Supreme Court of India
HONDA SIEL CARS INDIA LTD.versusCOMMISSIONER OF INCOME TAX, GHAZIABAD
- Citation
- 2017 INSC 477
- Decided
- 9 June 2017
- Disposal
- Dismissed
- Bench
- A K SIKRI
Holding
The technical fee and royalty paid for the technical collaboration are capital expenditures because they were incurred to set up a new manufacturing unit and confer an enduring benefit.
Summary
The Supreme Court examined whether the lump‑sum technical fee and royalty paid by Honda Siel Cars India Ltd. under a Technical Collaboration Agreement with Honda Motors Company Ltd., Japan, should be treated as capital or revenue expenditure under the Income‑Tax Act. The joint venture was created to set up a new automobile manufacturing plant, and the agreement provided not only technical know‑how but also on‑site assistance, plant installation and a licence to use the foreign company's intellectual property. The Court applied the “enduring nature test” and considered that the payment was made to acquire an asset that enabled the establishment of a new business, not merely to improve an existing one. Consequently, the fee and royalty were held to be capital expenditure. The High Court’s decision to treat the payments as capital was affirmed and the appeals were dismissed with costs.
Issues considered
- Whether the technical fee and royalty paid under the Technical Collaboration Agreement constitute capital expenditure or revenue expenditure under the Income Tax Act.
- Whether the purpose of the technical know‑how (setting up a new plant versus improving an existing business) determines its tax classification.
- How the enduring nature test applies to intangible technical know‑how in the context of income‑tax law.
Legislation cited
- Income Tax Act, 1961s. 148
Subjects
technical feecapital expenditurerevenue expendituretechnical know‑howjoint ventureincome taxenduring nature testtechnical collaboration agreement
Judgment
[2017] 6 S.C.R. I 004
A HONDA SIEL CARS INDIA LTD.
v.
COMMISSIONER OF INCOME TAX, GHAZIABAD
(Civil Appeal Nos. 4918 of 2017)
B JUNE 09, 2017
[A.K. SIKRI AND ASHOK BHUSHAN, JJ.]
Tax/Taxation:
Technical fee with reference to acquisition of technical
c information - If is a capital expenditure or revenue expenditure -
HMCL, Japan entered into joint venture with SIEL Ltd and
incorporated assessee-company. as a joint venture company -
Thereafter, HMCL, Japan entered into Technical Collaboration
Agreement with assessee-company to provide it different kinds of
technical know-how and technical information on payment of
D
technical fee on yearly basis - Whether technical fee payable by
assessee on yearly basis is to be treated as capital expenditure or
revenue expenditure - Held: If the technical know-how obtained
under agreement for which technical fee/royalty is paid is for a
limited period and only right lo use the technical know-how is there
E during the agreement with no right of acquisition, coupled with
fact that technical know-how is utilised for improvising existing
business, expenditure would be treated as revenue expenditure,
however, position may be different if technical know-how is for
purpose of setting up a new business - In instant case, the very
F purpose of agreement between the two companies was to set up a
joint venture company with aim and objective to establish a unit for
manufacture of automobiles and part thereof - Technical
collaboration with assessee-company included not only tram.fer of
technical information, but, complete assistance, actual, factual and
on spot, for establishment of plant, machinery etc. so as to bring in
G existence manufacturing unit for products - A new business was set
up with technical know-how provided by HMCL, Japan - Technical
collaboration agreement was framed in a manner so as to give a
colour of license for limited period but close scrutin.v of the same
shows it to be, otherwise - Therefore, expenditure incurred was of
capital nature.
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1005
INCOME TAX, GHAZIABAD
Distinction between capital and revenue expenditure with A
reference to acquisition of technical information - Held: Primary
test adopted to differentiate between capital and revenue
expenditure is the enduring nature test - Where the expenditure
incurred gives enduring benefit, it will be treated as capital
expenditure - In contradiction to the cases where expenditure of B
concurrent and reoccurring nature is incurred and later would
belong to revenue field - However, in case of technical information
and know-how, having regard to their unique characteristics, the
questions that need to be posed for determining the nature of such
expenditure are of different nature - In case where there is a transfer
of ownership in the intellectual property rights or in the licenses, it c
would be a capital expenditure - Whereas, when no such rights are
transferred but the arrangement facilitates grant of licence to use
those rights for a limited purpose or limited period, the royalty paid
for use of such information or know how would be in the nature of
revenue expenditure as no enduring benefits is acquired - But, there
D
is no single test or principle or rule of thumb which is paramount, it
is a question of law which must be answered in the light of all the
circumstances which are reasonable to take into account - What is
'Capital expenditure' and what is 'Revenue' are not eternal varieties
but must need to be flexible so as to respond to the changing economic
realities of business. E
Dismissing the appeals, the Court
HELD: 1. Distinction between capital and revenue
expenditure with reference to acquisition of technical information ·
and know-how has been spelled out by this Court as well as High
Courts in series of cases. Primary test which is adopted to F
differentiate between capital and revenue expenditure remains
the same, namely, the enduring nature test. It means where the
expenditure is incurred which gives enduring benefit, it will be
treated as capital expenditure. In contradistinction to the cases
where expenditure of concurrent and reoccurring nature is G
incurred and the later would belong to revenue field. Technical
information and know-how. are intangible. They have different ., ·
and distinct character from tangible assets. When the
expenditu.re is incurred to acquire a tangible asset, determination
as to whether the said acquisition of tangible asset is of capital
H
1006 SUPREME COURT REPORTS [2017] 6 S.C.R.
A nature or the expenditure is of revenue nature, may not pose a
problem. However, in case of technical information and know-
how, having regard to their unique characteristic, the questions
that need to be posed for determining the nature of such an
expenditure are also of different nature. In case where there is a
transfer of ownership in the intellectual property rights or in the
B
licences, it would clearly be a capital expenditure. However, when
no such rights are transferred but the arrangement facilitates
grant oflicence to use those rights for a limited purpose or limited
period, the Courts have held that in such a situation, the royalty
paid for use of such technical information or know-how would be
c in the nature of revenue expenditure as no enduring benefits is
acquired thereby. [Para 18) (1021-E-H; 1022-A-B]
