Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee-company entered into an agreement with a British company T, to obtain know-how for manufacture of new machines in its existing business - Assessee could use know-how obtained up to termination of agreement, which was initially for ten years and thereafter might be extended/terminated by parties subject to condition that on certain contingencies it could be terminated forthwith - T remained owner of all documents and materials supplied on account of know-how - Assessee was required to make an initial fees payment to T and a periodic payment on account of royalty - Whether initial fees payment made by assessee to T, as per agreement, could be allowed as revenue expenditure - Held, yes Facts The assessee-company carried on the business of manufacture of certain types of machines. It entered into an agreement with a British company T with the object to obtain assistance and know-how for manufacturing power press machines economically and efficiently upon payment of certain amount of fees. The assessee was entitled to use the know-how for manufacture of the machines up to the termination of the agreement. T remained the owner of all documents and materials supplied on account of know-how. The agreement was for a period of ten years and thereafter might be extended/terminated by the parties subject to the condition that on certain contingencies the agreement could be terminated forthwith. Apart from the payment of the initial fees, the assessee was also required to pay a periodic payment on account of royalty. During the relevant accounting period, the assessee in terms of the aforesaid agreement made the initial payment to T. The Tribunal found that the assessee did not acquire a new line of business but it took up the manufacture of new machines in its existing business and, therefore, the impugned payment constituted a revenue expenditure. On reference : Held Under the aforesaid agreement there was no out and out transfer of the foreign know-how to the assessee and the know-how supplied by T remained the property of T for all times to come. The assessee had not paid the…

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