Whether once Sec 35AB comes into play, then Sec 37 has no application for claiming deduction of expenditure incurred on transfer of technical knowhow - YES: Supreme Court

THE issues before the Bench are - Whether once Sec 35AB comes into play, then Sec 37 has no application for claiming deduction of expenditure incurred on transfer of technical knowhow and Whether the word 'knowhow' means any industrial information. And the verdict goes in favour of Revenue.

Facts of the case

Assessee company manufactures equipments which were used for mining. It entered into an Agreement with an American

company under which the American company was required to transfer technical know-how to the assessee for a consideration of USD 2,25,000/- to be paid in three instalments. The first instalment in convertible Indian currency amounting to Rs.17,49,889/- was paid. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company. The question which arose for determination was whether the amount of Rs.17,49,889/- could be claimed by the assessee as a deduction u/s 37. The claim of the assessee u/s 37 was rejected by the Department. However, the Department allowed the expenditure to be amortized u/s 35AB. Asessee contended that Section 35AB was not applicable to this case.

On appeal, the Supreme Court held that,

++ section 35AB(1) clearly states that where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, then one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. Explanation to the said section says that the word 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine;

++ if one carefully analyzes Section 35AB, it is clear that prior to 1st April, 1986, there was some doubt as to whether such expenditure could fall u/s 37. To remove that doubt, Section 35AB stood inserted. In sub-section (1) of Section 35AB, there is a concept of amortization of expenditure. Section 35AB says that the expenditure should have been incurred for the purposes of the business of the assessee. In the present case, the Technical Assistance Agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once Section 35AB comes into play, then Section 37 has no application.