REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4918 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 2140 OF 2017)

HONDA SIEL CARS INDIA LTD. .....PETITIONER (S) APPELLANT(S)

VERSUS COMMISSIONER OF INCOME TAX,  GHAZIABAD

.....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 4919 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4261 OF 2017)

CIVIL APPEAL NO. 4920 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4319 OF 2017)

CIVIL APPEAL NO. 4921 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4356 OF 2017)

A N D

CIVIL APPEAL NO. 4922 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4249 OF 2017)

J U D G M E N T

A.K. SIKRI, J.

Assessee  in  all  these  appeals  is  Honda  SIEL Cars  Ltd.

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(hereinafter referred to as the “Assessee”).  Question of law that

is raised is also identical.  Five appeals are filed only because of

the 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

September 12, 1995 with M/s. SEIL Ltd., a company incorporated

under  the  Indian  Companies  Act.   After  getting  necessary

approval from the Government of India, 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 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 technical know-how and technical information which were

to be provided by HMCL, Japan (as a licensor) to the assessee

(as  a  licensee).   For  providing  the  aforesaid  facilities,  it  was

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agreed  that  a  consideration/lump  sum  fee  of  30.5  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

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 of 30.5 million US Dollar  payable in five equal installments on

yearly basis is to be treated as revenue expenditure or  capital

expenditure.   

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 ‘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

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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 ITAT 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  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.   

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.

“8. Total  share  capital  of  HSCIL/Assessee was 36  crores  shares  out  of  which  35,63,99,995  shares were held by HMCL, Japan while remaining 3600005 shares held by M/s. Seil India.  In other words, joint venture was almost owned by HMCL, Japan, having around  99%  shares  and  Seil  India  (local  Indian

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company) owned only 1% shares.

9. Thereafter, M/s. 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, Japan as “licensor” and HSCIL/Assessee as licensee.”

14. In view of aforesaid licence, a consideration/lump sum fee agreed between parties was 30.5 million U.S Dollar, payable in five continuous equal  installments by licensee to licensor and payment  thereof  was to commence  from  third  year  after  commencement  of commercial  production.  Besides,  licensee  was  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 Information under Article 4.2 hereof, licensee shall pay to LICENSOR the following fees:

1. Lumpsum fee:

The amount of lumpsum fee payable by the licensee to the 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 (USS6,100,000), 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  transfer  remittance  to  the  bank account  designated  by  LICENSOR,  based  on  final government approval.

2. Royalty:

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.

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The  royalty  shall  calculated  on  the  basis  of  the ex-factory sale price of the product exclusive of excise duties,  minus  the  cost  of  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.

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 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 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 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  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

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the payment currency, calculated on the basis of a 365 day  year,  subject  to  Government  of  India/RBI approvals/guidelines prevailing at that time.

14.4 It is understood and confirmed that it should be separately  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 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  dien 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 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 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 of  ten(10) years from  the  date  of  agreement  or  seven  (7) years  from  the  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 notice to that effect  given to the other party at least three (3) months prior to the  expiration  of  initial  period  or  any

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subsequent renewed period. Notwithstanding the foregoing, in the event of termination of the Joint Venture Agreement, this Agreement shall accordingly terminate forthwith."

(emphasis added)

“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.  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 unless otherwise agreed upon by the parties hereto,

1.  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.

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;

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,  or  on  account  of  the establishment,  development  or  maintenance  of  the goodwill or other business of licensee, or on account of  any  other  cause  of  thing  whatsoever,  except  as provided in this Agreement;

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4.  Even  after  the  expiration  or  termination  of  this Agreement  for  any reason whatsoever, the  licensee permits  LICENSOR or its  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 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;

6.  LICENSOR  may  at  its  option  sell,  directly  or indirectly, the 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 Paragraph (6) above within a reasonable period of  time  after  the  expiration  or  termination  of  this Agreement,  then  licensee  may,  notwithstanding  the provision set forth in Paragraph (1) 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 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  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

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any right which shall have 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, 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 aforesaid 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 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 which reads as under:

“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 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

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models design patents and other intellectual property rights relating to the Manufacturing Facilities and the manufacture thereof) 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.

6. The term “know-Hose” shall mean any and all secret technical information (except for the Intellectual Property Right), whether 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  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  KnowHow,  such  as  service materials  and  Japanese  Industrial  Standard  (JIS), 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  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  under  the intellectual  property  rights  by  using  knowhow,  and 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.”   

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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)  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 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.   

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

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come to the aforesaid conclusion 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

absolute  control  as  it  held  99%  shares  in  the  joint  venture.

Further, technical know-how agreement for technical collaboration

which  not  only  included  transfer  of  technical  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.   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 M/s.

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 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 1  1979 (117) ITR 55

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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  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 ITR 481(Delhi)]

holding 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  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 that the High Court was influenced by irrelevant

factors  like  extent  of  share  holding  of  HMCL,  Japan  in  the

assessee which was of no relevance.  The learned counsel laid

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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 of ten years from the date of

agreement  or  seven  years  from  the  date  of  commercial

production.  The ownership rights in the know-how continued to

remain with HMCL, 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.        

   12) The  learned  counsel  for  the  Revenue  refuted  the  aforesaid

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 that the view which was taken

by ITAT was 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

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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

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  ITAT, on  the  other  hand,  reveals  that  it  had

arrived at a contrary conclusion.

14) Record  reveals  that  simultaneously  with  the  signing  of  TCA,

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’,

‘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 of parts required for the

manufacture of Honda cars.  This Agreement basically provided

each sale and purchase of pats shall be effected in accordance

Civil Appeal No. 4918 of 2017 & Ors. Page 16 of 34

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 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,  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  the  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 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

Civil Appeal No. 4918 of 2017 & Ors. Page 17 of 34

but,  were  made  to  enable  the  assessee  to  manufacture  the

Honda cars in India which are 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 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.  CIT3 and  the  test

applied was as to whether the expenditure, whether incurred at

the  time  of  setting  up  of  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.   

