Turnkey contract income accrues only on commissioning, while limited technical know-how licence fees are revenue expenditure.

Under a composite turnkey contract for supply, erection and commissioning of pumping sets, income does not accrue merely on despatch of auxiliary parts where contractual completion depends on successful erection, testing and takeover by the customer; only income attributable to pumping sets actually commissioned during the year is recognised. Payment for limited licence rights to drawings, designs, calculations and technical data, with continuing technical assistance and no transfer of an enduring asset, is revenue expenditure because it secures use of know-how for manufacturing purposes rather than acquisition of a new profit-making apparatus.

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Issues: (i) Whether amounts received on despatch of auxiliary parts under turnkey contracts for supply, erection and commissioning of pumping sets accrued as income before completion of erection and commissioning; and (ii) whether payment for licence rights to drawings, designs, calculations and technical data for manufacture of butterfly valves was capital expenditure or revenue expenditure.

Issue (i): Whether amounts received on despatch of auxiliary parts under turnkey contracts for supply, erection and commissioning of pumping sets accrued as income before completion of erection and commissioning.

Analysis: The contract required not merely supply of parts, but manufacture, erection, installation, testing and commissioning of complete pumping sets, and the property in the sets passed only on successful erection and takeover by the customer. The delivery and receipt of instalments were only part of a composite turnkey arrangement. On that basis, the contractual obligation was not completed on despatch of parts alone, and section 32 of the Sale of Goods Act, 1930 was treated as inapplicable to treat each despatch as a completed sale of the pumping sets.

Conclusion: The amounts received on despatch of auxiliary parts did not constitute taxable sale proceeds of the pumping sets before commissioning, and the addition was deleted, save for income relatable to any pumping set actually commissioned during the year.

Issue (ii): Whether payment for licence rights to drawings, designs, calculations and technical data for manufacture of butterfly valves was capital expenditure or revenue expenditure.

Analysis: The agreement gave access to and use of technical drawings, designs and patent-based know-how for a limited period, together with continuing technical assistance, without transferring any enduring capital asset to the assessee. The payment was for use of technical know-how to improve manufacturing quality and not for acquisition of a new profit-making apparatus.

Conclusion: The expenditure was revenue in nature and was rightly allowed as a deduction.

Final Conclusion: The assessee succeeded on the main income-accrual issue, while the Revenue failed on the disallowance issue relating to technical know-how, resulting in allowance of the assessee's appeal and dismissal of the Revenue's appeal.

Ratio Decidendi: Under a composite turnkey contract, income accrues only on completion of the contractual obligation culminating in erection and commissioning, and payment for limited licence-based technical know-how without transfer of an enduring asset is revenue expenditure.

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