HONDA SIEL CARS INDIA LTD. versus COMMISSIONER OF INCOME TAX, GHAZIABAD
[2017] 6 S.C.R. 1004, Supreme Court of India, 2017
Outcome: Dismissed (Dismissed)
Segment: Facts
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[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 
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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 
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realities of business. 
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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 
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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 
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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 know-
how, 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 
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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 
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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 
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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 
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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 2005-
2006. 
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, 
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An agreement dated May 21, 1996 between HMCL, Japan and the 
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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 
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[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 
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'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. 
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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. 
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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." 
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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 
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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 
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transfer remittance to the bank account designated by LICENSOR, 
based on final government approval. 
2. Royalty: 
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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. 
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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.] 
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14.4 It is understood and confirmed that it should be separately 
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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 <lien allowances, traveling expenses, 
staying or living expenses and other incidental expenses, shall be 
payable by licensee to LICENSOR in accordance with such" 
Memorandum on Exchange of Technicians", separate from and 
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in addition to the payments under this Article 14, and that no amount 
of any such fees, costs, expenses or other consideration is included 
in the payments under this Article 14." 
(emphasis added) 
15. Article 19 provides term/tenure of agreement and reads as 
D 
under: 
"Article 19. TERMS OF AGREEMENT: 
This Agreement shall become effective on the Effective Date, 
and shall continues in full force and effect for period often( I 0) 
years from the date of agreement or seven (7) years from the 
date of commencement of commercial production, and shall 
thereafter be renewed subject to the prevailing laws in
India; 
provided, however, that this Agreement may be terminated by 
either party at the end of the initial period as mentioned above 
or at the end of any subsequent renewed period by written 
notice to that effect given to the other party at least three (3) 
months prior to the expiration of initial period or any subsequent 
renewed period. Notwithstanding the foregoing, in the event 
of termination of the Joint Venture Agreement, this Agreement 
shall accordingly terminate forthwith." 
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(emphasis added) 
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"16. Agreement can be terminated by either of the parties by 
giving sixty days' notice, in case of default in performance of 
obligations under the agreement, as contemplated in Clause 20.1. 
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A 
Consequence of termination. of agreement is provided in Article 
21 and reads as under: 
"21.1 In the event of the expiration or any other termination of 
this Agreement for any reason whatsoever, (except where the 
parties have taken steps for the renewal of the agreement) and · 
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unless otherwise agreed upon by the parties hereto, 
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l. licensee shall, within 90 days, discontinue (I) the manufacture, 
sale and other disposition of the Products and the Parts, and (ii) 
the use of the Intellectual Property Rights, Technical Information 
licensed or furnished by LICENSOR under this Agreement. 
2. licensee shall promptly return to LICENSOR all particular 
documents and tangible property supplied by LICENSOR in 
connection with this Agreement and belonging to LICENSOR and 
shall keep all Information received by licensee hereunder secret 
and confidential in accordance with Article 7 hereof; 
3. licensee shall not be entitled to demand from LICENSOR, for 
the reason of the expiration or termination of this Agreement or 
the failure to renew or extend it, any damages, reimbursements · 
or other payments on account of the current or prospective profits 
on licensee's sale or anticipated sale of the Products and the Parts, 
or on account of the establishment, development or maintenance 
of the goodwill or other business oflicensee, or on account of any 
other cause of thing whatsoever, except as provided in this
Agreement; 
4. Even after the expiration or termination of this Agreement for 
any reason whatsoever, the licensee permits LICENSOR or its 
agents to have access to licensee's factories and other facilities 
and to make the necessary inspection to confirm whether licensee 
is observing its obligations under this Article 21.1; 
5. LICENSOR may at its option, but without obligation to do so, 
repurchase or cause to be repurchased at fair price agreed upon 
by the parties hereto, all or any portion of the Products and the 
Parts which licensee then has on hand and which remain unsold 
and unused at the time of the expiration or termination of this 
Agreement;
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
1015 
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] 
6. LICENSOR may at its option sell, directly or indirectly, the 
A 
Products and the Parts repurchased by it under paragraph (5) 
above in the Territory or any other country, without any liability on 
the part of LICENSOR, to account to licensee for any part of the 
proceeds of such sale or any other sums whatsoever; 
7. If LICENSOR does not exercise its option referred to in 
B 
Paragraph (6) above wi~hin a reasonable period of time after the 
expiration or termination of this Agreement, then licensee may, 
notwithstanding the provision set forth in Paragraph (I) above, 
sell on a non-exclusive basis, the Products and the Parts which 
licensee has on hand at the time of the expiration or termination 
of this Agreement within such a reasonable period of time as may 
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be agreed upon by the parties hereto; provided, however, that 
such sale shall be made in accordance with this Agreement and 
without impairing LICENSOR's reputation, provided further that 
the said sale shall be so executed without using the Trade mark of 
the LICENSOR in full or in part, and provided further, that running 
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royalties thereon shall be paid to LICENSOR on the same terms 
and conditions as provided herein. 
