The assessee was a joint venture between a Mauritius corporation, and a company in Japan, and engaged in the manufacture and sale of seats for passenger cars. The assessee claimed deduction towards engineering and development costs. The assessee furnished a copy of the engineering and recovery agreement under which such payment was made. The AO held that the amount paid was capital expenditure and hence, not deductible. The AO treated it as an intangible asset and allowed depreciation at 25 per cent. after capitalisation, which resulted in a disallowance.

The Tribunal held that, the relevant clauses of the engineering recovery agreement clearly mentioned the licence to the assessee to use the engineering development work done by the two joint venture companies was non-exclusive, payment by the assessee towards engineering and development cost each year was directly dependent upon the volume of production in such year using the technology, there was no obligation on the assessee to make any payment dehors the production in any later year in the eventuality of closing down of its business notwithstanding the fact that the two joint venture companies initially determined the amount payable per unit of production on the basis of aggregate targeted volume over the life of the project, similarly, the assessee was not eligible for any exemption from payment after a specific period on recoupment of costs by the two joint venture companies. It was manifest that the assessee did not have any dominion and control over the intellectual property rights of the technology developed by the Mauritius and Japanese companies, which was simply licensed to it on non-exclusive basis. Thus, the payment did not result in acquiring and owning the engineering and development technology for it to be characterised as an intangible asset capable of capitalisation. The payment in the nature of royalty for the use of such technology, being an item of revenue nature. Disallowance was not sustainable. (AY.2012-13)