A.K Sikri, J.:— The applicant-company (hereinafter referred to as “the assessee”), engaged in the manufacturing and sale of heat exchangers, (radiators) entered into “technical collaboration agreement” with Ford Motor Company, USA to manufacture “controlled atmosphere brazed aluminum heat exchangers (radiators)” with the technology owned by Ford Company, USA. According to the appellant, it was already in the business of manufacturing of radiators since 1992, and the said technical collaboration agreement was entered into for the purpose of the upgrading and manufacturing of radiators of new technology. Under the said agreement, the appellant was permitted to be a mere user of the techriology regarding the manufacturing of upgraded radiators for which the appellant was obliged to make lump sum: payment of US$ 1 million to Ford Motor Company; USA which was capitalized in the appellant's books of account. Under the same agreement, the appellant was obliged to pay royalty at 3 per cent, of; domestic sales and at 5 per cent, of export sales, to Ford Motor Company, USA for a period of 7 years for using the technology and for availing of technical services.

2. In the annual income-tax return filed for the assessment year 2002-03, the assessee paid a sum of Rs. 20,78,824 to the foreign collaborators as royalty calculated at 3 per cent, domestic sales and at 5 per cent, of export sales. This amount was claimed by the assessee as deductible expenditure treating the same as revenue/business expenditure. However, the Assessing Officer disallowed the same as, according to him, the expenditure was of capital nature.

3. This order of the Assessing Officer has been confirmed by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”). Challenging the orders of the Tribunal, the present appeal is preferred, which was admitted on the following substantial question of law:

“Whether the Income-tax Appellate Tribunal is right in law in holding the royalty expense as capital in nature?”

4. We find from the reading of the order of the Tribunal that the following aspects weighed with the Tribunal in forming the opinion that the payment in question represented capital expenditure:

(i) As per article 6 of the agreement, even after termination of the agreement the assessee can continue to use technical information in production of licensed products and shall have right to export the licensed products and, hence, as per this agreement assessee was getting an enduring benefit.

(ii) Technical services and technology which the licensor has to provide to the assessee is not on continuous basis but it is one time affair. Nothing was brought on record to show that any technical service was to be provided on day-to-day or on regular basis at any specified interval to support the claim of the assessee and thus it was the case of outright transfer of technical know-how.

(iii) That the case of the assessee was covered against it by two decisions of the Kerala High Court in the case of CIT v. Jacobs P. Ltd., [1979] 120 ITR 197 and CIT v. Polyformalin P. Ltd., [1986] 161 ITR 36 and by the decision of the hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86 (SC).

5. Learned counsel for the appellant submitted that the Tribunal failed to appreciate that the technical: collaboration agreement had two parts, viz., one for “transfer of CAB technology”, and the second for “providing technology and technical services” and separate consideration has, been provided in the agreement by article 4 for each of these elements. Further, the consideration has not been divided into two parts but separate consideration has been provided in the agreement for two entirely different things, viz., “transfer of CAB technology” and “providing technology and technical services”. He also submitted that the agreement only granted non-exclusive rights and licence to the assessee for use of technical information and industrial property rights for manufacture, sell, repair and service and that there was no acquisition of technical information by the assessee. Moreover, after the expiry of the term of the agreement, all the industrial property rights made available to the assessee would cease and the assessee would be entitled to merely use the technical information for production. The learned counsel also drew our attention to the various clauses of the agreement in support of his aforesaid submissions. He argued that technical information consisted of “technology” and “development” and that while lump sum consideration was paid for transfer of technology, “development” is a continuous process. By this continuous service, the assessee was being provided an opportunity to study the designs and manufacture, consultation, trading and engineering assistance and services of trained staff of the licensor in connection with manufacture and sale. Such services are mentioned in article 3, clause (2) of the agreement. He also explained that technology and technical services mentioned in sub-clause (b) of clause (2) of article 2 of the agreement, for which consideration was paid, are the services in nature of product specification, process details, testing, training, quality control, etc., which require continuity in rendering of services by their very technological nature. According to the learned counsel, the Tribunal failed to appreciate that the assessee was already in the business of radiators and any improvement to technologically and technically advanced products is a routine process and does not have any capital element. Reliance was placed on the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 where lump sum payment in one go to acquire know-how for improvement in Penicillin was held as revenue expenditure.

