Technical collaboration payments are revenue expenditure, but reimbursement of patent suit costs is not a business deduction.
Payments under a technical collaboration agreement were treated as revenue expenditure because they secured limited technical know-how, processes, formulae, information and licences for a fixed period without creating a capital asset or enduring advantage. The claim could not be treated as scientific research expenditure, since the research was carried on by the foreign company and the assessee only reimbursed part of its cost; however, the recurring payments were allowable as business expenditure. Reimbursement of the share of costs in a patent infringement suit was not deductible, because the assessee had no proved right in the relevant patents or trade mark, the litigation predated its existence, and the liability had not been shown to have devolved on it or to protect its own trading interest.
Issues: (i) Whether the payments made under the technical collaboration agreement were admissible as expenditure on scientific research or as revenue expenditure laid out wholly and exclusively for the business; (ii) Whether the reimbursement of the share of costs incurred in the patent infringement suit was an allowable business deduction.
Issue (i): Whether the payments made under the technical collaboration agreement were admissible as expenditure on scientific research or as revenue expenditure laid out wholly and exclusively for the business.
Analysis: The payments were not expenditure laid out or expended by the assessee on scientific research, because the research had been carried on by the foreign company and the assessee merely reimbursed part of its cost. The agreement gave the assessee limited access to technical knowledge, processes, formulae, information and licences for a fixed period, without transferring any capital asset or enduring advantage. The recurring payments were made to obtain technical assistance for carrying on the business and did not amount to capital expenditure.
Conclusion: The claim was not allowable under section 10(2)(xii), but the expenditure was allowable under section 10(2)(xv), in favour of the assessee.
Issue (ii): Whether the reimbursement of the share of costs incurred in the patent infringement suit was an allowable business deduction.
Analysis: The assessee had no proved right to the relevant May and Baker patents or trade mark under its agreement, and the suit had been filed before the assessee came into existence. The liability to share the litigation costs of the foreign company was not shown to have devolved on the assessee, and the payment was not made to protect the assessee's own trading interest.
Conclusion: The expenditure was not allowable as a business deduction, against the assessee.
Final Conclusion: The challenge to the allowance of the technical collaboration payments failed, and the claim for deduction of the litigation-cost reimbursement also failed; both appeals were dismissed.
Ratio Decidendi: A payment made to recoup another person's scientific research costs is not expenditure on scientific research by the assessee, and recurring payments for limited technical know-how and licence rights are revenue expenditure where no capital asset or enduring benefit is acquired.