2. The case of Alembic Chemical Works Co. Ltd. v.
Commissioner of Income Tax, Gujarat is significant in two
respects: (i) If the technical know-how obtained under the
D agreement for which technical fee/royalty is paid is for a limited
period and only right to use the technical know-how is there
during the agreement with no right of acquisition, coupled with
the fact that the said technical know-how is utilised for improvising
the existing business, the expenditure would be treated as
revenue expenditure. This case, thus, gives an indication that if
E such a technical know-bow is for the purpose of setting up a new
business; the position may be different. (ii) Another aspect which
needs to be noted is that while rendering the aforesaid decision,
this Court observed that there is no single test or principle or
rule of thumb which is paramount. It is ultimately a question of
F law, but a question which must be answered in the light of all the
circumstances which are reasonable to take into account, and
the weight which must be given to a particular circumstance in a
particular case, must depend on common sense rather than on
strict application of auy single legal principle. It was also observed
that solution to the problem is not to be found by any rigid test or
G description. It bas to be derived from many aspects of the whole
set of circumstances, some of which may point iu one direction,
some in the other. One consideration may point so clearly that it
dominates other and vaguer indications in the contrary direction.
It is a common sense appreciation of all guiding features which
H
•
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1007
INCOME TAX, GHAZIABAD
must provide the ultimate answer. This Court also said that the A
idea of 'once for all' payment and 'enduring benefit' are not to be
treated as something akin to statutory conditions; nor are the
notions of "Capital" or "Revenue" a judicial fetish. What is
'Capital Expenditure' and what is 'Revenue' are not eternal
varieties but must need be flexible so as to respond to the changing
B
economic realities of business. The expression "asset or
advantage of an enduring nature" was evolved to emphasize the
element of a sufficient degree of durability, appropriate to the
context. [Para 21] (1024-C-H; 1025-A-C]
3. When the aforesaid parameters are applied to the facts
of the present case, the conclusion drawn by the High Court that c
expenditure incurred was of capital nature, appears to be
unblemished. Admittedly, there was no existing business and,
thus, question of improvising the existing technical know-how
by borrowing the technical know-how of the HMCL, Japan did
not arise. The assessee was not in existence at all and it was the D
result of joint venture of·HMCL, Japan and Mis. HSCIL, India.
The very purpose of Agreement between the two companies was
to set up a joint venture company with aim and objective to
establish a unit for manufacture of automobiles and part thereof.
As a result of this agreement, assessee company was incorporated
which entered into Technical Collaboration Agreement (TCA) in E
question. This technical collaboration included not only transfer
of technical information, but, complete assistance, actual, factual
and on the spot, for establishment of plant, machinery etc. so as
to bring in existence manufacturing unit for the products. Thus,
a new business was set up with the technical know-how provided F
by HMCL, Japan and lumps um royalty, though in five instalments,
was paid therefor. [Para 22] [1025-C-F]
4. No doubt, this technical know-how is for the limited
period i.e. for the tenure of the agreement. However, it is
important to note that in case of termination of the Agreement, G
joint venture itself would come to an end and there may not be
any further continuation of manufacture of product with technical
know-how of foreign collaborator. The High Court has, thus,
rightly observed that virtually life of manufacture of product in
the plant and machinery, established with assistance of foreign
H
1008 SUPREME COURT REPORTS [2017] 6 S.C.R.
A company, is co-extensive with the agreement. The Agreement is
framed in a manner so as to given a colour of licence for a limited
period having no enduring nature but when a close scrutiny into
the said Agreement is undertaken, it shows otherwise. It is
significant to note in this behalf that the Agreement provides
that in the event of expiration or otherwise termination,
B
whatsoever, licensee, i.e., joint venture company/ Assessee shall
discontinue manufacture, sale and other disposition of products,
parts and residuary products. All these things then shall be at
the option of licensor. In other words, licensee in such contingency
would hand over unsold product and parts to licensor for sale by
c him. Clauses 19 and 21, make the Agreement in question, i.e.,
establishment of plant, machinery and manufacture of product
with the help of technical know-how, co-extensive, in continuance
of Agreement. The Agreement also has a clause of renewal which,
in totality of terms and conditions, will make the unit continue so
D long as manufacture of product in plant and machinery, established
with aid and assistance of foreign company, will continue. Since,
it is found that the Agreement in question was crucial for setting
up of the plant project in question for manufacturing of the goods,
the expenditure in the form of royalty paid would be in the nature
of capital expenditure and not revenue expenditure. [Para 23)
E [1025-G-H; 1026-A-D]
Mis. Jonas Woodhead and Sons (India) v. Commissioner
of Income Tax 1979 (117) ITR 55; CIT v. Hero Honda
Motors (2015) 327 ITR 48l(Delhi); Shriram
Refrigeration Industries v. Commissioner of Income Tax
F 1981 (127) ITR 746; Triveni Engineering Works Ltd. v.
CIT 1981 (136) ITR 340 - referred to.
Commissioner of Income Tax, Bombay City I v. Ciba
India Limited (1968) 69 ITR 692 (SC); Alembic
Chemical Works Co. Ltd. v. Commissioner of Income
G Tax, Gujarat (1989) 177 ITR 377 - relied on.
Case Law Reference
1979 (117) ITR 55 referred to Para 10
(2015) 327 ITR 481(Delhi) referred to Para 11
H 1981 (127) ITR 746 referred to Para 15
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1009
INCOME TAX, GHAZIABAD
1981 (136) ITR 340 referred to Para 15 A
(1968) 69 ITR 692 (SC) relied on Para 18
(1989) 177 ITR 377 relied on Para 19
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4918
of 2017. B
From the Order dated 21.12.2016 of the High Court of Judicature
at Allahabad in ITA No. 503 of2008
WITH
C. Nos. 4922, 4921, 4920 and 4919 of2017.
c
Parag P. Tripathi, Sr. Advocate, Deepak Chopra, Ms. Manasvini
Bajpai, Amit Shrivastava, Ankul Goyal and R. Chandrachud, Ad vs. for
the appellant.
