Running royalty for technical services treated as revenue expenditure; lump sum technology fee remains capital outlay for assessee

HC held that the lump sum fee of US $1 million paid under the technical collaboration agreement for acquisition of technology was capital expenditure, as already accepted by the assessee. However, the running royalty linked to domestic and export sales was held to be revenue expenditure. The court emphasized that the royalty was paid not for transfer of technology but for ongoing technical services, varying with sales volume and lacking enduring benefit. Relying on its earlier decision in a similar matter, HC answered the question in favour of the assessee and against the Revenue.

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Issues: (i) Whether the royalty payments made under a technical collaboration agreement for providing technology and technical services are capital in nature or are deductible as revenue/business expenditure.

Analysis: The agreement separates a lump sum payment for transfer of CAB technology and a royalty payable at specified percentages of domestic and export sales for providing technology services over seven years. The royalty varies annually with sales and is not a one-time transfer of the licensor's entire technical know-how. Relevant factors include the licence tenure, the nature of rights granted (non-exclusive licence to use technical information during the term), the continuing obligation to render technical services/assistance during production, and that the royalty is a running payment dependent on production/sales. Precedents and articulated principles distinguishing access to technical knowledge (treated as revenue) from absolute transfer or sale of secret processes (treated as capital) were applied to the contractual terms.

Conclusion: The royalty payments for providing technology and technical services are revenue expenditure and therefore deductible; the authorities' treatment of the royalty as capital expenditure is set aside.

Ratio Decidendi: Royalty payable as a running payment dependent on annual production/sales for continuing technical services or access to technology is revenue expenditure, whereas an absolute transfer of technical know-how or sale of secret processes is capital in nature.

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