HONDA SIEL CARS INDIA LTD. versus COMMISSIONER OF INCOME TAX, GHAZIABAD

Citation: [2017] 6 S.C.R. 1004 · Decided: 09-06-2017 · Supreme Court of India · Bench: A.K. SIKRI · Disposal: Dismissed

Judgment (excerpt)

A 
B 
c 
D 
E 
[2017] 6 S.C.R. I 004 
HONDA SIEL CARS INDIA LTD. 
v. 
COMMISSIONER OF INCOME TAX, GHAZIABAD 
(Civil Appeal Nos. 4918 of 2017) 
JUNE 09, 2017 
[A.K. SIKRI AND ASHOK BHUSHAN, JJ.] 
Tax/Taxation: 
Technical fee with reference to acquisition of technical 
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 
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 
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 
G 
H 
on spot, for establishment of plant, machinery etc. so as to bring in 
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. 
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 
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 
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 
c 
D 
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 
differentiate between capital and revenue expenditure remains 
F 
G 
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 
expenditu.re is incurred to acquire a tangi

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