Patent-use payments and audit-based reopening: limited rights were treated as revenue expenditure, and pure legal audit information could not justify reassessment.

Payments made by a non-owner to foreign collaborators for patent-right use were treated as revenue expenditure where the assessee obtained only limited use of the patents, without acquiring any enduring or capital asset. The amount was characterised as reimbursement of patent-registration-related costs and part of the expense of obtaining technical know-how, not capital outlay. On reassessment, internal revenue audit information on a pure question of law was stated to be insufficient material for reopening under section 147(b), especially where the relevant facts were already on record. The commentary concludes that the expenditure was allowable and that such reopening was invalid.

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Issues: (i) whether the amount paid towards patent-right charges to foreign collaborators was revenue expenditure or capital expenditure; (ii) whether the reassessment under section 147(b) was valid when based on internal revenue audit information on a question of law.

Issue (i): whether the amount paid towards patent-right charges to foreign collaborators was revenue expenditure or capital expenditure.

Analysis: The assessee was not the owner of the patents and merely used them for the duration of the collaboration arrangement. The payment was in the nature of reimbursement of the collaborators' patent-registration expenses and did not secure any perennial or enduring advantage to the assessee. The limited statutory term of a patent supported the view that the advantage was not permanent, and the payment was part of the cost of obtaining the use of technical know-how rather than an acquisition of a capital asset.

Conclusion: The payment was revenue expenditure and the disallowance was not justified, in favour of the assessee.

Issue (ii): whether the reassessment under section 147(b) was valid when based on internal revenue audit information on a question of law.

Analysis: The reassessment was founded on audit information concerning the legal character of the expenditure. The legal position governing such reopening had been clarified by the Supreme Court to the effect that audit information on a question of law does not constitute information for reopening under section 147(b). Since the point was purely legal and the relevant facts were already on record, it could be raised by the assessee before the Tribunal even though it had not been raised earlier.

Conclusion: The reassessment under section 147(b) was invalid, in favour of the assessee.

Final Conclusion: The order allowing the expenditure was sustained and the departmental appeal failed.

Ratio Decidendi: A payment made by a non-owner for the limited use of patents, without acquisition of an enduring asset or benefit, is revenue expenditure, and audit information on a pure question of law does not justify reopening under section 147(b).

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