1982 (4) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of royalty payments as revenue expenditure.
2. Nature of the technical know-how agreement and its implications on the classification of expenditure.

Summary:

Issue 1: Deductibility of Royalty Payments as Revenue Expenditure
The primary issue in these income-tax references pertains to the deductibility of royalty payments made by the assessee to foreign collaborators for the assessment years 1965-66 to 1969-70 and 1972-73. The Tribunal had to determine whether these payments were of a revenue nature. The Tribunal concluded that the royalty payments were recurring in nature and based on the sales of the valves manufactured by the assessee. The Tribunal found a striking similarity between the present case and the Supreme Court's decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, where it was held that payments for technical know-how were revenue expenditures. The Tribunal held that the payments were for the purpose of obtaining technical assistance for running the business and not for acquiring a permanent advantage.

Issue 2: Nature of the Technical Know-How Agreement
The agreement between the assessee and the foreign company, BLW, was examined to determine whether it conferred an enduring benefit or merely a license to use technical know-how. The agreement provided for a ten-year term, renewable with the Government of India's approval, and could be terminated with six months' notice. The royalty payments were linked to the "net selling value" of the valves and were recurring in nature. The agreement also included confidentiality clauses and restrictions on disclosing information to third parties. The Tribunal concluded that the assessee obtained a license to manufacture and sell valves and that the royalty payments were for the use of the know-how, not for its acquisition. The Tribunal emphasized that the payment of royalty was a recurring charge on the "net selling value" and did not confer an enduring benefit.

Conclusion:
The High Court agreed with the Tribunal's view that the royalty payments were revenue expenditures. The court noted that the payment of royalty had a direct nexus with the carrying on or conduct of the business and was an integral part of the profit-making process. The court also observed that the confidentiality restrictions indicated that no secret process or technical know-how was permanently transferred to the assessee. Therefore, the court answered the question in the affirmative and in favor of the assessee, concluding that the royalty payments were deductible as revenue expenditures.