A. N. S. Nadkarni,ASG, Ms. Gargi Khanna, Ms. Nisha Bagchi,
Santosh Rebello, Ms. Nivedita N., Ms. Sneha Prabhu. and Mrs. Anil D
Katiyar, Advs. for the respondents.
The Judgment of the Court was delivered by
A. K. SIKRI, J, 1. Assessee in all these appeals is Honda SIEL
Cars Ltd. (hereinafter referred to as the "Assessee"). Question of law
that is raised is also identical. Five appeals are filed only because of the E
reason that same issue has occurred in different Assessment Years, i.e.,
for the years 1999-2000, 2001-2002, 2002-2003, 2003-2004 and 2005-
2006.
2. M/s. Honda Motors Company Limited, Japan (hereinafter
referred to as "HMCL, Japan") had entered into a joint venture dated F
September 12, 1995 with Mis. SEIL Ltd., a company incorporated under
the Indian Companies Act. After getting necessary approval from the
Government oflndia, a joint venture company in the name of the assessee
was incorporated. After incorporation of the assessee as a joint venture,
An agreement dated May 21, 1996 between HMCL, Japan and the G
assessee was entered into, known as 'Technical Collaboration
Agreement' (for short, 'TCA'). As per the TCA, HMCL, Japan which
is engaged in the business of development, manufacture and sale of
automobiles and their parts agreed to give 'license' and 'technical
assistance' to the assessee. The TCA also stipulated different kinds of
H
1010 SUPREME COURT REPORTS [2017) 6 S.C.R.
A · technical know-how and technical infonnation which were to be provided
by HMCL, Japan (as a licensor) to the assessee (as a licensee). For
providing the aforesaid facilities, it was agreed that a consideration/lump
sum fee of30.5 million US Dollar would be paid by the assessee to the
HMCL, Japan in five continuous equal installments and payment thereof
was to commence from third year after commencement of commercial
B
production. Besides, assessee was also liable to pay royalty of 4%, both
on internal and exports, subject to taxes.
3. The dispute which has arisen is as to whether the said technical
fee of30.5 million US Dollar payable in five equal installments on yearly
basis is to be treated as revenue expenditure or capital expenditure.
c
4. The assessee had filed its first return for the Assessment Year
1999-2000 (in which year, first installment was paid) showing the said
expenditure as revenue expenditure. Though, in the normal assessment,
the expenditure was allowed as such, thereafter a notice was issued
under Section 148 of the Income Tax Act (hereinafter referred to as the
D 'Act') stating that said expenditure was capital in nature and, therefore,
instalment towards royalty paid in the sum of Rs. 79602000/-, by the
assessee to HMCL, Japan in that year had escaped assessment.
Ultimately, orders were passed treating the same as capital expenditure.
In the subsequent years, the Assessing Officer again treated the royalty
E paid as capital expenditure. The assessee filed appeals before the CIT(A)
which were dismissed. However, further appeals before the Income
Tax Appellate Tribunal (ITAT) were allowed and the !TAT held that the
expenditure is to be treated as the revenue. expenditure. Against the
order of the ITAT, the Department went in appeal before the High Court
of Allahabad which has allowed these appeals thereby reversing the
F order of the ITAT and agreeing with the view taken by the Assessing
Officer the payments of royalty expenditure in-question are to be treated
as capital expenditure. In the present appeals challenging the impugned
judgment dated December 21, 2016 passed by the High Court is
challenged.
G 5. With the aforesaid preliminary remarks about the nature of
controversy, we now proceed to take note of the facts in some detail.
6. As mentioned above, joint venture company, namely, the
assessee was incorporated by HMCL, Japan and SEIL, India.
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF IOI I
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
"8. Total share capital ofHSCIL/Assessee was 36 crores shares A
out of which 35,63,99,995 s~ares· were held by HMCL, Japan
while remaining 3600005 shares held by Mis. Seil India. In other
words, joint venture was almost owned by HMCL, Japan, having
around 99% shares and Seil India (locaUndian company) owned
only I% shares.
B
9. Thereafter, Mis. HMCL, Japan who held about 99% share of
joint venture company/subsidiary company, i.e., Assessee, entered
into an agreement on 21.5.1996 with HSCIL/Assessee which is
called as "Technical Collaboration Agreement". Agreement
stipulated and termed HMCL, Japa as "licensor" and HSCIL/
Assessee as licensee." C
14. In view of aforesaid licence, a onsideration/Iump sum fee
agreed between parties was 30.5 mi lion U.S Dollar, payable in
five continuous equtl installments y licensee to licensor and
payment thereof ""!as to commence frQ,m third year after
commencement of commercial production. Besides, licensee was D
also liable to pay royalty of 4%, both on internal and exports,
subject to taxes. Article 14 of agreement which talks of lump sum
fee and royalty reads as under:
"14.1 In consideration of the right and licence granted to licensee
under Article 2 hereof and of the furnishing of the Technical E
·Information under Article 4.2 hereof, licensee shall pay to
LICENSOR the following fees:
1. Lumpsum fee:
The amount o.f lumpsum fee payable by the licensee to the
F
LICENSOR shall be USS 30.5 million. This fee shall be payable
in 5 continuous equal annual installments, the amount of each of
which installments shall be six million one hundred thousand US
dollars (USS6, I 00,000), beginning from the 3rd year after the
commencement of Commercial Production. The lump sum fees
shall be payable by licensee in currency of US dollars by bank G
transfer remittance to the bank account designated by LICENSOR,
based on final government approval.
2. Royalty:
H
1012 SUPREME COURT REPORTS [2017] 6 S.C.R.
A The rate of royalty payable by the licensee to the LICENSOR
shall be Four(4) percent; both on internal sales and exports, subject
to taxes.
The royalty shall calculated on the basis of the ex-factory sale
price of the product exclusive of excise duties, minus the cost of
B standard bought out components and the landed cost of imported
components irrespective of the source of procurement, including
ocean-freight, insurance, custom duties, and other similar charges.
The royalty shall be payable for a period of seven (7) years from
the date of commencement of Commercial Production.
c List of standard bought out items is as per exhibit II.
