Business expenditure – Section 37(1) – A. Y. 2000-01 to 2002-03 – Where assessee, engaged in manufacturing and selling of motorcycles, made payment of royalty to a foreign company for merely acquiring right to use technical know how whereas ownership and intellectual property rights in know how remained with foreign company, payment in question was to be allowed as business expenditure –

The assessee was a joint venture between the Hero Group and Honda, Japan, for manufacture and sale of motorcycle using technology licensed by Honda. The assessee and Honda thereupon entered into an agreement called ‘licence and technical assistance agreement’ in terms of which assessee paid royalty to the Honda. The assessee claimed deduction of said payment u/s. 37(1). The Assessing Officer rejected assessee’s claim holding that it was in the nature of capital expenditure. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) In the facts of the present case, one has to consider whether the expenditure incurred on acquisition of right to technical information and know-how would satisfy the enduring benefit test in the capital field, or the right acquired had enabled the assessee’s trading and business apparatus, in practical and commercial sense.

ii) Technical information and know-how are intangible and have unique characteristics as distinct from tangible assets. These are acquired by a person over a period of time or acquired from a third person, who may transfer ownership or grant a licence in the form of right to use, i.e., grant limited rights, while retaining ownership rights. In the latter case technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer absolute or complete ownership.

iii) In the instant case, from perusal of terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical know how and information. The ownership and the intellectual property rights in the know how or technical information were never transferred or became an asset of the assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to assessee for day to day running and operation, i.e., to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24-1-1984. After expiry of the first agreement, the second agreement dated 2-6-1995, ensured continuity in manufacture, development, production and sale.

iv) In view of the aforesaid, it is held that the Tribunal was right in holding that the payment made to ‘Honda’ Japan under the ‘know-how’ agreement is revenue expense and not partly or wholly capital expense.”