2012 (6) TMI 436 - HC - Income Tax

High Court allows deduction for technical know-how expenses as revenue expenditure under Income-tax Act

Commissioner of Income-tax Versus Molex (India) Ltd.

Commissioner of Income-tax Versus Molex (India) Ltd. - [2012] 344 ITR 156 Issues:1. Treatment of expenses incurred for imparting technical know-how as revenue expenditure under section 37(1) of the Income-tax Act, 1961.2. Interpretation of agreements between the assessee and a foreign company for technical assistance.3. Application of section 35AB of the Act in relation to payments made for technical know-how.Analysis:Issue 1: Treatment of expenses for technical know-howThe Tribunal held that the expenses incurred for imparting technical know-how to the assessee should be treated as revenue expenditure under section 37(1) of the Income-tax Act, 1961. The Tribunal differentiated between acquiring technical know-how and using technical expertise, stating that the payment was for the latter and not for acquiring any know-how. As per the Tribunal's interpretation, the expenses did not fall within the meaning of section 35AB but could be considered as revenue expenditure under section 37(1) of the Act. Therefore, the entire expenses were deemed allowable as a deduction under section 37(1), contrary to the Assessing Officer's decision to disallow a portion of the deduction.Issue 2: Interpretation of agreements for technical assistanceThe Tribunal analyzed the agreements entered into between the assessee and the foreign company to determine the nature of the payments made. It observed that under the agreements, the foreign company was providing technical assistance to the assessee for manufacturing operations and improving product quality. The Tribunal highlighted that the payments were made for imparting necessary know-how and expertise to the assessee's personnel, rather than for acquiring technical know-how. This distinction was crucial in determining the treatment of the expenses under the Income-tax Act.Issue 3: Application of section 35AB in relation to paymentsThe dispute revolved around the applicability of section 35AB of the Act to the payments made for technical know-how. The Revenue argued that the payments should be treated as consideration for acquiring technical know-how, falling under section 35AB. Conversely, the assessee contended that the payments were for imparting technical expertise and should be considered as revenue expenditure under section 37(1). The Tribunal, after considering the terms of the agreements and relevant statutory provisions, concluded that the payments did not meet the criteria under section 35AB and were, therefore, eligible for deduction under section 37(1) of the Act.In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and allowing the entire expenses incurred for imparting technical know-how as a revenue expenditure under section 37(1) of the Income-tax Act, 1961.