(emphasis added) 
21.2 This expiration or any other termination of this Agreement 
here under shall be without prejudice to any right which shall have 
accrued to either party here under prior to
such expiration or 
termination." 
(emphasis added)" 
7. As is clear from the reading of Article 14 of the Agreement, 
the aforesaid royalty in 5 equal installments was to be paid for the right 
in license that was granted by the HMCL, Japan to the assessee under 
Article 2 as well as for furnishing of technical information under Article 
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4.2. Under the l!_foresaid articles, HMCL, Japan had to provide 
manufacturing facilities, know-how, technical information and it also gave 
information regarding intellectual property rights to the assessee which 
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the assessee was entitled to exploit only as a licensee and without getting 
any rights in the said intellectual property belonging to HMCL, Japan. 
The terms 'manufacturing facilities, intellectual property rights, know-
how and technical information' were defined in clauses 3, 5, 6 and 7 of 
the Agreement wbich reads as under: 
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SUPREME COURT REPORTS 
[2017] 6 S.C.R. 
"3. The term "Manufacturing Facilities" shall mean jigs, tools, 
dies, machinery' and equipment which licensee for the 
manufacture, assembly, testing of inspection of the products. 
5. The terms "Intellectual Property Rights" shall mean those 
patents, utility models design patents and other intellectual property 
rights directly relating to the Products or the licensed parts 
themselves relating to the manufacture of the products or the 
licenced parts (including many pending applications thereof, but 
excluding trademarks, and excluding patents utility models design 
patents and other intellectual property rights relating to the 
Manufacturing Facilities and the manufacture thereof) which 
Licensor owns at the time of execution of this Agreement or may 
own from time to time during the term of this Agreement or under 
which Licensor is entitled to grant a licen.ce to licensee. 
6. The term "know-Hose" shall mean any and all secret technical 
information (except for the Intellectual Property Right), whether 
in writing or not, including but not limited to drawings, standards, 
specifications, material lists, process manuals and direction maps, 
which directly relates to the products or the licenced parts 
themselves or is necessary for the manufacture of the products 
or the licenced parts and which Licensor owns at the time of 
execution of this Agreement or under which Licensor is entitled 
to grant a
licence to licensee. 
7. The term "Technical Information;' shall mean() the KnowHow, 
and (II) any technical information, not included in the Know How, 
such as service materials and Japanese Industrial Standard (JIS), 
whether in writing or not, which directly relates to the products or 
the licenced parts or is necessary for the manufacture of the 
products or the licenced parts and which Licensor owns at the 
time of execution of this Agreement or may own from time to 
time during the term of this Agreement or under which Licensor 
is entitled to grant a licence to licensee, and the Technical 
Information shall include the "Technical Materials" (emphasis 
added) 
13. Licence was granted by HMCL, Japan to an indivisible, non-
transferable and exclusive right and licence to manufacture, use 
and sell the products and the licensed parts within the territory
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] 
under the intellectual property rights by using knowhow, and 
technical information. It also provided that licensee, i.e., HSCIL/ 
Assessee may grant sub-licenses with a prior written consent of 
licensor. It also provided that to sale or export any products and 
parts, to any place outside territory of India, prior consent of 
licensor would be required." 