14.2 The total amount of royalty specified in the counter signed
report and invoice under Article 13 .1 hereof shall be payable by
licensee in the currency of US Dollars by bank transfer remittance
to the bank account designated by LICENSOR, so that such
D remittance shall reach LICENSOR not later than the 10th day of
month next following the month in which such countersigned report
and invoice reach licensee. In the event the currency in which the
amount of running royalty is calculated differs from the currency
in which payment of the running royalty is to be made, then
E conversion shall be made in accordance with the final quotation
of the telegraphic transfer selling rate of exchange prevailing at
the time of remittance by the Delhi office of any international
bank, mutually agreed separately.
14.3 All payments and remittances by licensee will be subject to
Tax Deduction at Source (TDS)/levy of CESS (under Research
F
and Development Cess Act, 1986). Receipt by LICENSOR of
any payment tendered hereunder shall not constitute
LICENSOR'S acceptance of any account, schedule or figure on
which such payment is based. All payments made or to be made
by licensee to LICENSOR hereunder shall not be refundable to
G licensee, in any facts or circumstances whatsoever. If licensee
fails to make any payment here under on the due date, licensee
agrees to pay a late payment fee in the amount equivalent to
LIBOR +TWO (X) percent per annum in the payment currency,
calculated on the basis of a 365 day year, subject to Government
oflndia/RBI approvals/guidelines prevailing at that time.
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1013
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
I
14.4 It is understood and confirmed that it should be separately A
agreed to by the parties hereof in the "Memorandum on Exchange
of Technicians" referred 'to in Article 4 hereof the any and all
fees, costs, expenses and other consideration for and in connection
with the technical guidance provided by LICENSOR by dispatching
to licensee technical experts (s) of LICENSOR and the technical
8
training of licensee's engineers) at a factory or factories of
LICENSOR or any of its designers, including but not limited to
technical guidance fees, per <lien allowances, traveling expenses,
staying or living expenses and other incidental expenses, shall be
payable by licensee to LICENSOR in accordance with such"
Memorandum on Exchange of Technicians", separate from and C
in addition to the payments under this Article 14, and that no amount
of any such fees, costs, expenses or other consideration is included
in the payments under this Article 14."
(emphasis added)
15. Article 19 provides term/tenure of agreement and reads as D
under:
"Article 19. TERMS OF AGREEMENT:
This Agreement shall become effective on the Effective Date,
and shall continues in full force and effect for period often( I 0)
years from the date of agreement or seven (7) years from the E
date of commencement of commercial production, and shall
thereafter be renewed subject to the prevailing laws in India;
provided, however, that this Agreement may be terminated by
either party at the end of the initial period as mentioned above
or at the end of any subsequent renewed period by written
F
notice to that effect given to the other party at least three (3)
months prior to the expiration of initial period or any subsequent
renewed period. Notwithstanding the foregoing, in the event
of termination of the Joint Venture Agreement, this Agreement
shall accordingly terminate forthwith."
(emphasis added) G
"16. Agreement can be terminated by either of the parties by
giving sixty days' notice, in case of default in performance of
obligations under the agreement, as contemplated in Clause 20.1.
H
1014 SUPREME COURT REPORTS [2017] 6 S.C.R.
A Consequence of termination. of agreement is provided in Article
21 and reads as under:
"21.1 In the event of the expiration or any other termination of
this Agreement for any reason whatsoever, (except where the
parties have taken steps for the renewal of the agreement) and ·
B unless otherwise agreed upon by the parties hereto,
l. licensee shall, within 90 days, discontinue (I) the manufacture,
sale and other disposition of the Products and the Parts, and (ii)
the use of the Intellectual Property Rights, Technical Information
licensed or furnished by LICENSOR under this Agreement.
c 2. licensee shall promptly return to LICENSOR all particular
documents and tangible property supplied by LICENSOR in
connection with this Agreement and belonging to LICENSOR and
shall keep all Information received by licensee hereunder secret
and confidential in accordance with Article 7 hereof;
D 3. licensee shall not be entitled to demand from LICENSOR, for
the reason of the expiration or termination of this Agreement or
the failure to renew or extend it, any damages, reimbursements ·
or other payments on account of the current or prospective profits
on licensee's sale or anticipated sale of the Products and the Parts,
E or on account of the establishment, development or maintenance
of the goodwill or other business oflicensee, or on account of any
other cause of thing whatsoever, except as provided in this
Agreement;
4. Even after the expiration or termination of this Agreement for
any reason whatsoever, the licensee permits LICENSOR or its
F
agents to have access to licensee's factories and other facilities
and to make the necessary inspection to confirm whether licensee
is observing its obligations under this Article 21.1;
5. LICENSOR may at its option, but without obligation to do so,
repurchase or cause to be repurchased at fair price agreed upon
G
by the parties hereto, all or any portion of the Products and the
Parts which licensee then has on hand and which remain unsold
and unused at the time of the expiration or termination of this
Agreement;
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1015
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
6. LICENSOR may at its option sell, directly or indirectly, the A
Products and the Parts repurchased by it under paragraph (5)
above in the Territory or any other country, without any liability on
the part of LICENSOR, to account to licensee for any part of the
proceeds of such sale or any other sums whatsoever;
7. If LICENSOR does not exercise its option referred to in B
Paragraph (6) above wi~hin a reasonable period of time after the
expiration or termination of this Agreement, then licensee may,
notwithstanding the provision set forth in Paragraph (I) above,
sell on a non-exclusive basis, the Products and the Parts which
licensee has on hand at the time of the expiration or termination
of this Agreement within such a reasonable period of time as may C
be agreed upon by the parties hereto; provided, however, that
such sale shall be made in accordance with this Agreement and
without impairing LICENSOR's reputation, provided further that
the said sale shall be so executed without using the Trade mark of
the LICENSOR in full or in part, and provided further, that running D
royalties thereon shall be paid to LICENSOR on the same terms
and conditions as provided herein.
(emphasis added)
21.2 This expiration or any other termination of this Agreement
here under shall be without prejudice to any right which shall have E
accrued to either party here under prior to such expiration or
termination."
