Technical assistance payments under royalty agreements cannot be disallowed on suspicion alone without proof of profit diversion.

Technical assistance payments under royalty agreements were held not to be disallowable merely because they appeared large compared with profits. The Tribunal found that the assessee had produced substantial collaboration and supporting material, that the technical assistance was integral to the business, and that Reserve Bank of India approval existed. It held that reasonableness must be assessed from the businessman's perspective and that suspicion, without positive material showing excessiveness, sham arrangement, or diversion of profits, cannot justify disallowance. The technical assistance expenditure was therefore allowed and the royalty disallowance was deleted.

---

---

Issues: Whether the disallowance of payments made for technical assistance under the royalty agreements was justified under the income-tax provisions as excessive, unreasonable, or a colourable device to divert profits.

Analysis: The payments were examined in the context of the assessee's long-standing collaboration agreements, the technical and commercial material produced, and the approvals granted by the Reserve Bank of India. The authorities below had relied mainly on the size of the payments vis-a -vis the assessee's profits and on assumptions that the assessee had not furnished sufficient material. The Tribunal found that the assessee had substantially produced the information and supporting material sought, that the technical assistance was integral to the business, and that the Revenue had brought no positive material to prove siphoning of profits or any sham arrangement. It also held that the reasonableness of such expenditure had to be judged from the businessman's point of view and that mere suspicion or comparison with post-payment profits could not justify disallowance.

Conclusion: The disallowance of the technical assistance payments was not warranted and was deleted.

Final Conclusion: The Revenue's appeal failed, the assessee obtained relief on the substantive royalty disallowance, and the remaining grounds in the cross-objection and alternative claim did not survive.

Ratio Decidendi: Where expenditure is supported by collaboration agreements, substantial evidence of technical benefit, and regulatory approval, a disallowance cannot rest on suspicion or on a comparison of payment with profits alone; the Revenue must establish with material that the payment was excessive or a profit-diversion device.

---