Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2002-03 - Assessee-company engaged in manufacturing and sale of heat exchangers (radiators) entered into a technical collaboration agreement with an American company for purpose of upgrading and manufacturing of radiators with technology owned by American company - Under said agreement, assessee was permitted to be a mere user of technology regarding manufacturing of upgraded radiators for which it was obliged to make a lump sum payment to American company - Under said agreement, assessee was also obliged to pay a fixed percentage of royalty on domestic and export sales to American company for a period of 7 years for using technology and for availing of technical services - Assessee claimed amount of royalty paid as deductible expenditure, treating same as revenue/business expenditure - Assessing Officer disallowed same holding aforesaid expenditure to be of capital nature - Whether since payment of royalty was not because of 'transfer' of technology, but for providing 'technical services', and it would decrease or increase every year depending upon decrease or increase in sales, it should have been treated as revenue expenditure - Held, yes FACTS The assessee-company, engaged in the manufacturing and sale of heat exchangers (radiators), entered into a technical collaboration agreement with an American company for the purpose of upgrading and manufacturing of radiators with the technology of the American company. Under the said agreement, the assessee was permitted to be a mere user of the technology regarding the manufacturing of upgraded radiators for which it was obliged to make a lump sum payment to the American company. Under the same agreement, the assessee was also obliged to pay a fixed percentage of royalty on domestic and export sales to the American company for a period of 7 years for using the technology and for availing of technical services. The assessee claimed the amount of royalty paid as deductible expenditure, treating the same as revenue/business expenditure. The Assessing Officer disallowed the same holding that the aforesaid expenditure was…

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