Drilcos (India) Pvt. Ltd vs. CIT (Supreme Court)

Lumpsum technical know-how fees are deductible only u/s 35AB & not s. 37(1)

The assessee entered into a “Licence and Technical Assistance Agreement” with an American company pursuant to which the American company agreed to transfer technical know-how to the assessee in consideration of US $2,25,000 to be paid in three installments. The assessee paid the first installment amounting to Rs.17.49 lakhs. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company. The assessee claimed that as the technical know-how was not received, the amount paid was deductible u/s 37(1) and not under s. 35AB. The AO & CIT(A) rejected the claim though the Tribunal upheld it. The High Court reversed the Tribunal. On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:

S. 35AB provides for the amortisation of any lump sum consideration for acquiring any know-how for use for the purposes of his business in 6 installments. Though because of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American company, the word “for” in s. 35AB, which is a preposition in English grammar, has to be emphasised while interpreting s. 35AB. S. 35AB says that the expenditure should have been incurred for the purposes of the business of the assessee. The Technical Assistance Agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once s. 35AB comes into play, then s. 37 of the Act has no application.