Revenue expenditure treatment of distributorship payment turned on whether it was part of the price for business know-how.

A payment made under a distributorship arrangement was treated as revenue expenditure because it formed an integral part of the composite bargain for obtaining technical know-how, use of registered trade marks, and related commercial benefits from the foreign collaborator. Applying the practical and commercial test, the character of the outlay depended on the advantage obtained in substance; here, the amount was part of the price for acquiring business know-how rather than the cost of an independent enduring asset. The deduction was therefore allowable and the disallowance was not justified.

---

---

Issues: Whether the sum of Rs. 50,000 paid under the distributorship arrangement was revenue expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, or capital expenditure.

Analysis: The payment was part of the composite arrangement under which the assessee obtained technical know-how, use of registered trade marks, and related benefits from the foreign collaborator. The obligation to appoint the collaborator's nominee as distributor and to pay the sum for setting up that distributorship was an integral stipulation of the bargain, contemporaneous with the seven-year arrangement under which the assessee secured the business advantage. Applying the practical and commercial test, the character of the payment depended on the nature of the advantage obtained, and in substance the amount formed part of the price for acquiring the know-how.

Conclusion: The payment was revenue expenditure and was allowable as a deduction; the disallowance was not justified.

Final Conclusion: The appeal failed, and the assessee's claim to deduct the payment as revenue expenditure was upheld.

Ratio Decidendi: Where an expenditure is incurred as an integral part of the bargain for obtaining technical know-how and the associated commercial advantage, its character is revenue rather than capital if it is part of the price of that business benefit and not the acquisition of an independent enduring asset.

---