(emphasis added)"
7. As is clear from the reading of Article 14 of the Agreement,
F
the aforesaid royalty in 5 equal installments was to be paid for the right
in license that was granted by the HMCL, Japan to the assessee under
Article 2 as well as for furnishing of technical information under Article
4.2. Under the l!_foresaid articles, HMCL, Japan had to provide
manufacturing facilities, know-how, technical information and it also gave
information regarding intellectual property rights to the assessee which G
the assessee was entitled to exploit only as a licensee and without getting
any rights in the said intellectual property belonging to HMCL, Japan.
The terms 'manufacturing facilities, intellectual property rights, know-
how and technical information' were defined in clauses 3, 5, 6 and 7 of
the Agreement wbich reads as under:
H
1016 SUPREME COURT REPORTS [2017] 6 S.C.R.
A "3. The term "Manufacturing Facilities" shall mean jigs, tools,
dies, machinery' and equipment which licensee for the
manufacture, assembly, testing of inspection of the products.
5. The terms "Intellectual Property Rights" shall mean those
patents, utility models design patents and other intellectual property
B rights directly relating to the Products or the licensed parts
themselves relating to the manufacture of the products or the
licenced parts (including many pending applications thereof, but
excluding trademarks, and excluding patents utility models design
patents and other intellectual property rights relating to the
Manufacturing Facilities and the manufacture thereof) which
c Licensor owns at the time of execution of this Agreement or may
own from time to time during the term of this Agreement or under
which Licensor is entitled to grant a licen.ce to licensee.
6. The term "know-Hose" shall mean any and all secret technical
information (except for the Intellectual Property Right), whether
D in writing or not, including but not limited to drawings, standards,
specifications, material lists, process manuals and direction maps,
which directly relates to the products or the licenced parts
themselves or is necessary for the manufacture of the products
or the licenced parts and which Licensor owns at the time of
E execution of this Agreement or under which Licensor is entitled
to grant a licence to licensee.
7. The term "Technical Information;' shall mean() the KnowHow,
and (II) any technical information, not included in the Know How,
such as service materials and Japanese Industrial Standard (JIS),
F whether in writing or not, which directly relates to the products or
the licenced parts or is necessary for the manufacture of the
products or the licenced parts and which Licensor owns at the
time of execution of this Agreement or may own from time to
time during the term of this Agreement or under which Licensor
is entitled to grant a licence to licensee, and the Technical
G Information shall include the "Technical Materials" (emphasis
added)
13. Licence was granted by HMCL, Japan to an indivisible, non-
transferable and exclusive right and licence to manufacture, use
and sell the products and the licensed parts within the territory
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1017
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
under the intellectual property rights by using knowhow, and A
technical information. It also provided that licensee, i.e., HSCIL/
Assessee may grant sub-licenses with a prior written consent of
licensor. It also provided that to sale or export any products and
parts, to any place outside territory of India, prior consent of
licensor would be required."
B
8. It may also be pointed out, at this stage, that as a part of
Agreement, certain memoranda were also executed between the parties,
VIZ.:
(a) Memorandum on exchange of technician
(b) Memorandum on supply of parts c
(c) Memorandum on supply of manufacturing facilities
9. It is on the analysis of the aforesaid clauses of the Agreement
that issue needs to be decided. As per the Revenue, technical know-
how and royalty payments are of enduring nature and, therefore, they
D
would qualify as capital expenditure. On the other hand, the assessee
maintains that it had acquired mere right to use technical information
provided by HMCL, Japan and, thus, it did not lead to creation of any
asset of enduring nature. Therefore, it was to be treated as revenue
expenditure.
E
10. The High Court, after taking note of various judgments on the
subject and the principles laid down in those judgments, came to the
conclusion that royalty was for enduing benefit of the business. It was
not only for running the business but for bringing the business into existence
and then for running and sustaining it. In other words, main reason
which persuaded the High Court to come to the aforesaid conclusion F
was that there was no existing business which needed to be improvised
with the aid of technical know-how. This TCA was executed with the
aim and objective to establish a new unit for manufacture of automobiles
and parts thereof. Therefore, a new unit was brought into existence in
the form of assessee on which HMCL, Japan, a foreign company, had
G
absolute control as it held 99% shares in the joint venture. Further,
technical know-how agreement for technical collaboration which not
only included transferoftechnical information, but, complete assistance,
actual, factual and on the sport, for establishment of plant and machinery
etc. so as to bring into existence manufacturing unit for the products.
H
1018 SUPREME COURT REPORTS [2017] 6 S.C.R.
A The Agreement also provided for continuous assistance at every stage.
The High Court was of the opinion that in the aforesaid circumstances,
the test laid down by the Full Bench of Madras High Court in Mis.
Jonas Woodhead and Sons (India) vs. Commissioner of Income
Tax1 becomes applicable which is to the effect that whenever a complete
new plant with a complete new process, with new technology for a
B
manufacture of product is brought into existence, payment for such
technical know-how is to be treated as capital expenditure. The High
Court also remarked that the expenditure in the form of technical know-
how fee and royalty was not only for running the business but for bringing
the business into existence and, therefore, could not be treated as the
c revenue expenditure.
11. Mr. Tripathi, learned senior counsel appearing for the assessee
submitted at the outset that on identical issue pertaining to this very
assessee, Delhi High Court has taken a contrary view in the case of
CIT vs. Hero Honda Motors [(2015) 327 /TR 48J(Delhi)j holding
D that payment of technical know-how fee and royalty was in the nature
of revenue expenditure. His further submission was that the very premise
on which Allahabad High Court had given the impugned judgment, was
contrary to record. In this behalf his submission was that the High
Court had proceeded on the premise that the technical know-how fee
and royalty was paid for setting up the plant for manufacture of
E automobiles which are contrary to the factual finding recorded by the
Tribunal in this case. According to him, the know-how was provided to
the assessee for the purpose of manufacturing of products in India. He
also argued th.at the High Court was influenced by irrelevant factors like
extent of share holding of HMCL, Japan in the assessee which was of
F no relevance. The learned counsel laid much emphasis that in terms of
TCA, the appellant had only acquired the right to use the technical know-
how provided by HMCL for manufacture of products, during the currency
of the TCA, which was for an initial period often years from the date of
agreement or seven years from the date of commercial production. The
ownership rights in th.e know-how continued to re.main with HMCL,
G Japan and the appellant was not authorized to transfer the know-how
license to any other person or assign or convey the same to any third
party. Thus, what the appellant acquired was only a limited right to use
and exploit the know-how for manufacture of products and parts.