8. It may also be pointed out, at this stage, that as a part of 
Agreement, certain memoranda were also executed between the parties, 
VIZ.: 
(a) Memorandum on exchange of technician 
(b) Memorandum on supply of parts 
( c) Memorandum on supply of manufacturing facilities 
9. It is on the analysis of the aforesaid clauses of the Agreement 
that issue needs to be decided. As per the Revenue, technical know-
how and royalty payments are of enduring nature and, therefore, they 
would qualify as capital expenditure. On the other hand, the assessee 
maintains that it had acquired mere right to use technical information 
provided by HMCL, Japan and, thus, it did not lead to creation of any 
asset of enduring nature. Therefore, it was to be treated as revenue 
expenditure. 
10. The High Court, after taking note of various judgments on the 
subject and the principles laid down in those judgments, came to the 
conclusion that royalty was for enduing benefit of the business. It was 
not only for running the business but for bringing the business
into existence 
and then for running and sustaining it. In other words, main reason 
which persuaded the High Court to come to the aforesaid conclusion 
was that there was no existing business which needed to be improvised 
with the aid of technical know-how. This TCA was executed with the 
aim and objective to establish a new unit for manufacture of automobiles 
and parts thereof. Therefore, a new unit was brought into existence in 
the form of assessee on which HMCL, Japan, a foreign company, had 
absolute control as it held 99% shares in the joint venture. Further, 
technical know-how agreement for technical collaboration which not 
only included transferoftechnical information, but, complete assistance, 
actual, factual and on the sport, for establishment of plant and machinery 
etc. so as to bring into existence manufacturing unit for the products. 
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The Agreement also provided for continuous assistance at every stage. 
The High Court was of the opinion that in the aforesaid circumstances, 
the test laid down by the Full Bench of Madras High Court in Mis. 
Jonas Woodhead and Sons (India) vs. Commissioner of Income 
Tax1 becomes applicable which is to the effect that whenever a complete 
new plant with a complete new process, with new technology for a 
manufacture of product is brought into existence, payment for such 
technical know-how is to be treated as capital expenditure. The High 
Court also remarked that the expenditure in the form of technical know-
how fee and royalty was not only for running the business but for bringing 
the business into existence and, therefore, could not be treated as the 
revenue expenditure. 
11. Mr. Tripathi, learned senior counsel appearing for the assessee 
submitted at the outset that on identical issue pertaining to this very 
assessee, Delhi High Court has taken a contrary view in the case of 
CIT vs. Hero Honda Motors [(2015) 327 /TR 48J(Delhi)j holding 
that payment of technical know-how fee and royalty was in the nature 
of revenue expenditure. His further submission was that the very premise 
on which Allahabad High Court had given the impugned judgment, was 
contrary to record. In this behalf his submission was that the High 
Court had proceeded on the premise that the technical know-how fee 
and royalty was paid
for setting up the plant for manufacture of 
automobiles which are contrary to the factual finding recorded by the 
Tribunal in this case. According to him, the know-how was provided to 
the assessee for the purpose of manufacturing of products in India. He 
also argued th.at the High Court was influenced by irrelevant factors like 
extent of share holding of HMCL, Japan in the assessee which was of 
no relevance. The learned counsel laid much emphasis that in terms of 
TCA, the appellant had only acquired the right to use the technical know-
how provided by HMCL for manufacture of products, during the currency 
of the TCA, which was for an initial period often years from the date of 
agreement or seven years from the date of commercial production. The 
ownership rights in th.e know-how continued to re.main with HMCL, 
G 
Japan and the appellant was not authorized to transfer the know-how 
license to any other person or assign or convey the same to any third 
party. Thus, what the appellant acquired was only a limited right to use 
and exploit the know-how for manufacture of products and parts. 
