding the applicability of Section 35A on trademark expenditure in the future.

3. The third issue concerns the allowability of interest paid on borrowed funds as revenue expenditure under Section 36(1)(iii). The parties agreed that the question was settled against the revenue by a Supreme Court decision. Therefore, the court did not entertain this question. The appeal was disposed of with no order as to costs, concluding the judgment.

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