1981 (10) TMI 11 - HC - Income Tax

Foreign Collaboration Payments Deemed Revenue Expenditure

The High Court held that payments to a foreign collaborator under a collaboration agreement constituted revenue expenditure as they were for technical aid ... Business Expenditure, Enduring Nature, Foreign Company, Revenue Expenditure Issues:1. Whether the payments made to a foreign collaborator under a collaboration agreement constitute revenue expenditureRs.Analysis:The judgment pertains to a reference made by the Appellate Tribunal under the Income Tax Act regarding the nature of payments made by an assessee-company to its collaborator, M/s. Dunlop Rim and Wheel Ltd., U.K. The assessee, engaged in manufacturing wheels for trucks, tanks, and tractors, claimed these payments as revenue expenditure for assessment years 1963-64 to 1970-71. The Income Tax Officer (ITO) disallowed a portion of the payment, contending it was for commencing a business and should be attributed to the capital account. However, the Appellate Assistant Commissioner (AAC) upheld the assessee's claim, stating the payments were for technical aid and did not result in the acquisition of any enduring asset. The Department appealed to the Tribunal, which also confirmed the AAC's order, leading to the matter being referred to the High Court.The Tribunal, after reviewing the agreement terms, observed that the payments were for the use of scientific data and information necessary for manufacturing equipment, not for acquiring any asset or right. The Tribunal concluded that the payments were of a revenue nature, permissible as deductions. The Commissioner argued that the Tribunal's understanding was flawed, suggesting that unless there was a transfer of an asset, the expenditure should be considered revenue. The High Court clarified that the Tribunal's decision was correct as the payments were not for acquiring an enduring asset or benefit. The Court emphasized that the agreement was for operational purposes, not asset acquisition. Therefore, the expenditure was rightly treated as revenue.In summary, the High Court held that the payments made to the foreign collaborator under the collaboration agreement constituted revenue expenditure as they were for technical aid and operational purposes, not for acquiring any enduring asset. The Court affirmed the Tribunal's decision, answering the reference question in favor of the assessee.