I 1979 (117) !TR 55 
H
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
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12. The learned counsel for the Revenue refuted the aforesaid 
A 
submissions of Mr. Tripathi. His contention was that finding of fact was 
arrived at by the Assessing Officer, which was confirmed by the CIT(A) 
as well that a new asset in the form of setting up of a new company had 
come into existence with the aid of technical know-how and, therefore, 
the expenditure in-question was capital expenditure. He further submitted 
that the view which was taken by ITATwas un-sustainable and, therefore, 
rejected .by the High Court. Referring to the reasoning given by the 
High Court in the impugned judgment which is already taken note of 
above, his submission was that the same should be accepted. 
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13. We have considered the respective submissions of counsel 
for the parties on either side. First thing which is discernible in the 
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impugned judgment of the High Court is that the High Court has 
proceeded entirely on the basis that technical know-how was used for 
setting up of a plant for manufacture of automobiles. Judgment of the 
!TAT, on the other hand, reveals that it had arrived at a contrary 
conclusion. 
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14. Record reveals that simultaneously with the signing ofTCA, 
certain other agreements were also entered into between HMCL, Japan 
and the assessee on May 21, 1996. 
15. Nomenclature of these three agreements is already taken 
note of above. These are 'Memorandum on
Exchange of Technicians', 
'Memorandum on Supply of Parts' and 'Memorandum on Supply of 
Manufacturing Facilities'. The Tribunal went into the nature of these 
agreements. Engineers and technicians were sent by HMCL, Japan to 
India for providing necessary guidance for setting up of plant. Likewise, 
Memorandum on Supply of Parts related to the supply by HMCL, Japan 
of parts required for the manufacture of Honda cars. This Agreement 
basically provided each sale and purchase of pats shall be effected in 
accordance with the terms and conditions of an individual purchased 
contract for the parts, which means that the supply of parts is governed 
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by separate contracts. Third Agreement known as 'Memorandum on 
Supply of Manufacturing Facilities' stipulated the specification of the 
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manufacturing facilities to be sold by Japanese company to the assessee, 
their sale prices and the time of delivery which was to be separately 
decided by the parties from time to time. It contained detailed provisions 
in respect of the specifications and changes thereto, terms of payment, 
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inspection before delivery, functional testing of materials, packing, 
·insurance, on-sight inspection, warranty title risk, patents, trademarks 
etc. Undoubtedly, payments made in respect of facilities given under the 
aforesaid Memoranda are capitalised by t,he assessee, showing the same 
to be the capital expenditure. Contrasting these three Memoranda with 
the TCA, ITAT returned a finding to the effect that for setting up the 
manufacturing facilities and for the tax, separate agreements had been 
entered into by the parties and separate payments were made by the 
assessee as consideration therefor. This makes it clear that the payment 
of technical know-how and royalty are not part of payments for setting 
up the plant which manufactures the Honda cars in India but, were 
made to enable the assessee to manufacture the Honda cars in India 
which :ire its stock and trade. The Tribunal was conscious of the fact 
that this TCA was also entered into at the time of setting up of the fact 
and since the know-how was being obtained for the first time and was 
crucial to the setting up of the business of the assessee. It posed a 
question as to whether this could make the difference and the expenditure 
was to be treated as capital expenditure. However, after noticing that 
no such distinction was drawn by Delhi High Court in Shriram 
Refrigeration Industries Vs. Commissioner of Income Tax2 and 
Triveni Engineering
Works Ltd. Vs. C/T3 and the test applied was as 
to whether the expenditure, whether incurred at the time of setting up of 
the business or later, acquisition of technical know-how or was only for 
the use of the know-how for a particular period. Applying the aforesaid 
test, the Tribunal found that TCA in-question gave a limited right to the 
assessee to use the technology with no ownership or proprietary rights " 
therein. 
