Drafting of agreement:
Special care is required in regard to the terms of the agreement. Since the facts and circumstances of each case differ from one another, it would be difficult to lay down a uniform guideline or principle by which the nature of the expenditure could be indicated as being capital or revenue in nature much in advance of incurring the expenditure itself. Therefore, having regard to the broad principles laid down by the Supreme Court case and also the High Courts in various cases one should, as far as practicable, plan the terms of the agreement in such a manner as to ensure that the amount payable to the foreign collaborator qualifies for deduction either as a revenue expenditure under section 37(1) when it is incurred or as capital expenditure qualifying for amortisation by way of depreciation admissible thereon.
In many cases, the problem of allocation of expenditure between capital and revenue and also the determination of the amount of royalties or fees for technical services or other consideration for the transfer of patents, copyrights, etc. outside India poses a considerable advantage both for the taxpayers and for the tax authorities. The solution to this problem lies in proper planning whereby under the terms of the agreement it is expressly indicated as to what is the amount of payment attributable to each type of service provided or asset given by the collaborator to the Indian taxpayer. To prescribe one composite amount of consideration for covering all the different types of services is to the disadvantage of both the Indian taxpayer and the foreign collaborator. It would be most advisable to have separate agreements for collaboration between the Indian company and the foreign collaborator for each of the technical services besides ensuring that the transfer of capital assets, wherever contemplated, is made by the collaborator to the Indian assessee outside India in every case. The agreement should also provide the amount of consideration for each type of service rendered or asset given, indicating also the manner in which the payment to the collaborator should be calculated. In other words, every care should be taken to secure that there is no ambiguity in terms of the agreement as a result of which the tax authorities might interpret the same to the disadvantage of the assessee. If it is not convenient to have separate agreements for different types of technical services because of the difficulties involved in obtaining the approval of the Central Government/CBDT to the agreements individually in each case coupled also with the formalities involved in obtaining the permission required under the Foreign Exchange Management Act from the different authorities, the Indian company may enter into one single collaboration agreement but the agreement should spell out in clear terms the different types of technical services and the amount of consideration payable for each one of them. By doing so, the Indian assessee and the foreign collaborator would be in a position to secure that the tax authorities do not have any authority to ignore the consideration specified under the agreement and substitute/allocate or even apportion the amount of consideration to the different items in the manner they find to be beneficial to the revenue.
Expenditure incurred towards professional fees for drafting of agreement in connection with the investments, collaboration, etc. would be expenditure of a revenue nature [CIT v. Century Spg. & Mfg. Co. Ltd. (1994) 210 ITR 783 (Bom)]