Termination of Agreement :

The Bombay High Court in Dorr-Oliver India Ltd. v. CIT (1998) 234 ITR 723 has held that in the case of a collaboration agreement, the liability of the Indian company to make payment under the agreement to the non-resident would continue only so long as the agreement remains operative. When once the Government of India and the Reserve Bank do not approve the agreement or direct the assessee to terminate the Agreement by a specified period, the moneys paid/payable after the date of termination of the agreement would not qualify for deduction as a business expenditure. This is because a termination of the agreement brings about cession of the liability and hence the question of deduction for a non-existing liability does not arise; for this purpose it is immaterial that the collaboration agreement initially entered into had stipulated that it would be operative for specified period and came to be terminated as per the orders of the Government or the Reserve Bank earlier than the duration of the agreement.