# HONDA SIEL CARS INDIA LTD v. COMMISSIONER OF INCOME TAX, GHAZIABAD - **Citation:** [2017] 6 S.C.R. 1004 - **Court:** Supreme Court of India - **Decided:** 2017-06-09 - **Case number:** Civil Appeal Nos. 4918 of 2017 - **Bench:** A.K. Sikri, Ashok Bhushan - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/honda-siel-cars-india-ltd-v-commissioner-of-income-tax-ghaziabad-32319 - **Pages:** 24 ## Headnote 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 i ## Text _Characters 0–39,273 of 56,523. This is a partial read: ask again with offset=39273 for what follows._ 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 tangible asset, determination as to whether the said acquisition of tangible asset is of capital H 1006 A B c D E F G H SUPREME COURT REPORTS [2017] 6 S.C.R. nature or the expenditure is of revenue nature, may not pose a problem. However, in case of technical information and knowhow, 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. However, when no such rights are transferred but the arrangement facilitates grant oflicence 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. [Para 18) (1021-E-H; 1022-A-B] 2. The case of Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, Gujarat is significant 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-bow is for the purpose of 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 auy single legal principle. It was also observed that solution to the problem is not to be found by any rigid test or description. It bas to be derived from many aspects of the whole set of circumstances, some of which may point iu 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 HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF INCOME TAX, GHAZIABAD • 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 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. [Para 21] (1024-C-H; 1025-A-C] 3. When the aforesaid parameters are applied 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 Mis. 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 Technical Collaboration Agreement (TCA) in question. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, 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 lumps um royalty, though in five instalments, was paid therefor. [Para 22] [1025-C-F] 4. 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, established with assistance of foreign 1007 A B c D E F G H 1008 SUPREME COURT REPORTS [2017] 6 S.C.R. A 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 B c 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 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. Clauses 19 and 21, 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 totality of terms and conditions, will make the unit continue so D 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 E of capital expenditure and not revenue expenditure. [Para 23) [1025-G-H; 1026-A-D] Mis. Jonas Woodhead and Sons (India) v. Commissioner of Income Tax 1979 (117) ITR 55; CIT v. Hero Honda Motors (2015) 327 ITR 48l(Delhi); Shriram Refrigeration Industries v. Commissioner of Income Tax F 1981 (127) ITR 746; Triveni Engineering Works Ltd. v. CIT 1981 (136) ITR 340 - referred to. Commissioner of Income Tax, Bombay City I v. Ciba India Limited (1968) 69 ITR 692 (SC); Alembic Chemical Works Co. Ltd. v. Commissioner of Income G Tax, Gujarat (1989) 177 ITR 377 - relied on. Case Law Reference 1979 (117) ITR 55 referred to (2015) 327 ITR 481(Delhi) referred to H 1981 (127) ITR 746 referred to Para 10 Para 11 Para 15 HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1009 INCOME TAX, GHAZIABAD 1981 (136) ITR 340 (1968) 69 ITR 692 (SC) (1989) 177 ITR 377 referred to relied on relied on Para 15 Para 18 Para 19 CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4918 A of 2017. B From the Order dated 21.12.2016 of the High Court of Judicature at Allahabad in ITA No. 503 of2008 WITH C. Nos. 4922, 4921, 4920 and 4919 of2017. Parag P. Tripathi, Sr. Advocate, Deepak Chopra, Ms. Manasvini Bajpai, Amit Shrivastava, Ankul Goyal and R. Chandrachud, Ad vs. for the appellant. c A. N. S. Nadkarni,ASG, Ms. Gargi Khanna, Ms. Nisha Bagchi, Santosh Rebello, Ms. Nivedita N., Ms. Sneha Prabhu. and Mrs. Anil D Katiyar, Advs. for the respondents. The Judgment of the Court was delivered by A. K. SIKRI, J, 1. Assessee in all these appeals is Honda SIEL Cars Ltd. (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 20052006. 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 Mis. SEIL Ltd., a company incorporated under the Indian Companies Act. After getting necessary approval from the Government oflndia, a joint venture company in the name of the assessee was incorporated. After incorporation of the assessee as a joint venture, E F An agreement dated May 21, 1996 between HMCL, Japan and the G 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 H 1010 SUPREME COURT REPORTS [2017) 6 S.C.R. A · technical know-how and technical infonnation which were to be provided by HMCL, Japan (as a licensor) to the assessee (as a licensee). For providing the aforesaid facilities, it was agreed that a consideration/lump sum fee of30.5 million US Dollar would be paid by the assessee to the HMCL, Japan in five continuous equal installments and payment thereof B c 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 of30.5 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 D '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. E F G H In the subsequent years, the Assessing Officer again treated the royalty 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 !TAT 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. HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF IOI I INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] "8. Total share capital ofHSCIL/Assessee was 36 crores shares A out of which 35,63,99,995 s~ares· were held by HMCL, Japan while remaining 3600005 shares held by Mis. Seil India. In other words, joint venture was almost owned by HMCL, Japan, having around 99% shares and Seil India (locaUndian company) owned only I% shares. B 9. Thereafter, Mis. 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, Japa as "licensor" and HSCIL/ Assessee as licensee." C 14. In view of aforesaid licence, a onsideration/Iump sum fee agreed between parties was 30.5 mi lion U.S Dollar, payable in five continuous equtl installments y licensee to licensor and payment thereof ""!as to commence frQ,m third year after commencement of commercial production. Besides, licensee was D 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 o.f lumpsum fee payable by the licensee to the LICENSOR shall be USS 30.5 million. This fee shall be payable E F in 5 continuous equal annual installments, the amount of each of which installments shall be six million one hundred thousand US dollars (USS6, I 00,000), 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 G transfer remittance to the bank account designated by LICENSOR, based on final government approval. 2. Royalty: H 1012 SUPREME COURT REPORTS [2017] 6 S.C.R. A 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. The royalty shall calculated on the basis of the ex-factory sale price of the product exclusive of excise duties, minus the cost of B 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. c D E F G H 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 the payment currency, calculated on the basis of a 365 day year, subject to Government oflndia/RBI approvals/guidelines prevailing at that time. HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 1013 INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] I 14.4 It is understood and confirmed that it should be separately A 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 8 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