Business expenditure characterization for royalty and technical fee under licence agreement held revenue expenditure and deductible

Characterisation of payments under a licence for patents, trade mark and technical know-how: the agreement granted non-exclusive licences and technical assistance for a fixed initial lump-sum plus recurring payments; the arrangement did not transfer ownership of intangible assets. The payment under the upfront clause was held to be related to mere use of the licenced know-how and trading assets of the licensor, not the acquisition of an enduring asset or capital benefit for the licensee, and was therefore a revenue expenditure incurred wholly and exclusively for business and allowable as a deduction.

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Issues: Whether the payment of Rs. 18,825 under article 6(a) of the collaboration/licence agreement is a revenue expenditure deductible for assessment year 1968-69 or a capital expenditure (i.e., an acquisition of an asset or enduring advantage)?

Analysis: The agreement grants a non-exclusive licence to use patents, trade mark and technical information; payments under article 6(a) are recurring, variable and related to annual production rather than an initial lump sum or predetermined capital sum. The licence is terminable at the volition of either party, the owner retains proprietary rights, improvements vest in the owner, and the technical information functions as guidance (a manual) supplied for production. Applying commercial tests and established authorities distinguishing assignment from mere licence, the nature, duration and mode of payment, and the parties' retained rights indicate no acquisition of an enduring proprietary asset; the payment is for the use and assistance to produce profits in the course of business and is not related to any capital value.

Conclusion: The payment under article 6(a) is revenue expenditure; decision is in favour of the assessee.

Ratio Decidendi: A recurring payment for a terminable, non-exclusive licence to use patents, trade mark and technical assistance, where proprietary rights remain with the owner and payments are related to annual production, constitutes revenue expenditure and not a capital outlay.

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