2005 (8) TMI 54 - HC - Income Tax

Court rules technical know-how expenditure as revenue, not capital; no enduring benefits. Precedents support revenue treatment.

The court determined that the expenditure on technical know-how was revenue expenditure, not capital, as it did not result in enduring benefits or a ... Addition of Rs. 12,89,251 treated as capital expenditure on account of technical know-how - In the present case, we have seen that under the agreement technical know-how was to be provided for the period of seven years and not parting permanently. It was not for the establishment of any plant or machinery but for the manufacturing of equipment and machinery for cane sugar plant. Thus, we are of the view that the technical know-how received by the assessee was not of enduring nature and the payment for acquiring the technical know-how was in the nature of revenue expenditure and not capital expenditure Issues Involved:1. Nature of expenditure on technical know-how: whether it is capital or revenue expenditure.Issue-wise Detailed Analysis:1. Nature of Expenditure on Technical Know-How:The primary issue in the judgment is whether the expenditure incurred by the assessee on acquiring technical know-how should be treated as capital or revenue expenditure. The assessee, a company engaged in the manufacture and sale of sugar machinery parts, entered into an agreement with a West German company (BMA) for technical know-how. The Assessing Officer treated the expenditure as capital, asserting that the agreement provided the assessee with a 'benefit of enduring nature' and involved an 'absolute transfer of technical knowledge.' This was based on the Supreme Court's decision in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86.The assessee appealed, arguing that the expenditure was revenue in nature because:- The technical know-how only modified existing machinery.- The machinery was part of the assessee's stock-in-trade.- The agreement was for a limited period of seven years, during which technologies could become obsolete.- BMA had no patented rights in India.- The facts of the case were distinguishable from the cited Supreme Court decision.The Commissioner of Income-tax (Appeals) supported the assessee's view, relying on several judicial precedents, including Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 (Patna), which held that payments for technical know-how were revenue expenditures. The Tribunal upheld this decision, noting the agreement's limited duration and the nature of the technical know-how provided.The High Court affirmed the Tribunal's decision, emphasizing that the technical know-how agreement was for a limited period and did not result in a permanent transfer of assets or enduring benefits. The court referenced several cases to support this view, including:- CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC): Payments for technical know-how were deemed revenue expenditure because the know-how was not permanently transferred.- Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28 (Bom): Technical know-how is not a capital asset.- Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC): The test of 'enduring benefit' is not rigid and must be considered in the context of business realities.- CIT v. British India Corporation Ltd. [1987] 165 ITR 51 (SC): Payments for technical know-how were treated as revenue expenditure.The court concluded that the technical know-how received by the assessee was not of an enduring nature and the payment for it was revenue expenditure. Hence, the question was answered in favor of the assessee and against the Revenue.