Restricted technical know-how licence payments treated as revenue expenditure where ownership and proprietary control remained with the licensor.

Royalty paid under a restricted licence for technical know-how and intellectual property was treated as revenue expenditure because the agreement conferred only limited, non-transferable use rights, while ownership and proprietary control remained with the licensor. The same reasoning applied to the separately payable model fee, as it related to ongoing model development within the existing collaboration and did not transfer any underlying rights. The technical guidance fee was also left undisturbed as deductible revenue expenditure because no agreement or material was produced to show a different character. Where technical know-how is licensed only for limited business use and proprietary rights are retained, the consideration is ordinarily revenue in nature.

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Issues: (i) whether royalty paid under the licence and technical assistance agreement for use of technical know-how and intellectual property was capital expenditure or revenue expenditure; (ii) whether the separately payable model fee was capital expenditure or revenue expenditure; and (iii) whether the technical guidance fee was deductible as revenue expenditure.

Issue (i): whether royalty paid under the licence and technical assistance agreement for use of technical know-how and intellectual property was capital expenditure or revenue expenditure.

Analysis: The agreement conferred only a limited, exclusive and non-transferable licence for use of technical information and know-how for the term of the agreement, while ownership and intellectual property rights remained with Honda. The recipient was bound by strict confidentiality, could not assign or sub-license, had to return documents and materials on expiry or termination, and obtained no absolute transfer of proprietary rights. In such a commercial setting, the fact that the licence operated for a period of ten years or that some use might continue did not convert the payment into capital expenditure, because the arrangement merely enabled continued business operations with access to updated technology.

Conclusion: The royalty payment was revenue expenditure and not capital expenditure.

Issue (ii): whether the separately payable model fee was capital expenditure or revenue expenditure.

Analysis: The model fee was linked to model change and the development of additional models within the existing manufacturing arrangement. It formed part of the continuing commercial collaboration and did not secure any transfer of ownership in the underlying know-how or intellectual property. The fee was payable under the same restricted licensing structure, with the licensor retaining proprietary rights and the assessee obtaining only a restricted right to use the technology for business operations.

Conclusion: The model fee was revenue expenditure and not capital expenditure.

Issue (iii): whether the technical guidance fee was deductible as revenue expenditure.

Analysis: No agreement or supporting material showing the nature of the technical guidance fee was produced. In the absence of the underlying document, nature, and character of the payment, no basis was available to disallow the Tribunal's treatment of the amount as revenue expenditure.

Conclusion: The technical guidance fee was not interfered with and remained deductible as revenue expenditure.

Final Conclusion: The substantial questions of law were answered in favour of the assessee, and the Revenue's appeals failed.

Ratio Decidendi: Where technical know-how is licensed only for limited use and the licensor retains ownership, confidentiality, and control, the consideration paid is ordinarily revenue expenditure and not capital expenditure.

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