By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi
Chartered Accountants
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Section 37(1) — Nature of payment made for acquiring technical know-how is capital or revenue expenditure depends upon whether payment is made to acquire any proprietary rights in technical know-how or right to use same for the business for limited period of time.
Section 92 — Transfer Pricing Officer (TPO) is not concerned, nor is he competent to decide as to whether payment for technical rights is capital or revenue — Tribunal decision regarding nature of payment for technical rights by assessee could not be deferred at the request of Department till TPO determines arm’s-length price. Such course was not contemplated by law.
Section 37(1) — Expenditure incurred on advertisement is undisputedly business expenditure —Assurance given by assessee to give away car at its own cost to winner of advertisement scheme launched by paint company might be beneficial to the assessee in the long run and allowable as business expenditure.
Facts: I
The assessee paid Rs.29.40 crore being lump-sum fee for technical know-how and Rs.18.55 crore being royalty to Honda Motor Company Ltd. (HMCL) under technical collaboration agreement. Under the said agreement the assessee acquired right to use technical information provided by HMCL and ownership rights continued to remain with HMCL. As the assessee got only limited right to use and exploit know-how and did not acquire any intellectual property, he claimed the expenditure as revenue. However AO did not accept the assessee’s contention to treat the expenditure as revenue. He disallowed the same and treated the same as capital expenditure on the ground that know-how was crucial for setting up of the assessee’s business and not towards running an existing business.
Facts: II
Reference was made by the Revenue to TPO, to determine arm’s-length price of the amount paid for technical know-how and royalty. The Revenue requested ITAT that it should not give any finding on nature of the above payment till TPO determines its arm’s-length price.
Facts: III
Nerolac Paint launched a sales promotion scheme where the winner would get Honda City car. The assessee-company agreed to bear the cost of the car.
The Revenue disallowed the above advertisement expenditure in the books of the assessee as they were of the opinion that Nerolac Paint stood to benefit from the campaign and not the assessee.
Held: I
In order to ascertain whether payment made for acquiring technical know-how is capital or revenue expenditure, test that is to be applied in such case is whether the assessee got any proprietary/ownership rights or he merely got right to use the same for his business, irrespective of whether expenditure was incurred at the time of initiation of business or at any point of time subsequent thereto.
After noticing all the terms of technical know-how agreement, the ITAT held that on payment for technical know-how the assessee did not become owner of the same. HMCL continued to retain ownership rights in the technical know-how. HMCL merely granted licence to the assessee for manufacture of cars. The manufacture of the cars was the business for which the company was established. Payment made to HMCL was not in connection with setting up of plant but to enable the assessee to manufacture Honda cars in India which formed part of its stock in trade.
Therefore the payment of lump-sum fees for technical know-how and the royalty were treated as part of revenue expenditure.
Held: II
The function of TPO under the provisions of section 92 to 92C is to determine arm’s-length price and he is not concerned with deciding whether it is capital or revenue, nor is he competent in law to decide such question.
The ITAT held that it is first necessary to determine nature of payment and if it is held to be capital then it is not allowable as deduction and determination of arm’s-length price by TPO may not be necessary. However if it held to be revenue, then while giving effect to the order, the AO may, if so advised, refer the question of determination of arm’s-length price to TPO. But decision of tribunal regarding nature of payment cannot be deferred till determination of arm’s-length price by TPO. Such path was not contemplated by law.
Therefore, the request made by the Revenue was rejected.
Held: III
Any expenditure which is not capital or personal nature is allowable as deduction provided it is incurred wholly and exclusively for the purpose of the business according to section 37(1). Expenditure incurred wholly and exclusively for the purpose of the business does not cease to be so merely because it also benefits some other person.
As long as the expenditure benefits the assessee it should be allowed as deduction. Assurance of giving away Honda car at its own cost to the winner of Nerolac Paint promotion scheme may be beneficial to the assessee’s business in long run and is business expenditure. Hence, the expenditure incurred on advertisement should be allowed.
