TMI BlogNorms and principles to be applied in assessing foreign/Indian participants in technical collaborationX X X X Extracts X X X X X X X X Extracts X X X X ..... e and the decision depends not merely upon the terms of the particular agreement but also on the nature of the technical know-how actually imparted thereunder. It is, therefore, not possible to lay down clear-cut solutions to cover all conceivable situations. Only general principles and guidelines can be indicated which should be applied in individual cases according to the facts of each case. 3. Technical know-how is a term of wide connotation and includes several kinds of technical knowledge, assistance and services. There are several ingredients constituting technical know-how such as (i) the design of the product to be manufactured, (ii) the design of the process for manufacture, (iii) the design and engineering of the plan, and (iv) the erection and commissioning of the plant, etc., etc. There are also different ways of imparting technical know-how which may be (i) through outright sale of designs, know-how, etc., (ii) by lending the services of foreign technicians, (iii) by giving technical assistance during the period of agreement, (iv) through royalty or licensing agreements, or (v) through foreign capital participation. A further important aspect is whether or not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Officer must fully understand and comprehend the nature of the asset or enduring benefit which the assessee has acquired. If what has been acquired under the agreement is merely a licence for the user, for a limited period, of the technical knowledge of the foreign participant, together with or without the right to use the patents and trade marks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian participant, and should be regarded as expenditure incurred for the purpose of running the business during the period of the agreement. The payment would, therefore, be revenue in nature. The recent decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 provides clear guidance in cases of this type. 6. The first step, therefore, in dealing with foreign collaboration agreements is to analyse the terms of the agreement and ascertain the facts relating to the working or implementation of the agreement in order to find out, what rights or benefits or property have been acquired under the agreement by the Indian participant and for what consideration. In a case where the payment is made who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve acquired an enduring benefit for the purpose of his trade. Further, after the conclusion of the.period of the collaboration, what are the rights and benefits, if any, which would permanently accrue to the Indian participants business? These and other related questions have to be looked into in order to decide whether the expenditure is capital or revenue in nature. If as a result of this examination, it is found that no asset or advantage of a permanent or enduring character is acquired by the Indian participant, the expenditure should be treated as revenue expenditure and allowed as a deduction. It may, however, be noted in this connection that if the said expenditure, on product and process designs and drawings is treated as capital expenditure, the Indian participant will not be entitled to any depreciation or development rebate on the outlay. The amount cannot also be amortised and allowed over a period of years (unless the payment is for the acquisition of patent rights which are discussed separately) as there is at present no provision to this effect in the Income-tax Act. As regards expenditure of a capital nature incurred after February 28, 1966 on the acquisition of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to tax in India where the patent has been exploited. Deduction will, however, be admissible against the royalty income for the cost of current services rendered in order to earn the royalty. 10. The cases where payments of each of the above categories are clearly and truly ascertainable from the terms of the agreement and with reference to all relevant facts will not present serious difficulty. But in cases where the agreement stipulates a consolidated payment or where the true character of the payment is different from that ascribed to it in the agreement difficulty would arise in the allocation of the payment for the various services rendered under the agreement. Ordinarily, a payment expressed as a percentage of the sales in India is to be treated as payment of royalty and taxed in India. When the payment is stated to be for technical know-how or services rendered abroad but is related to the sales, the Income-tax Officer will have to go into the facts of the case and determine the extent to which the payment attributed to technical services abroad represents in fact payment for (i) services abroad, (ii) services in India, and (iii) royalty or extra royalty for exploit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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