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2006 (10) TMI 128 - HC - Income TaxChallenged the Order passed by Tribunal - Royalty payment - technical know-how - capital expenditure for acquiring an asset or advantage of enduring nature, or expenditure properly attributable to revenue - HELD THAT:- When one is dealing with tangible assets, it is generally not very difficult to reach a decision. Things, which the trader uses in his business to produce what he has to sell are part of his fixed capital and their cost is a capital outlay although their useful life may be short. Things, which a trader turns over in the course of his trade, are circulating capital and their cost is a revenue expense. However, when one comes to intangible assets there is much more difficulty. To help the conduct of his business a trader may obtain a right to do something on someone else's property or an obligation by someone to do or refrain from doing something or makes a contract which affects the way in which he conducts his business; and the right or obligation or the effect of the contract may endure for a short or a long period of years. The question then arises whether the sum, which he has paid for that advantage, is a capital or revenue expense. If the asset, which is acquired, is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay; and we do not see how it could matter that the payment was made by sums paid annually or periodically. It appears to us, however, that an asset, which is nothing more than a right to enjoy a certain advantage over a period, is intrinsically of a different character from a thing, which a person buys and can immediately use or consume in any way he chooses. We are dealing with payments made to MMC to secure technical know-how and to sell LCVs under their brand name during the currency of the agreement subject to periodic payment of royalty for using the licence. The Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692; AIR 1968 SC 1131 has enunciated the principles applicable to such cases. In that case, the assessee a subsidiary of the Swiss company paid certain payment to Ciba Ltd., Basle (the Swiss company) pursuant to the agreement dated December 17, 1947, whereby the latter agreed for "technical and research contribution" in so far as they relate to pharmaceutical products which were manufactured, processed and sold by the assessee in India. It was held that the agreement merely give the right to the assessee, without any thing more, to draw upon the technical knowledge of the foreign collaborator for the purpose of carrying on its business and did not acquire an asset or advantage of enduring nature for the benefit of its business. Considering the effect of payment, it was held to be a revenue expenditure. We think, it is more reasonable to regard the periodic royalty payment to MMC as an outlay for earning profits in the normal course of business than as expenditure with the object of acquiring an advantage or asset of enduring and/or lasting nature for the benefit of the trade. Thus, we have no hesitation to hold that the Tribunal rightly decided the issue relating to question No. 1 in favour of the assessee and against the Revenue. Hence, we dismiss these appeals by holding that the affirmative answer to all the three questions must go in favour of the assessee and against the Revenue.
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