Royalty apportionment and plant depreciation under technical collaboration agreements accepted on the facts
Royalty paid under a limited technical collaboration arrangement may be apportioned on a factual basis between revenue and capital components where the agreement does not show an outright acquisition of an enduring capital asset. On the facts noted, 50% of the royalty was treated as revenue expenditure, while the balance capitalised amount was attributable to plant design and know-how and was eligible for depreciation and development rebate. Fencing around refinery processing units was also treated as plant entitled to depreciation and rebate. The Bombay High Court therefore accepted the assessee's tax treatment on all three questions.
Issues: (i) Whether the fencing round the refinery processing units constituted plant entitled to depreciation and rebate; (ii) whether 50% of the royalty payment could be allowed as revenue expenditure; (iii) whether the remaining 50% of the royalty payment could be included in the cost of machinery and plant for depreciation and development rebate.
Issue (i): Whether the fencing round the refinery processing units constituted plant entitled to depreciation and rebate.
Analysis: The question was covered by an earlier decision of the same Court on the identical facts. The answer was therefore taken from that binding precedent.
Conclusion: The issue was answered in the affirmative and in favour of the assessee.
Issue (ii): Whether 50% of the royalty payment could be allowed as revenue expenditure.
Analysis: The royalty was paid under a limited-duration technical collaboration arrangement for use of processes, know-how, patents and technical assistance. The agreement did not disclose an outright purchase of a licence or a capital asset of enduring character on the material placed before the Court. The Tribunal's bifurcation of the payment into revenue and capital components was treated as a reasonable assessment on the facts, and there was no basis to hold that no part of the payment was revenue in nature or that the allowance of 50% was excessive.
Conclusion: The issue was answered in the negative and in favour of the assessee.
Issue (iii): Whether the remaining 50% of the royalty payment could be included in the cost of machinery and plant for depreciation and development rebate.
Analysis: The balance amount was treated by the Tribunal as capital expenditure, but there was no material to justify splitting that balance into two equal parts and denying depreciation and development rebate on half of it. On the facts found, the whole capitalised balance was attributable to the plant, its design, and the know-how for its operation, so there was no warrant for withholding depreciation and development rebate from any part of that balance.
Conclusion: The issue was answered in the affirmative and in favour of the assessee.
Final Conclusion: All three referred questions were resolved in favour of the assessee, resulting in acceptance of the assessee's position on the depreciation and royalty-related tax treatment.
Ratio Decidendi: A royalty paid under a limited technical collaboration agreement is not automatically capital in nature merely because the agreement contemplates post-termination use of paid-up rights; the payment may be apportioned on a reasonable factual basis between revenue and capital elements, and a capitalised balance attributable to plant design or know-how cannot be partially denied depreciation without supporting material.
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AI Drafter ✕
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