I 1979 (117) !TR 55
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1019
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
12. The learned counsel for the Revenue refuted the aforesaid A
submissions of Mr. Tripathi. His contention was that finding of fact was
arrived at by the Assessing Officer, which was confirmed by the CIT(A)
as well that a new asset in the form of setting up of a new company had
come into existence with the aid of technical know-how and, therefore,
the expenditure in-question was capital expenditure. He further submitted
B
that the view which was taken by ITATwas un-sustainable and, therefore,
rejected .by the High Court. Referring to the reasoning given by the
High Court in the impugned judgment which is already taken note of
above, his submission was that the same should be accepted.
13. We have considered the respective submissions of counsel
for the parties on either side. First thing which is discernible in the C
impugned judgment of the High Court is that the High Court has
proceeded entirely on the basis that technical know-how was used for
setting up of a plant for manufacture of automobiles. Judgment of the
!TAT, on the other hand, reveals that it had arrived at a contrary
conclusion. D
14. Record reveals that simultaneously with the signing ofTCA,
certain other agreements were also entered into between HMCL, Japan
and the assessee on May 21, 1996.
15. Nomenclature of these three agreements is already taken
note of above. These are 'Memorandum on Exchange of Technicians', E
'Memorandum on Supply of Parts' and 'Memorandum on Supply of
Manufacturing Facilities'. The Tribunal went into the nature of these
agreements. Engineers and technicians were sent by HMCL, Japan to
India for providing necessary guidance for setting up of plant. Likewise,
Memorandum on Supply of Parts related to the supply by HMCL, Japan F
of parts required for the manufacture of Honda cars. This Agreement
basically provided each sale and purchase of pats shall be effected in
accordance with the terms and conditions of an individual purchased
contract for the parts, which means that the supply of parts is governed
by separate contracts. Third Agreement known as 'Memorandum on
Supply of Manufacturing Facilities' stipulated the specification of the G
manufacturing facilities to be sold by Japanese company to the assessee,
their sale prices and the time of delivery which was to be separately
decided by the parties from time to time. It contained detailed provisions
in respect of the specifications and changes thereto, terms of payment,
H
1020 SUPREME COURT REPORTS [2017] 6 S.CR.
A inspection before delivery, functional testing of materials, packing,
·insurance, on-sight inspection, warranty title risk, patents, trademarks
etc. Undoubtedly, payments made in respect of facilities given under the
aforesaid Memoranda are capitalised by t,he assessee, showing the same
to be the capital expenditure. Contrasting these three Memoranda with
the TCA, ITAT returned a finding to the effect that for setting up the
B
manufacturing facilities and for the tax, separate agreements had been
entered into by the parties and separate payments were made by the
assessee as consideration therefor. This makes it clear that the payment
of technical know-how and royalty are not part of payments for setting
up the plant which manufactures the Honda cars in India but, were
c made to enable the assessee to manufacture the Honda cars in India
which :ire its stock and trade. The Tribunal was conscious of the fact
that this TCA was also entered into at the time of setting up of the fact
and since the know-how was being obtained for the first time and was
crucial to the setting up of the business of the assessee. It posed a
question as to whether this could make the difference and the expenditure
D
was to be treated as capital expenditure. However, after noticing that
no such distinction was drawn by Delhi High Court in Shriram
Refrigeration Industries Vs. Commissioner of Income Tax2 and
Triveni Engineering Works Ltd. Vs. C/T3 and the test applied was as
to whether the expenditure, whether incurred at the time of setting up of
E the business or later, acquisition of technical know-how or was only for
the use of the know-how for a particular period. Applying the aforesaid
test, the Tribunal found that TCA in-question gave a limited right to the
assessee to use the technology with no ownership or proprietary rights "
therein.
F 16. The aforesaid conclusion recorded by the ITAThas been upset
by the High Court in the impugned judgment. It would be pertinent to
point out that even the High Court has not interpreted the clauses of the
TAC to conclude that proprietary rights in the technical know-how stood
acquired by the assessee. It has proceeded on the basis that it was ~only
right to use the technical know-how which was given. Its conclusion
G rests entirely on the basis that the technical know-how was given for
setting up of the new plant. It is this difference of opinion which is to be
settled here.
2
1981 (127) !TR 746
3 1981 (136) ITR 340
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1021
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
17. A reading of the TCA would bring out the following pertinent A
aspects:
"(a) the appell!lnt was granted indivisible and non-transferable
right to manufacture in India the range of products using know
how/technology licensed by HMCL;.
(b) the appellant had during the currency of the agreement only B
the right to access the manufacturing know-how/technology owned
byHMCL;
(c) there was no transfer of the know-how/technology in favour
of the appellant and the proprietary rights therein always vested
inHMCL; c
(d) the appellant was to keep the know-how/technology confidential
and was barred from assigning the same to any third party.
(e) the agreement was for a period of 10 years and was renewable
at the ~ption of the parties; and D
(f) on the expiry of the agreement, the appellant was prohibited
from using the know-how/technology and as duty bound to return
all copies of the drawings, designs, etc. made available by HMCL
under the agreement"
