Law: Income Tax Act, 1961

Section: 256

Business expenditure-Collaboration agreement with foreign company for manufacture of clocks-Agreement described as licensing agreement valid for five years Provision for use of know-how during currency of agreement No provision for use after expiry of agreement-Payment of fees for know-how-Whether allowable as business expenditure--Held yes. The assessee entered into an agreement with S. the agent of foreign company G, under which S agreed to pass on to the assessee certain technical know-how to enable the assessee to manufacture alarm clocks in India for which the assessee agreed to pay a price spread over a period of five years. The assessee also agreed to pay royalty at 5 per cent. of the sale price of the products in consideration of certain facilities and supply of tools, dies, technical knowledge, information advice, etc. After obtaining the approval of the Government of India, a formal agreement was entered into between the assessee and S. Though the agreement provided for renewal after a period of five years, it was nor actually renewed. In pursuance of this agreement the assessee paid Rs. 1,03,420 towards royalty and Rs. 41, 638 towards technical know-how fees spread over a period of five years and claimed the amounts as a deduction for the various assessment years. The officer allowed deduction of the royalty payment but disallowed the amount of Rs. 41,638 paid towards technical know-how fees, on the ground that the payment was in the nature of a capital expenditure. This was confirmed by the Appellate Assistant Commissioner and the Tribunal. On a reference to the High Court at the instance of the assessee Held, that the various circumstances, namely, (1) the parties them- selves describing the agreement as a licensing agreement, (2) the agreement being only for a very short duration of five years, (3) the know-how itself being in the initial stages for assembling the clocks out of the imported parts and in the later stages for manufacturing the parts themselves indigenously for the purpose of assembling the clocks and (4) there being nothing in the agreement that even after the expiry of the period of the agreement the assessee was entitled to make…

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