Law: Income Tax Act, 1961

Section: 256

Income-tax---Capital or revenue expenditure ---Assessee engaged in manaufacture of oil engines---Entering into collaboration agreement with foreign company for supply of technical assistance for products to be manufactured and assembled and supply of drawing, specifications, etc., for foreign companys engines--¬Technical know-how obtained supplemental to existing business---Payment to be measured annually in terms of gross sales--- Though agreement was for period of 10 years, it was liable to be terminated by either party at one years notice---On termination of agreement assessee to return all plans, designs, drawings, patent rights etc. to foreign company---Secrecy clause id agreement which precluded assessee from divulging any information supplied to it to any third party---No enduring benefit obtained by assessee under agreement--¬Amount paid under agreement to foreign company for supply of technical assistance, etc., is revenue expenditure. `The assessee-company was engaged in the manufacture and sale of oil engines, etc. It entered into a collaboration agreement with a foreign company and, in pursuance of the agreement, paid to the foreign company a sum of Rs.20,79,513 as consideration for supply of (i) technical assistance for products to be manufactured and assembly thereof and (ii) supply of drawings, specifications for procedures and operating and maintenance manuals for the foreign companys engines. The assessee claimed the amount paid as a deduction in computing its income. The Income Tax Officer took the view that one-half of the amount paid was in the nature of royalty and hence partook of the character of capital expenditure. With regard to the remaining half, the Income Tax Officer took the view that 50 percent thereof related to technical assistance for the products to be manufactured and assembled and the remaining 50 per cent related to supply of manaufacturing drawings, specifications, etc., and the consideration relatable to technical assistance received from day to day in respect of the products manufactured was revenue expenditure and the remaining 50 percent was capital expenditure. The Appellate Assistant Commissioner concurred with the…

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