Technical know-how for new production lines is capital expenditure when it creates an enduring business advantage.

Technical know-how, drawings and designs acquired under a collaboration agreement to manufacture new types of machine tools were treated as capital expenditure because they created a valuable intangible asset and enabled a new line of production. The expenditure was directed to bringing into existence an enduring advantage, not merely meeting the day-to-day needs of an existing business, so it was not deductible as revenue outlay. The authority cited on restricted and short-term use of technical knowledge was distinguished on the facts.

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Issues: Whether the amount paid under the collaboration agreement for obtaining technical know-how, drawings and designs to manufacture new types of machine tools was capital expenditure or revenue expenditure.

Analysis: The payment secured for the assessee a valuable intangible asset in the form of know-how, blueprints and manufacturing technique enabling production of new machines. The advantage was not confined to the day-to-day conduct of an existing business but was obtained for bringing into existence a new line of production, with benefit extending for the currency of the agreement and beyond in substance. Applying the test of aim and object of the expenditure, and the principle that expenditure for acquiring an asset or advantage of enduring benefit is capital in nature, the amount could not be treated as revenue outlay. The cited authority dealing with restricted and short-term use of technical knowledge was distinguished on facts.

Conclusion: The payment of Rs. 26,713 was properly disallowed as capital expenditure and the answer was against the assessee.

Final Conclusion: Amounts paid to acquire technical know-how for commencing production of new goods and securing an enduring advantage are capital in nature, not deductible as revenue expenditure.

Ratio Decidendi: Where technical know-how is acquired as a capital asset to enable production of new goods and the expenditure secures an enduring advantage, the payment is capital expenditure notwithstanding that the consideration is made under a collaboration agreement.

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