18. If the aforesaid factors are taken in isolation, probably the E
claim of the assessee may be justified. Distinction between capital and
revenue expenditure with reference to acquisition of technical infonnation
and know-how has been spelled out by this Court as well as High Courts
in series of cases. Primary test which is adopted to differentiate between
capital and revenue expenditure remains the same, namely, the enduring
F
nature test. It means where the expenditure is incurred which gives
enduring benefit, it will be treated as capital expenditure. In
contradistinction to the cases where expenditure of concl!frent and
reoccurring nature is incurred and the later would belong to revenue
field. Technical information and know-how are intangible. They have
different and distinct character from tangible assets. When the G
expenditure is incurred to acquire a tangible asset, detennination as to
whether the said acquisition of tangible asset is of capital nature or the
expenditure is of revenue nature, may not pose a problem. However, in
case of technical infonnation and know-how, having regard to their unique
H
1022 SUPREME COURT REPORTS [2017] 6 S.C.R.
A characteristic, the questions that need to be posed for determining the
nature of such an expenditure are also of different nature. In case
where there is a transfer of ownership in the intellectual property rights
or in the licences, it would clearly be a capital expenditure. However,
when no such rights are transferred but the arrangement facilitates grant
B oflicence to use those rights for a limited pu.rpose or limited period, the
Courts have held that in such a situation, the royalty paid for use of such
technical information or kllow-how would be in the nature of revenue
expenditure as no enduring benefits is acquired thereby. This was so
held in a classic case, entitled Commissioner of Income Tax, Bombay
City Iv. Ciba India Limited'. In the said case, the assessee company
C had procured know-how in the form of processes, formulae, scientific
data, working, prescription and other intellectual property rights developed
by a Swiss Company, to produce licensed preparations and to promote
their sale in India. Inspite of the fact that the Swiss Company had granted
to the Indian assessee "full and sole right and licence" in the territory of
D India under the patents listed in Schedule-I, to make use, exercise and
vend the inventions referred to therein and to use the trade marks set
out in Schedule-II in the territory oflndia, this Court held that what was
conferred was a mere right to use. The Indian assessee, it was observed,
was not entitled to exclusive rights to patents, trademarks etc. As per
the agreement, proprietary information was not to be divulged to third
E parties without consent. The rights granted enabled access to the technical
knowledge and experience with right to use patents and trademarks for
a limited period. The Swiss Company did not part with any asset of its
business, nor did the Indian assessee acquire any asset or advantage of
enduring nature. The right empowered the Indian assessee to draw for
_F the purpose of carrying on its business as a manufacturer and rely upon
the technical knowledge of the Swiss Company. There was no attempt
to part with technical knowledge absolutely in favour of the Indian
assessee. It was not a case of transfer of intellectual rights once for all.
Thus, the expenditure incurred was revenue in nature.
19. Likewise, in Alembic Chemical Works Co. Ltd. v.
G Commissioner of Income Tax, Gujarat5, the assessee was engaged
in the manufacture of antibiotics and pharmaceuticals on the basis of
licence which was granted to it by the Government for manufacture of
antibiotic, penicillin etc. It entered into an agreement with Japanese
' ( 1968) 69 !TR 692 (SC)
H '(1989)177ITR377
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1023
INCOME TAX, GHAZIABAD (A. K. SIKRI, J.)
Company for supply of requisite technical know-how so as to achieve A
substantially high level of performance or production with the aid of
better technology and process of fermentation and with better yielding
penicillin strains that was developed by the foreign company. Under the
agreement, royalty was to be paid. This royalty payment was treated as
capital expenditure till the stage of the High Court. This Court reversed B
the judgment of the Courts below by holding the expenditure would be
revenue in nature. In its judgment, the Court culled out certain principles
laid down therein to determine, whether expenditure of assessee was
'Capital Expenditure' or 'Revenue Expenditure' and said:
(i) When an expenditure is made, not only once and for all, but
with a view to bringing into existence an asset or an advantage C
for the enduring benefit of trade, I think that there is very
good reason (in the absence of special circumstances leading
to an opposite conclusion) for treating such an expenditure
as properly attributable not to revenue but to capital (referred
to British Insulated Helsby Cables Ltd. v. Atherton, (1926) D
AC 205).
(ii) If the expenditure is made for acquiring or bringing into
existence an asset or advantage for the enduring benefit of
the business it is properly attributable to capital and is of the
nature of capital expenditure. If on the other hand it is made E
not for the purpose of bringing into existence any sucli asset
or advantage but for running the business or working it with a
view to produce the profits, it is a revenue expenditure.
(iii) The aim and object of the expenditure would determine the
character of the expenditure whether it is a capital expenditure F
or a revenue expenditure.
20. It was also held that three aspects should be considered, (a)
the character of the advantage sought, and in this, its lasting qualities
may play a part, (b) the manner in which it is to be used, relied upon or
enjoyed, and in this and under the former head recurrence may play its G
part and (c) the means adopted to obtain it.
21. The decision went in favour of the assessee primarily on the
ground that the assessee in that case was already engaged in the
preparation of antibiotic since long. Therefore, it could not be said that
H
1024 SUPREME COURT REPORTS [2017] 6 S.C.R.
A the area of improvisation by obtaining know-how from foreign
collaboration was not a part of improvisation of existing business or that
the entire gamut of existing manufacturing operation for the commercial
production of penicillin in the assessee's existing plant had become
obsolete or inappropriate in relation to the exploitation of the new sub-
cultures of the high yielding strains of penicillin. The Court also
B
emphasised that it cannot be said that mere introduction of new bio-
synthetic source required the erection and commissioning of a totally
new and different type of plant and machinery. To this, added factors
were that the agreement placed limitations on the right of the assessee
in dealing with the know-how and the conditions as to non-partibility,
c confidentiality and secrecy of the' know-how inclined towards the
inference that the right pertained more to the use of know-howthan to
its exclusive acquisition. This case is significant for our purposes in two
respects:
(i) If the technical know-how obtained under the agreement for
D which technical fee/royalty is paid is for a limited period and
only right to use the technical know-how is there during the
agreement with no right of acquisition, coupled with the fact
that the said technical know-how is utilised for improvising
the existing business, the e?'penditure would be treated as
revenue expenditure. This case, thus, gives an indication that
E if such a technical know-how is for the purpose of setting up
a new business, the position may·be different.
(ii) Another aspect which needs to be nQted is that while rendering
the aforesaid decision, this Court observed that there is no
single test or principle or rule of thumb which is paramount.
