Revenue expenditure test applied to royalty for know-how and trade mark use, allowing deduction in business profits.

Royalty paid under an agreement for technical information, trade mark use and manufacturing assistance was held to be revenue expenditure deductible in computing business profits. The court applied the principle that the true character of an outgoing depends on its purpose and surrounding circumstances. Because the payment was recurrent, linked to actual manufacture and sales, and formed part of the commercial arrangement enabling the assessee to carry on business, it was treated as part of the profit-earning process. The court further noted that no capital asset or enduring right was acquired, and the foreign company was not parting with a capital asset by supplying know-how. The royalty was therefore allowable as a deduction.

---

---

Issues: Whether the royalty of Rs. 13,938 paid under the agreement for technical information, trade mark use, and manufacturing assistance was a revenue expenditure deductible in computing business profits.

Analysis: The payment was recurrent, linked to actual manufacture and sales, and formed part of the commercial arrangement by which the assessee was enabled to carry on its business in accordance with the agreement. The Court applied the principle that the true nature of an outgoing must be determined from the purpose for which it is incurred and the surrounding circumstances. Where the expenditure is an integral part of the profit-earning process and not the acquisition of an asset or right of a permanent character, it is revenue in nature. The Court held that the foreign company was not parting with a capital asset by furnishing know-how and that the assessee was only obtaining technical information and related facilities for carrying on its manufacturing activity.

Conclusion: The royalty payment was revenue expenditure and was allowable as a deduction.

---