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16. The aforesaid conclusion recorded by the ITAThas been upset 
by the High Court in the impugned judgment. It would be pertinent to 
point out that even the High Court has not interpreted the clauses of the 
TAC to conclude that proprietary rights in the technical know-how stood 
acquired by the assessee. It has proceeded on the basis that it was ~only 
right to use the technical know-how which was given. Its conclusion 
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rests entirely on the basis that the technical know-how was given for 
setting up of the new plant. It is this difference of opinion which is to be 
settled here. 
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2 1981 (127) !TR 746 
3 1981 (136) ITR 340
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
1021 
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] 
17. A reading of the TCA would bring out the following pertinent 
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aspects: 
"(a) the appell!lnt was granted indivisible and non-transferable 
right to manufacture in India the range of products using know 
how/technology licensed by HMCL;. 
(b) the appellant had during the currency of the agreement only 
the right to access the manufacturing know-how/technology owned 
byHMCL; 
(c) there was no transfer of the know-how/technology in favour 
of the appellant and the proprietary rights therein always vested 
inHMCL; 
( d) the appellant was to keep the know-how/technology confidential 
and was barred from assigning the same to any third party. 
( e) the agreement was for a period of 10 years and was renewable 
B 
c 
at the ~ption of the parties; and 
D 
(f) on the expiry of the agreement, the appellant was prohibited 
from using the know-how/technology and as duty bound to return 
all copies of the drawings, designs, etc. made available by HMCL 
under the agreement" 
18. If the aforesaid factors are taken in isolation, probably the 
claim of the assessee may be justified. Distinction between capital and 
revenue expenditure with reference to acquisition of technical infonnation 
and know-how has been spelled out by this Court as well as High Courts 
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in series of cases. Primary test which is adopted to differentiate between 
capital and revenue expenditure remains 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 concl!frent 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 
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expenditure is incurred to acquire a tangible asset, detennination as to 
whether the said acquisition of tangible asset is of capital nature or the 
expenditure is of revenue nature, may not pose a problem. However, in 
case of technical infonnation and know-how, having regard to their unique 
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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 
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oflicence to use those rights for a limited pu.rpose or limited period, the 
Courts have held that in such a situation, the royalty paid for use of such 
technical information or kllow-how would be in the nature of revenue 
expenditure as no enduring benefits is acquired thereby. This was so 
held in a classic case, entitled Commissioner of Income Tax, Bombay 
City Iv. Ciba India Limited'. In the said case, the assessee company 
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had procured know-how in the form of processes, formulae, scientific 
data, working, prescription and other intellectual property rights developed 
by a Swiss Company, to produce licensed preparations and to promote 
their sale in India. Inspite of the fact that the Swiss Company had granted 
to the Indian assessee "full and sole right and licence" in the territory of 
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India under the patents listed in Schedule-I, to make use, exercise and 
vend the inventions referred to therein and to use the trade marks set 
out in Schedule-II in the territory oflndia, this Court held that what was 
conferred was a mere right to use. The Indian
assessee, it was observed, 
was not entitled to exclusive rights to patents, trademarks etc. As per 
the agreement, proprietary information was not to be divulged to third 
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parties without consent. The rights granted enabled access to the technical 
knowledge and experience with right to use patents and trademarks for 
a limited period. The Swiss Company did not part with any asset of its 
business, nor did the Indian assessee acquire any asset or advantage of 
enduring nature. The right empowered the Indian assessee to draw for 
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the purpose of carrying on its business as a manufacturer and rely upon 
the technical knowledge of the Swiss Company. There was no attempt 
to part with technical knowledge absolutely in favour of the Indian 
assessee. It was not a case of transfer of intellectual rights once for all. 
