October 2024

In a landmark ruling on depreciation for technical know-how, the Supreme Court of India, in Scientific Engineering House (P) Ltd. vs. CIT, overturned the High Court and Tribunal to hold that payments for technical documentation under collaboration agreements constitute acquisition of a depreciable asset. The Court meticulously interpreted the agreements, concluding that the ‘documentation service’ (drawings, designs, charts, plans, etc.) was the core consideration, not incidental. Applying the functional test from Yarmouth vs. France, it ruled that such technical know-how in tangible form qualifies as ‘plant’ under section 43(3) of the Income Tax Act 1961, as it serves as essential tools for the business. This decision clarifies that capital expenditure on technical documentation is eligible for depreciation, reinforcing a broad interpretation of ‘plant’ to include intangible business assets critical to operations. The judgment provides crucial guidance for businesses engaging in technical collaborations, ensuring tax benefits for investments in know-how.