6. Learned counsel for the Revenue, on the other hand, contended that the benefit provided to the assessee as per the aforesaid agreement was of enduring nature for the benefit of his business inasmuch as per article 6 of the agreement, even after termination of the agreement, the assessee could continue to use the technical information in production of the license products. He further, submitted that a finding of fact was ‘arrived at in the present case that as per clause (1)(b) of article 4 of the agreement, the assessee had to pay royalty at 3 per cent, of domestic and at 5 per cent, of export sales’ in consideration of the obligation of providing technology and technical services. The term “technology and technical services” was defined in clause (2)(b) of article 1 of the agreement. On the interpretation of this clause, the Tribunal opined that the technical services and technology, which the licensor had to provide to the assessee was not on continuous basis, but a one time affair. She thus submitted that a correct finding of fact was arrived at by the authorities below to the fact that royalty expenditure was capital in nature.

7. We have given our due consideration to the aforesaid submissions made by the learned counsel for both the parties. Since the answer to the question formulated above depends on the construction of technical collaboration agreement dated May 25, 1999, entered into between the assessee and the foreign collaborators, viz., Ford Motors Company, we have scanned the said agreement as well, minutely. As per article 2 of the agreement, the licensor has granted to the assessee non-exclusive rights and licences during the term of the agreement in the contract territory to manufacture, sell, retail and service license products, using technical information furnished by the licensor and under the Industrial Property Rights. Article 3 provides that the licensor shall supply the assessee with technical information promptly to assist the assessee to introduce manufacture of licensed products. During the term of the agreement, the licensor also agreed to supply technical improvement and infusion in use in mass production by the assessee relating to the licensed products without additional charge. Article 4 deals with payments to be made by the assessee as a consideration for the aforesaid transfer of technology, etc. It is in two parts. Clause (1)(a) of article 4 stipulates making payments of lump sum fee and reads as under:

“(a) For transfer of CAB technology by licensor to licensee, licensee shall pay the licensor a lump sum of US$ one million (1,000,000) in three equal instalments.”

clause (1)(b) of article 4 deals with royalty payment (with which we are concerned) reads as under:

“(b) In consideration of the obligations of providing technology services, the licensee shall pay a royalty of 3 per cent, on domestic and 5 per cent, on export sales, subject to tax, calculated on the basis of the net ex-factory sale price as stated in the licensee's invoice of all licensed product produced by or for the licensee, exclusive of excise duties minus the cost of standard bought out components and the landed cost of imported components, irrespective of the source or procurement including ocean freight, insurance, customs duties, etc. Royalty shall be paid for a period of seven years from the date of the commencement of commercial production.”

8. Thus, for transfer of technology, the assessee agreed to pay a lump sum amount of US $ 1 million. This payment is admittedly treated as capital expenditure by the assessee and has been shown as such. However in so far as payment of royalty is concerned which is an issue before us, that depends on the domestic as well as export sales. Quantum of the said sales would determine the extent of royalty to be paid and it will decrease or increase every year depending upon the decrease or increase in the sales. Significantly, this payment is not because of “transfer” of technology, but for providing “technical services”. In such circumstance, we are of the opinion that this payment of royalty, which is a continuous process, should have been treated as revenue expenditure. In a recent judgment given by this court in the case of CIT v. Sharda Motor Industrial Ltd. in I.T.A No. 837 of 2009 decided on September 3, 2009 [2009] 319 ITR 109 (Delhi), identical issue arose. In the aforesaid case also/lump sum payment was made for providing technical know-how, which was considered as capital expenditure. In addition, royalty was also paid by the assessee at a particular percentage of the sales. Holding that, the said payment would be in the nature of revenue expenditure, this court dealt with the issue in the following manner (page 73):

“3. In so far as lump sum payment against transfer of technical know-how provided by the Korean company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The Commissioner of Income-tax (Appeals) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler.

4. We are of the opinion that this finding of the Commissioner of Income-tax (Appeals), as approved by the Income-tax Appellate Tribunal, is a finding of fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year.

5. In Commissioner Of Income-Tax v. J.K Synthetics Limited, [2009] 309 ITR 371 (Delhi), after elaborately discussing the entire case law on the subject, the court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expendi-ture One of the principles enumerated therein reads as under (pages 412-413 of 309 ITR):

‘(v) expenditure incurred for grant of licence which accords “access” to technical knowledge, as against, “absolute” transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grairefrom the chaff, one would have to closely look at the attendant circumstances, such as:

(a) the tenure of the licence,

(b) the right, if any, in the licensee to create further rights in favour of third parties.

(c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licensor,

(d) whether the licence transfers the “fruits of research” of the licensor, ‘once for all’,

(e) whether, on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which “access” to knowledge was obtained during the subsistence of the licence.

(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature.’”

9. In these circumstances, we answer the question in favour of the assessee and against the Revenue. As a result, the order of the authorities below is set aside. No costs.