Thus, the expenditure incurred was revenue in nature. 
19. Likewise, in Alembic Chemical Works Co. Ltd. v. 
G Commissioner of Income Tax, Gujarat5, the assessee was engaged 
in the manufacture of antibiotics and pharmaceuticals on the basis of 
licence which was granted to it by the Government for manufacture of 
antibiotic, penicillin etc. It entered into an agreement with Japanese 
' ( 1968) 69 !TR 692 (SC) 
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'(1989)177ITR377
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
1023 
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Company for supply of requisite technical know-how so as to achieve 
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substantially high level of performance or production with the aid of 
better technology and process of fermentation and with better yielding 
penicillin strains that was developed by the foreign company. Under the 
agreement, royalty was to be paid. This royalty payment was treated as 
capital expenditure till the stage of the High Court. This Court reversed 
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the judgment of the Courts below by holding the expenditure would be 
revenue in nature. In its judgment, the Court culled out certain principles 
laid down therein to determine, whether expenditure of assessee was 
'Capital Expenditure' or 'Revenue Expenditure' and said: 
(i) When an expenditure is made, not only once and for all, but 
with a view to bringing into existence an asset or an advantage 
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for the enduring benefit of trade, I think that there is very 
good reason (in the absence of special circumstances leading 
to an opposite conclusion) for treating such an expenditure 
as properly attributable not to revenue but to capital (referred 
to British Insulated Helsby Cables Ltd. v. Atherton, (1926) 
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AC 205). 
(ii) If the expenditure is made for acquiring or bringing into 
existence an asset or advantage for the enduring benefit of 
the business it is properly attributable to capital and is of the 
nature of capital expenditure. If on the
other hand it is made 
E 
not for the purpose of bringing into existence any sucli asset 
or advantage but for running the business or working it with a 
view to produce the profits, it is a revenue expenditure. 
(iii) The aim and object of the expenditure would determine the 
character of the expenditure whether it is a capital expenditure 
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or a revenue expenditure. 
20. It was also held that three aspects should be considered, (a) 
the character of the advantage sought, and in this, its lasting qualities 
may play a part, (b) the manner in which it is to be used, relied upon or 
enjoyed, and in this and under the former head recurrence may play its 
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part and ( c) the means adopted to obtain it. 
21. The decision went in favour of the assessee primarily on the 
ground that the assessee in that case was already engaged in the 
preparation of antibiotic since long. Therefore, it could not be said that 
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the area of improvisation by obtaining know-how from foreign 
collaboration was not a part of improvisation of existing business or that 
the entire gamut of existing manufacturing operation for the commercial 
production of penicillin in the assessee's existing plant had become 
obsolete or inappropriate in relation to the exploitation of the new sub-
cultures of the high yielding strains of penicillin. The Court also 
emphasised that it cannot be said that mere introduction of new bio-
synthetic source required the erection and commissioning of a totally 
new and different type of plant and machinery. To this, added factors 
were that the agreement placed limitations on the right of the assessee 
in dealing with the know-how and the conditions as to non-partibility, 
confidentiality and secrecy of the' know-how inclined towards the 
inference that the right pertained more to the use of know-howthan to 
its exclusive acquisition. This case is significant for our purposes 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 e?'penditure would be treated as 
revenue expenditure. This case, thus, gives an
indication that 
if such a technical know-how is for the purpose of setting up 
a new business, the position may·be different. 
(ii) Another aspect which needs to be nQted 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 any single legal principle. It was also observed 
that solution to the problem is notto be found by any rigid test 
or description. It has to be derived from many aspects of the 
whole set of circumstances, some of which may point in one 
direction, some in the other. One consideration may point so 
clearly that it dominates other and vaguer indications in the
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
INCOME TAX, GHAZIABAD [A. K. SIKRI, J.] 
contrary direction. It is a common sense appreciation of all 
guiding features which 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. 