16) The aforesaid conclusion recorded by the ITAT has 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

2  1981 (127) ITR 746 3  1981 (136) ITR 340

Civil Appeal No. 4918 of 2017 & Ors. Page 18 of 34

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 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.

17) A reading  of  the  TCA would  bring  out  the  following  pertinent

aspects:

“(a) the  appellant  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 the right to access the manufacturing know-how/technology owned by HMCL;

(c)  there  was  no  transfer  of  the know-how/technology in  favour  of  the  appellant  and the proprietary rights therein always vested in HMCL;

(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 option of the parties; and

(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 claim of

Civil Appeal No. 4918 of 2017 & Ors. Page 19 of 34

the assessee may be justified.  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 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

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

expenditure is incurred to acquire a tangible asset, determination

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  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  licences,  it  would  clearly  be  a  capital  expenditure.

Civil Appeal No. 4918 of 2017 & Ors. Page 20 of 34

However,  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 Courts  have held  that  in

such  a  situation,  the  royalty  paid  for  use  of  such  technical

information  or  know-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 I v. Ciba India Limited4.  In the said case, the

assessee  company  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  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 of India, 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  parties 4 (1968) 69 ITR 692 (SC)

Civil Appeal No. 4918 of 2017 & Ors. Page 21 of 34

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  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.

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  Company  for  supply  of  requisite

technical know-how so as to achieve substantially high level of

performance or production with the aid of better technology and

5 (1989) 177 ITR 377

Civil Appeal No. 4918 of 2017 & Ors. Page 22 of 34

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 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  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] 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

Civil Appeal No. 4918 of 2017 & Ors. Page 23 of 34

nature of capital expenditure. If on the other hand it is made

not  for  the  purpose  of  bringing  into  existence  any  such

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 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 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 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

Civil Appeal No. 4918 of 2017 & Ors. Page 24 of 34

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 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,

confidentiality and secrecy of the know-how inclined towards the

inference that the right pertained more to the use of know-how

than 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

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  such  a  technical  know-how is  for  the  purpose  of

Civil Appeal No. 4918 of 2017 & Ors. Page 25 of 34

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 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 any single legal principle.  It was also

observed that solution to the problem is not to 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  contrary  direction.  It  is  a

common sense appreciation of  all  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

Civil Appeal No. 4918 of 2017 & Ors. Page 26 of 34

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  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

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 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

result  of  joint  venture of  HMCL, Japan and M/s.  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  technical

collaboration.   This  technical  collaboration  included  not  only

transfer of technical information, but, complete assistance, actual,

Civil Appeal No. 4918 of 2017 & Ors. Page 27 of 34

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

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

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 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  disposition of  products,  parts  and  residuary products.  All

Civil Appeal No. 4918 of 2017 & Ors. Page 28 of 34

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 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  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.  The Tribunal is

conclusion that it is only the other three memoranda which were

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

Civil Appeal No. 4918 of 2017 & Ors. Page 29 of 34

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 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 lump sum technical know-how fees, cannot be considered as being connected 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  manufacture  Honda  cars  in  India.   It  may be recalled  that  this  was  also  the  view  taken  by  the Assessing  Officer.   Further,  the  assessee  was  not already in the manufacture of cars and was commencing 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 ITAT

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.  ITAT felt satisfied

with  the  said  explanation  and  held  that  the  expenditure  was

Civil Appeal No. 4918 of 2017 & Ors. Page 30 of 34

revenue in nature.  It is at this stage that the Tribunal erred in not

approaching the issue in right perspective.

25) Coming to the judgment of the 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  setting  up  of  new plant  for  the  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

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 had granted

to the respondent assessee a right and licence to manufacture,

assemble, sell, distribute, repair and service two/three wheelers.

Civil Appeal No. 4918 of 2017 & Ors. Page 31 of 34

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.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; JUNE 09, 2017

Civil Appeal No. 4918 of 2017 & Ors. Page 32 of 34

ITEM NO.6               COURT NO.4               SECTION - XI (For judgment)                S U P R E M E  C O U R T  O F  I N D I A                        RECORD OF PROCEEDINGS

CIVIL APPEAL NO.4918 OF 2017 HONDA SIEL CARS INDIA LTD. Appellant(s)                                 VERSUS

COMMISSIONER OF INCOME TAX, GHAZIABAD     Respondent(s) With C.A.No.4922/2017 C.A.No.4921/2017 C.A.No.4920/2017 C.A.No.4919/2017 Date : 09/06/2017 These appeals were called on for judgment today. For Petitioner(s) Ms.Manasvini Bajpai, Adv.

Mr. R.Chandrachud, Adv.                     For Respondent(s) Ms.Sadhna Sandhu, Adv.

Ms.Nivedita Nair, Adv. Ms.Gargi Khanna, Adv. Mr.Natkarni Nisha Bagchi, Adv. Ms.Anil Katiyar, Adv. Ms.Sangita Rai, Adv.

Hon'ble  Mr.Justice  A.K.Sikri  pronounced  the judgment of the Bench comprising His Lordship and Hon'ble Mr.Justice Ashok Bhushan.

The appeals are dismissed with cost in terms of the signed judgment.     

(SATISH KUMAR YADAV)                   (H.S.PARASHER)      AR-CUM-PS                               COURT MASTER   

(Signed reportable judgment is placed on the file)

Civil Appeal No. 4918 of 2017 & Ors. Page 33 of 34

Civil Appeal No. 4918 of 2017 & Ors. Page 34 of 34