Facts of the Case

The assessee, Hero Honda Motors Limited (now Hero MotoCorp), was engaged in manufacturing and sale of motorcycles under technical collaboration with Honda Motor Company, Japan. Under the licence and technical assistance agreement dated 02.06.1995, the assessee made royalty payments and model fee payments for use of technical know-how, intellectual property rights, drawings, specifications and technical information.

The Revenue treated the payments as capital expenditure on the ground that the technical know-how resulted in enduring benefit to the assessee and hence could not be allowed as revenue expenditure.

The Tribunal held the expenditure to be revenue in nature and allowed deduction. Aggrieved, the Revenue filed appeals before the Delhi High Court.

Issues Involved

  1. Whether royalty payment made under the technical know-how agreement was revenue expenditure or capital expenditure?
  2. Whether model fee paid for model changes was capital expenditure?
  3. Whether the Commissioner was justified in invoking revisionary jurisdiction under Section 263

Petitioner’s Arguments (Revenue)

  • The technical know-how agreement conferred enduring benefit upon the assessee.
  • Royalty and model fee payments were linked to acquisition of technical know-how and intellectual property.
  • Such acquisition strengthened the profit-making apparatus of the assessee.
  • Therefore, the expenditure should be treated as capital expenditure.

Respondent’s Arguments (Assessee)

  • The agreement only granted limited right to use technical know-how and did not transfer ownership.
  • Honda retained complete ownership over intellectual property rights.
  • The know-how was confidential, non-transferable and required return on termination.
  • Payments were recurring and linked to production/sales.
  • Therefore, the expenditure was revenue expenditure allowable under Section 37(1).

Court Findings / Order

The Delhi High Court held in favour of the assessee and against the Revenue.

The Court observed:

  • The agreement merely granted right to use technical know-how and not ownership.
  • Intellectual property rights remained vested with Honda.
  • The assessee could not transfer or sublicense the know-how.
  • Confidentiality obligations continued even after termination.
  • Technical know-how in automobile industry requires constant upgradation and does not create enduring capital asset.

Accordingly:

  • Royalty payment was held to be revenue expenditure.
  • Deduction under Section 37(1) was allowable.
  • Revenue’s appeal was dismissed.

Important Clarification

The Court clarified that mere use of technical know-how without transfer of ownership does not amount to acquisition of a capital asset.

Important tests:

  • Ownership vs right to use
  • Transferability
  • Confidentiality restrictions
  • Duration of licence
  • Requirement to return documents
  • Continuing control of licensor

These factors determine whether expenditure is capital or revenue.

Sections Involved

  • Section 37(1) – Allowability of business expenditure
  • Section 263 – Revision by Commissioner
  • Section 260A – Appeal before High Court
  • Double Taxation Avoidance Agreement (India–Japan)

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:11016-DB/SKN03022015ITA6962011_103818.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.