22. When we apply the ·aforesaid parameters 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 knowchow 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 TCA in question for technic~I collaboration. 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 lumpsum royalty, though in five 
instalments, was paid therefor. 
23. 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 
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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 G 
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, establishes with 
assistance of foreign company, is co-extensive with the agreement. The 
Agreement is framed in a manner so as to given a colour of licence for 
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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 that in the event of 
expiration or otherwise termination, whatsoever, licensee, i.e.,joint venture 
company/ Assessee shall discontinue manufacture, sale and other 
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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. In case licensor does not exercise such an option and the 
product is allowed to be sold by licensee, it would continue to pay royalty 
as per rates agreed under the agreement. Clauses 19 and 21, in our 
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view, 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 our view, in totality of terms and 
conditions, will make the unit continue so long as manufacture of product 
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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 ofroyalty paid would
be in the 
nature of capital expenditure and not revenue expenditure. The Tribunal 
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is conclusion that it is only the other three memoranda which were 
necessary for setting up the manufacturing facilities and payment 
thereunder would qualify as capital expenditure, and not the payment of 
technical fees/royalty on the ground that this Agreement was not in 
connection with the setting up of a plant or manufacturing facilities, is 
not correct. It would be interesting to note that even the Tribunal had 
nurtured doubt on the nature of this expenditure as TCA was signed 
simultaneously with the other memoranda to facilitate setting up of a 
new factory and not improvising the earlier set up. This doubt has 
expressed by the ITAT itself in the following words: 
"''Our doubt was why the payment, at least of the Jump sum 
technical know-how fees, cannot be considered as being connected 
to the initial starting up of the business and hence not allowable 
since the know-how was bring obtained for the first time and was 
crucial to the setting up of the business of the assessee which 
undisputedly was to lllanufacture Honda cars in India. It may be 
recalled that this was also the view taken by the Assessing Officer.
HONDA SIEL CARS INDIA LTD. v. COMMISSIONER OF 
1027 
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Further, the assessee was not already in the manufacture of cars 
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and was co'llmencing such an activity for the first time. It was 
not a case of a business already in existence. The payment was 
an "once for all" payment, though staggered over a period of 
years." 
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24. However, discussion that follows thereafter suggests that the 
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!TAT was satisfied with the explanation of the assessee that the High 
Courts have always applied the test as to whether the expenditure, whether 
incurred at the time of setting up of business or later, was for acquisition 
of the technical know-how or was only for the use of know-how for a 
particular period. !TAT felt satisfied with the said explanation and held 
that the expenditure was revenue in nature. It is at this stage that the 
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Tribunal erred in not approaching the issue in right perspective. 
25. Coming to the judgment of the Delhi High Court in the case of 
this very assessee, it would be noticed that in that case, technical know-
how was obtained for improvising scooter segment, which unit was 
already in existence. On the contrary, in present case, the TCA was for 
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setting up of new plant forthe first time to manufacture cars. The Delhi 
High Court specifically noted this fact in para 14 of the judgment. While 
analysing the agreement in that case which was for providing technical 
know-how in relation to the product i.e. two
wheelers and three wheelers 
and the purpose was to introduce 'new models' of the said product 
developed by the Japanese Company, the High Court noted that the 
agreement specifically recorded that the respondent assessee was 
already engaged in the business of manufacturing, assembling, selling 
and otherwise dealing with two/three wheelers and their parts as a joint 
venture. It referred to the earlier collaboration agreement dated January 
24, 1984 and the subsequent amendment thereto which conferred and 
had granted to the respondent assessee a right and licence to manufacture, 
assemble, sell, distribute, repair and service two/three wheelers. The 
aforesaid distinction between the two Agreements has made all the 
difference in the results. As a consequence, we find no merit in these 
appeals which are dismissed with cost. 
Ankit Gyan 
Appeals dismissc:d. · 
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