1980 (3) TMI 2 - HC - Income Tax

Annual fee under collaboration agreement qualifies for deduction as revenue expenditure

Commissioner Of Income-Tax, Tamil Nadu V. Versus Lakshmi Card Clothing Manufacturing Company Private Limited

Commissioner Of Income-Tax, Tamil Nadu V. Versus Lakshmi Card Clothing Manufacturing Company Private Limited - [1984] 149 ITR 712, 21 TAXMANN 177 Issues:- Determination of whether the payment of annual fee under clause 9 of the collaboration agreement is a revenue expenditure and should be allowed under section 37 of the Income-tax Act, 1961.Analysis:The case involves an assessee, a private limited company engaged in the manufacture and sale of card clothing, which entered into a collaboration agreement with a foreign company. The collaboration agreement included clauses 3 and 9, outlining the rights and obligations of the parties. The assessee was required to pay an annual fee of 6,000 francs to the foreign company for a period of 10 years under clause 9. The Income Tax Officer (ITO) initially treated this payment as capital expenditure, disallowing the deduction claimed. However, the Appellate Assistant Commissioner (AAC) held that the payment was partly for services and partly in the nature of royalty, qualifying it as a revenue expenditure. The Tribunal concurred, determining that the payment was for technical advice and services to aid the normal running of the manufacturing business, thus classifying it as a revenue expenditure eligible for deduction under section 37(1).The Revenue contended that the payment constituted capital expenditure, citing precedents and arguing that the technical know-how provided by the foreign company resulted in an enduring benefit to the assessee. However, the court emphasized that the services under clauses 4 to 7 of the agreement were distinct from the fee payment under clause 9. The services under clause 9 were related to providing instructions and information on the foreign company's latest technical developments, aiding the day-to-day business operations of the assessee. The court determined that these services did not result in the acquisition of a permanent asset or right, leading to the conclusion that the fee paid under clause 9 was a revenue expenditure, allowing for deduction under section 37.In summary, the court held that the annual fee paid under clause 9 of the collaboration agreement was in the nature of revenue expenditure and should be allowed as a deduction under section 37 of the Income-tax Act, 1961. The decision favored the assessee, affirming that the fee was related to services essential for the normal operation of the business, rather than capital expenditure. The court ruled in favor of the assessee, granting the costs of the reference and upholding the deduction of the fee as a revenue expenditure.