Royalty for use of technical know-how is revenue expenditure when it does not create an enduring manufacturing right.

Royalty paid under collaboration agreements for the actual use of technical know-how, data and information was treated as revenue expenditure, not capital expenditure. The payments were made to Japanese collaborators in connection with manufacture of electric components, and the Tribunal found they did not secure an enduring right to manufacture the licensed articles. The prior authority relied on by the Revenue had been reversed by a later Full Bench decision, and that principle supported allowance of the deduction. The expenditure was therefore held deductible as revenue in nature.

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Issues: Whether royalty payments made under collaboration agreements for use of technical know-how, data and information were allowable as revenue expenditure.

Analysis: The assessee paid royalty to two Japanese collaborators under agreements connected with manufacture of electric components. The Tribunal found that the payments were attributable to the actual use of technical know-how, data and information supplied by the foreign companies, rather than consideration for acquiring the right to manufacture the licensed articles. The earlier decision relied upon by the Revenue had since been reversed in a later Full Bench decision, and the Tribunal's view was consistent with that later principle.

Conclusion: The royalty payments were revenue expenditure and were allowable.

Final Conclusion: The reference was answered in favour of the assessee, and the expenditure of Rs. 50,652 was held to be deductible as revenue in nature.

Ratio Decidendi: Where royalty under a collaboration arrangement is paid for the actual use of technical know-how, data and information, and not for acquisition of an enduring right to manufacture, the payment is revenue expenditure.

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