Whether Sec 35AB gets attracted where sum incurred towards procurement of technical know-how is revenue in nature - NO: HC

THE issue before the court is - Whether Sec 35AB gets attracted where sum incurred towards procurement of technical know-how is revenue in nature. NO is the answer.

Facts of the case

The assessee company is engaged in the production of engineering related products. The assessee had entered into an agreement with an English company based in UK under name and style "Wall Colmony Limited" (WCL) for the procurement of a technology called "Colmonoy Sweat-on-Paste". In consideration of the transfer of technical know how, the assessee agreed to pay WCL a sum of 50,000 pounds in three equal instalments. For the A.Ys 1992-93 and 1993-94, the assessee claimed 100% deduction on amount incurred towards procuring technical knowhow as revenue expenditure falling u/s 37. The AO rejected the said claim of the assessee and brought the said expenditure u/s 35AB. On appeal, the CIT(A) reversed the order of AO. On further appeal, the Tribunal upheld the order of CIT(A). Being dissatisfied, the Revenue filed appeals before this Court, wherein, the matter was remanded back to the Tribunal to consider the issue afresh. The Tribunal thereafter, in the light of the directions issued by this Court considered the matters afresh and allowed the appeals filed by Revenue.

Having heard the parties, the High Court held that,

++ the clauses of agreement make it clear that the assessee had only the right to use the know-how procured from WCL and there was no absolute acquisition of the technical know-how by the assessee. The technical know-how supplied by the WCL to the assesseen is an adequate knowledge of the technical know-how, practiced by the WCL at the date of the agreement for production of the produce with certain conditions, which establishes that the control was with the WCL. The consideration paid is for imparting the knowledge of 'know-how' to the assessee's personnel. In clause-9 "manufacture", it is stipulated that subject to performance by the assessee of his obligations under the agreement, WCL shall grant licence to the assessee to manufacture the product during the life of the agreement. And during the life of the agreement, WCL shall not grant such licence in India to any other person, Company, whether body corporate or not, partnership firm, Corporations without obtaining prior consent from WCL. The "termination" clause stipulates that either party shall have right to give notice of termination if the other party has committed a serious breach of its obligations under this agreement and in the "exclusion" clause, it is specified that no rights or licences are granted by WCL under or by virtue of the agreement except those which are specifically set out therein, and no such rights or licences shall continue to have effect after the termination of the agreement except so far as specific provision is made for such continuing effect. A reading of these clauses makes it clear that the no absolute acquisition of the technical know-how was made by the assessee. In our view, the period of agreement itself is not the determinative test to arrive at the nature of expenditure whether revenue or capital. Considering the over all clauses of the agreement, this court is of the opinion that amount expended by the assessee for procurement of technical know-how is in the nature of revenue and not capital;

++ section 35AB is applicable if the expenses incurred are held to be capital in nature. As it is noticed, the terms and conditions of the agreement entered into between the parties demonstrates that the amount expended are revenue in nature and does fall u/s 37. Another aspect of the matter is that to attract the provisions of Section 35AB, the three main factors namely, payment of lumpsum consideration, acquiring any know how and for the purpose of business, have to be compulsorily satisfied. As noticed, there is neither absolute acquisition of the technical know how by the assessee, nor any enduring benefit has accrued to the assessee. No ownership or domain right was enjoyed by the assessee. In such circumstances, this court is of the view that the amount expended by the assessee towards procurement of 'know-how' is revenue in nature and Section 35AB is not attracted. The Budget speech of the Finance Minister, memo explaining the provisions in Finance Bill and the CBDT Circular dated 12.6.1985 fortifies that Section 35AB is an enabling provision inserted w.e.f 01.04.1986 to provide further encouragement for indigenous scientific research and not to limit or curtail the Powers of Section 37, which is already existing. The reading of Section 37 makes it more clear that any expenditure not being expenditure of the capital nature described in Sections 30 to 36 shall be allowed in computing the income chargeable under the heads "profits and gains in the business or profession". It means that Section 35AB is applicable only if the expenditure is in the nature of capital expenditure. Though the CIT(A) has held that the expenditure incurred by the assessee is revenue in nature, falling u/s 37, the Tribunal failed to appreciate the same in the right perspective and has come to a conclusion that Section 35AB being a specific Provision for technical know, general Provision of Section 37 is not applicable, which is not sustainable.