Law:

Section:

Section 37(1) of the income-tax act, 1961-Capital or revenue expenditure-Assessee-company entered into agreement with foreign company under which latter agreed to supply technical know-how and training facilities to assessee for manufacture of certain products in India and also help it in construction of its works and development of fresh products-Assessee paid to foreign company royalty at 5 per cent of its net annual sales and claimed deduction thereof-Whether part of royalty payment could be disallowed as being capital in nature-Held, on facts, yes Facts The assessee-company entered into an exclusive technical aid agreement with a foreign company whereby the latter agreed to render technical aid and to supply plant and machinery on the basis that equity shares in the assessee-company of the value of Rs. 3,00,000 were to be allotted and issued to the foreign company. The foreign company also agreed (i) to train personnels selected by the assessee company ; (ii) to assist the assessee in the construction and equipment of its works and advise it on processes and manufactures ; (iii) to enable the assessee to manufacture any additional products where it considered that the assessee could do so economically ; (iv) to disclose to the assessee all technical information and formulae within its competence relating to the manufacture of the products in India ; and (v) to grant the necessary licences and the use of all the appropriate brand names, trademarks, etc., of the foreign company to the assessee for a period coterminous with the main agreement, which was initially for 10 years and renewable thereafter. The agreement provided for payment, in consideration of the rights granted by the foreign company, of a fee by way of royalty of 5 per cent of the actual net sales. The assessee claimed deduction of the royalty paid under the agreement. The ITO disallowed 50 per cent of the royalty holding that it pertained to the supply of technical know-how which gave the assessee a benefit of an enduring nature. On appeal, the case came up before the two AACs in respect of separate assessment years. The first AAC allowed the entire royalty for the years referred to him, while…

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