Facts of the Case

The assessee, Hero Honda Motors Ltd. (presently Hero MotoCorp Ltd.), was engaged in manufacturing and selling motorcycles through a joint venture with Honda Motor Co., Japan.

Initially, the parties entered into a technical collaboration agreement in 1984 for manufacturing motorcycles in India. After expiry of the original agreement, a fresh Licence and Technical Assistance Agreement dated 02.06.1995 was executed.

Under this agreement, Hero Honda paid:

  1. Running Royalty for use of technical know-how
  2. Model Fee for model changes
  3. Technical Guidance Fee

The Revenue treated these payments as capital expenditure, whereas the assessee claimed them as revenue expenditure deductible under Section 37(1).

The Tribunal allowed the assessee’s claim. Revenue appealed before Delhi High Court.

Issues Involved

  1. Whether royalty paid under technical know-how agreement is revenue expenditure or capital expenditure?
  2. Whether model fee paid for model changes is capital or revenue in nature?
  3. Whether technical guidance fee is capital expenditure?
  4. Whether revision under Section 263 was valid?

Petitioner’s Arguments (Revenue Department)

The Revenue contended:

  • The technical know-how agreement provided enduring benefit to the assessee.
  • The technology enabled manufacturing of motorcycles and therefore created a capital asset.
  • Royalty payments were linked with acquisition of technical knowledge and thus capital in nature.
  • Model fee and technical guidance fee also resulted in long-term advantage.
  • Hence such expenditure could not be allowed under Section 37(1).

Respondent’s Arguments (Assessee)

Hero Honda argued:

  • The agreement granted only a limited right to use technology, not ownership.
  • Honda retained complete intellectual property rights.
  • The assessee was prohibited from transferring or disclosing know-how.
  • The agreement was for business continuity and operational efficiency.
  • Technical know-how in automobile industry becomes obsolete quickly due to constant upgrades.
  • Therefore expenditure was revenue in nature and allowable under Section 37(1).

Court Findings / Order

The Delhi High Court held:

1. Royalty is Revenue Expenditure

The Court observed:

  • Ownership of know-how remained with Honda.
  • Hero Honda received only a restricted licence to use technology.
  • No transfer of proprietary rights took place.
  • Confidentiality obligations continued even after termination.

Therefore, royalty payment was revenue expenditure.

2. Model Fee Also Revenue in Nature

The Court noted earlier Tribunal decisions had consistently treated model fee as revenue expenditure.

Hence no interference was warranted.

3. Technical Guidance Fee

Revenue failed to place sufficient documents on record.

Accordingly, no adverse finding could be made.

4. Section 263 Revision Invalid

Since the Assessing Officer’s original order was legally correct, revision under Section 263 could not survive.

Thus, all appeals of Revenue were dismissed and decided in favour of Hero Honda.

Important Clarification by Court

The Court clarified an important principle:

Payment for mere access or right to use technical know-how remains revenue expenditure, even if the business derives continuing commercial benefit.

Only where there is absolute transfer of ownership in know-how, it may become capital expenditure.

The “enduring benefit” test is not absolute and must be applied commercially..

Sections Involved

  • Section 37(1) – Allowability of business expenditure
  • Section 263 – Revisionary powers of Commissioner
  • Section 260A – Appeal before High Court
  • Double Taxation Avoidance Agreement (DTAA) – India-Japan (Article 7 & 12)

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:1069-DB/SKN03022015ITA6942011.pdf

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