1976 (11) TMI 67 - HC - Income Tax

Payments to Swiss company for consultancy services held admissible deductions under Indian Income-tax Act

The court upheld the Tribunal's decision that the payments made to the Swiss company were admissible deductions under section 10(2)(xv) of the Indian ... Business Expenditure, Capital Or Revenue Expenditure, Collaboration Agreement Issues Involved:1. Admissibility of deduction under sections 10(2)(xii), 10(2)(xiv), or 10(2)(xv) of the Indian Income-tax Act, 1922.2. Nature of the 3% contribution paid to the Swiss company.3. Classification of the expenditure as capital or revenue.Issue-wise Detailed Analysis:1. Admissibility of Deduction under Sections 10(2)(xii), 10(2)(xiv), or 10(2)(xv):The primary question was whether the sums of Rs. 2,20,663 and Rs. 3,19,834 paid to the Swiss company were admissible deductions under sections 10(2)(xii), 10(2)(xiv), or 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal initially held that the amounts were not allowable under sections 10(2)(xii) or 10(2)(xiv) but allowed the deductions under section 10(2)(xv). The Tribunal's decision was based on the interpretation that the expenditure was for the purpose of running the business and not for acquiring a capital asset.2. Nature of the 3% Contribution:The 3% contribution paid to the Swiss company was scrutinized to determine its nature. Article 8(a) of the agreement specified that the contribution was for 'ordinary research work which includes analyses, development of new formulae being special to the requirement of the Indian market and any such research work which may be asked for by the licensee.' The Commissioner initially considered this as a payment for research contribution, which he deemed as capital expenditure. However, the Tribunal and the court later interpreted it as a payment for continuous consultancy services necessary for the smooth running of the assessee's production and meeting market demands.3. Classification of the Expenditure as Capital or Revenue:The court examined whether the 3% contribution constituted capital or revenue expenditure. The Commissioner had viewed it as capital expenditure aimed at improving the method of production and evolving improved formulae. However, the Tribunal, supported by the correspondence between the assessee and the Swiss company, found that the payment was for addressing day-to-day operational issues rather than for acquiring a capital asset. The court concluded that the expenditure was for running the business and producing profits, thus classifying it as revenue expenditure.Conclusion:The court upheld the Tribunal's decision that the sums paid to the Swiss company were admissible deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922. The payments were deemed to be for consultancy services essential for the assessee's business operations and not for acquiring a capital asset. Consequently, the expenditure was classified as revenue expenditure, making it eligible for deduction.Final Judgment:The question referred to the court was answered affirmatively, allowing the two sums as deductions under section 10(2)(xv). The Commissioner was directed to pay the costs of the reference to the assessee.