F It is ultimately a question of law, but a question which must
be answered in the light of all the circumstances which are
reasonable .to take into account, and the weight which must
be given to a particular circumstance in a particular case,
must depend on common sense rather than on strict
G application of any single legal principle. It was also observed
that solution to the problem is notto be found by any rigid test
or description. It has to be derived from many aspects of the
whole set of circumstances, some of which may point in one
direction, some in the other. One consideration may point so
clearly that it dominates other and vaguer indications in the
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1025
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
contrary direction. It is a common sense appreciation of all A
guiding features which must provide the ultimate answer. This
Court also said that the idea of 'once for all' payment and
'enduring benefit' are not to be treated as something akin to
statutory conditions; nor are the notions of "Capital" or
"Revenue" a judicial fetish. What is 'Capital Expenditure'
B
and what is 'Revenue' are not eternal varieties but must need
be flexible so as to respond to the changing economic realities
of business. The expression "asset or advantage of an
enduring nature" was evolved to emphasize the element of a
sufficient degree of durability, appropriate to the context.
22. When we apply the ·aforesaid parameters to the facts of the c
present case, the conclusion drawn by the High Court that expenditure
incurred was of capital nature, appears to be unblemished. Admittedly,
there was no existing business and, thus, question of improvising the
existing technical knowchow by borrowing the technical know-how of
the HMCL, Japan did not arise. The assessee was not in existence at D
all and it was the result of joint venture of HMCL, Japan and Mis.
HSCIL, India. The very purpose of Agreement between the two
companies was to set up a joint venture company with aim and objective
to establish a unit for manufacture of automobiles and part thereof. As
a result of this agreement, assessee company was incorporated which
entered into TCA in question for technic~I collaboration. This technical E
collaboration included not only transfer of technical information, but,
complete assistance, actual, factual and on the spot, for establishment of
plant, machinery etc. so as to bring in existence manufacturing unit for
the products. Thus, a new business was set up with the technical know:
how provided by HMCL, Japan and lumpsum royalty, though in five F
instalments, was paid therefor.
23. No doubt, this technical know-how is for the limited period
i.e. for the tenure of the agreement. However, it is important to note
that in case of termination of the Agreement, joint venture itself would
come to an end and there may not be any further continuation of G
manufacture of product with technical know-how of foreign collaborator.
The High Court has, thus, rightly observed that virtually life of
manufacture of product in the plant and machinery, establishes with
assistance of foreign company, is co-extensive with the agreement. The
Agreement is framed in a manner so as to given a colour of licence for
H
1026 SUPREME COURT REPORTS [2017] 6 S.C.R.
A a limited period having no enduring nature but when a close scrutiny into
the said Agreement is undertaken, it shows otherwise. It is significant to
note in this behalf that the Agreement provides that in the event of
expiration or otherwise termination, whatsoever, licensee, i.e.,joint venture
company/ Assessee shall discontinue manufacture, sale and other
B disposition of products, parts and residuary products. All these things
then shall be at the option of licensor. In other words, licensee in such
contingency would hand over unsold product and parts to licensor for
sale by him. In case licensor does not exercise such an option and the
product is allowed to be sold by licensee, it would continue to pay royalty
as per rates agreed under the agreement. Clauses 19 and 21, in our
C view, make the Agreement in question, i.e., establishment of plant,
machinery and manufacture .of product with the help of technical know-
how, co-extensive, in continuance of Agreement. The Agreement also
has a clause of renewal which, in our view, in totality of terms and
conditions, will make the unit continue so long as manufacture of product
D in plant and machinery, established with aid and assistance of foreign
company, will continue. Since, it is found that the Agreement in question
was crucial for setting up of the plant project in question for manufacturing
of the goods, the expenditure in the form ofroyalty paid would be in the
nature of capital expenditure and not revenue expenditure. The Tribunal
is conclusion that it is only the other three memoranda which were
E necessary for setting up the manufacturing facilities and payment
thereunder would qualify as capital expenditure, and not the payment of
technical fees/royalty on the ground that this Agreement was not in
connection with the setting up of a plant or manufacturing facilities, is
not correct. It would be interesting to note that even the Tribunal had
nurtured doubt on the nature of this expenditure as TCA was signed
F
simultaneously with the other memoranda to facilitate setting up of a
new factory and not improvising the earlier set up. This doubt has
expressed by the ITAT itself in the following words:
"''Our doubt was why the payment, at least of the Jump sum
technical know-how fees, cannot be considered as being connected
G to the initial starting up of the business and hence not allowable
since the know-how was bring obtained for the first time and was
crucial to the setting up of the business of the assessee which
undisputedly was to lllanufacture Honda cars in India. It may be
recalled that this was also the view taken by the Assessing Officer.
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1027
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.]
Further, the assessee was not already in the manufacture of cars A
and was co'llmencing such an activity for the first time. It was
not a case of a business already in existence. The payment was
an "once for all" payment, though staggered over a period of
years." -
24. However, discussion that follows thereafter suggests that the B
!TAT was satisfied with the explanation of the assessee that the High
Courts have always applied the test as to whether the expenditure, whether
incurred at the time of setting up of business or later, was for acquisition
of the technical know-how or was only for the use of know-how for a
particular period. !TAT felt satisfied with the said explanation and held
that the expenditure was revenue in nature. It is at this stage that the C
Tribunal erred in not approaching the issue in right perspective.
25. Coming to the judgment ofthe Delhi High Court in the case of
this very assessee, it would be noticed that in that case, technical know-
how was obtained for improvising scooter segment, which unit was
already in existence. On the contrary, in present case, the TCA was for D
setting up of new plant forthe first time to manufacture cars. The Delhi
High Court specifically noted this fact in para 14 of the judgment. While
analysing the agreement in that case which was for providing technical
know-how in relation to the product i.e. two wheelers and three wheelers
and the purpose was to introduce 'new models' of the said product E
developed by the Japanese Company, the High Court noted that the
agreement specifically recorded that the respondent assessee was
already engaged in the business of manufacturing, assembling, selling
and otherwise dealing with two/three wheelers and their parts as a joint
venture. It referred to the earlier collaboration agreement dated January
24, 1984 and the subsequent amendment thereto which conferred and F
had granted to the respondent assessee a right and licence to manufacture,
assemble, sell, distribute, repair and service two/three wheelers. The
aforesaid distinction between the two Agreements has made all the
difference in the results. As a consequence, we find no merit in these
appeals which are dismissed with cost. G
Ankit Gyan Appeals dismissc:d. ·
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