Brief facts of the case- The respondent-assessee Hero Motocorp Limited, earlier known as Hero Honda Motors Limited, was a joint venture between the Hero Group and Honda Motorcycle Company Limited, Japan. for manufacture and sale of motorcycle using technology licenced by Honda.
For the above purpose ,they both have entered into a ‘license and technical assistance agreement’ in which Honda will provide know-how to manufacture ,assemble, sell and otherwise deal with two/three wheelers and their parts as a joint venture .Hero Motors Limited have to pay royalty, Model Fees and technical guidance fees for availing the service of know-how.
Some of the terms of the agreement are as follows:
a) Rights and licenses granted by the licensor to the respondent assessee were exclusive, indivisible and non-transferrable, without the right to grant sub-licenses to manufacture, assemble, sell and distribute the product or parts thereof. The rights and duties under the agreement were not assignable or delegatable, directly or indirectly.
b) The aforesaid license was for the term of the agreement, i.e. 10 years
c) Knowhow, technical information and other non-public technical or business information was to remain solely and exclusively the property of Honda and was to be held in trust and in confidence for Honda by the respondent assessee
After reading the above terms,it is clear that that ownership and the intellectual property rights in the know has never been transferred but the same were ardently and vigorously protected by Honda.Only the restricted rights on stringent terms has been granted. The ownership in the intangible continued to remain exclusive and sole property of Honda.
Contention of the Assessee/Respondent: While giving reference to case of CIT Bombay City I Vs Ciba India Limited (1986) 69 ITR 692 (SC) in which it was decided that as only the right to use the know-how has been granted but not the intellectual right has been transferred to the asssessee, so the same should be treated as revenue expense. Assessee also argued that in its case also it was only given the right to use the intellectual rights in manufacturing 2/3 wheelers for 10 years has been granted which can be renewed from time to time.
The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. So the same expense should be treated as revenue expense.
Contention of the Revenue/Appellant:Revenue argued that as the above said agreement entered into between Hero Honda Motors Limited and Honda Motorcycle Company Limited ,Japan is going to give enduring benefit in long term to the company so the same should be treated as capital expense.
Held by the respective court: As the only rights to use the know-how and the technology has been granted to the assessee not the ownership of the know-how has been transferred .The ultimate ownership remains with the Honda Motorcycle company Limited. Assessee is using the same for the smooth functioning of the business. So the same should be treated as revenue expense.