Nature of royalty for acquiring technical know-how treated as capital expenditure where acquisition confers enduring proprietary right

Consideration paid for acquiring technical know-how and data used to set up and operate a manufacturing plant confers an enduring proprietary advantage and therefore constitutes capital expenditure. The payment was for acquisition of a right of enduring nature, not a transient licence conditioned on continued payments, so the expenditure must be capitalised as acquisition of an intangible capital asset rather than treated as revenue expenditure. The clarification distinguishes acquisition of ownership or enduring rights in know-how from mere user-based royalty arrangements, with the operative effect that such payments are capital in nature.

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Issues: Whether the sum of Rs. 28,917 paid as royalty under an agreement for transfer of technical know-how and data constituted revenue expenditure or capital expenditure.

Analysis: The agreement transferred know-how and data for setting up and operating a manufacturing plant without any temporal limit on the assessee's right to use the know-how, subject only to confidentiality and a prohibition on transfer. Consideration was paid partly upfront and partly by royalty over five years. The payment conferred an advantage of an enduring nature and amounted to acquisition of the know-how and data as an asset rather than a mere licence for temporary use. Established tests require examination of the object and effect of expenditure and whether it creates or enhances a capital asset; on these facts the payment operates as part-payment for acquisition of technical know-how and data and is capital in character.

Conclusion: The sum of Rs. 28,917 constituted capital expenditure and not revenue expenditure.

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