1979 (2) TMI 20 - HC - Income Tax

Court rules training and payments to companies as revenue, not capital, expenses.

The Court determined that payments to M/s. Daimler Benz and M/s. Henricot were revenue, not capital, expenditures. Training expenses were also considered ... Capital Or Revenue Expenditure, Collaboration Agreement Issues Involved:1. Nature of payments made by the assessee-company to two foreign companies.2. Whether the payments made to M/s. Daimler Benz and M/s. Henricot should be treated as capital or revenue expenditure.3. Allowability of training expenses incurred by the assessee.Issue-wise Detailed Analysis:1. Nature of Payments Made by the Assessee-Company to Two Foreign Companies:The assessee-company, M/s. Tata Locomotive and Engineering Co. Ltd. (Telco), entered into agreements with M/s. Daimler Benz and M/s. Henricot for technical advice, information, and assistance. The services provided by M/s. Daimler Benz included technical advice, exclusive manufacturing rights, supply of drawings and designs, technical information, jigs, tools, fixtures, parts, components, use of the name and trademarks, technical personnel, and training facilities. M/s. Henricot provided technical knowledge, detailed drawings, designs, data, advice on production methods, training facilities, and assistance in starting the Telco Steel Foundry.2. Whether the Payments Made to M/s. Daimler Benz and M/s. Henricot Should Be Treated as Capital or Revenue Expenditure:The Income Tax Officer (ITO) treated the payments to M/s. Daimler Benz and M/s. Henricot as capital expenditure. However, the Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal (ITAT) treated these payments as revenue expenditure.Payments to M/s. Daimler Benz:The Tribunal found that the payments to M/s. Daimler Benz were for technical assistance, knowledge, and the right to use the trade name for 15 years. The Tribunal concluded that the payments were for the user of technical knowledge and information, not for acquiring any proprietary rights. The Tribunal held that the payments were revenue expenses.Payments to M/s. Henricot:The Tribunal found that the payments to M/s. Henricot were for technical knowledge and assistance in operating the steel foundry. The Tribunal concluded that no capital asset was acquired and that the payments were for the user of technical knowledge, thus treating them as revenue expenses.Court's Analysis:The Court emphasized that the nature of the payments should be determined based on whether they were related to the carrying on or conduct of the business or if the assessee acquired any capital asset or benefit of a permanent character. The Court noted that the payments were for obtaining technical know-how and training facilities, which were essential for producing quality products. The Court held that technical know-how and training do not constitute a tangible asset and that acquiring such know-how cannot be treated as a capital asset. The Court relied on the Supreme Court's decision in CIT v. Ciba of India Ltd., which held that acquiring technical knowledge for a limited period does not result in acquiring a capital asset or advantage of an enduring nature.3. Allowability of Training Expenses Incurred by the Assessee:The training expenses incurred by the assessee for training its personnel at M/s. Henricot's Belgian plant were claimed as revenue expenditure. The Tribunal held that the training expenses were incurred for running the business efficiently and producing higher profits, thus treating them as revenue expenditure. The Court agreed with the Tribunal's view, emphasizing that the training expenses were closely related to the profit-earning process and should be allowed as revenue expenditure.Conclusion:The Court concluded that the payments made to M/s. Daimler Benz and M/s. Henricot were revenue expenditure and not capital expenditure. The training expenses incurred by the assessee were also allowable as revenue expenditure. The question referred to the Court was answered in the affirmative and in favor of the assessee. The assessee was entitled to the costs of the reference from the revenue.