THE issue before the Bench is - Whether when the parting of technical knowhow was linked to providing assistance to the transferee in renovation, installation and commissioning of the plant, assessee is to be faulted with for claiming transfer of knowhow as an independent transaction. YES is the answer.
Facts of the case
The assessee was engaged in the manufacture of closure systems required for plastic bottles. The moulds required for the manufacture of the said goods were imported. With the object of going out of the said business, during the financial year ended 31st March, 1997 the assessee sold its plant and machinery including the imported moulds to SPBP, a sister concern, and the self-developed technical know-how to M/s. T. T purchased the said plant and machinery and moulds from SPBP along with certain other plant and machinery belonging to SPBP. For the sale of the self-developed technical know-how, comprising drawings, designs, manuals, process know-how, etc. the assessee entered into an agreement (first agreement) with T. Out of the consideration of Rs. 59 lakhs for the said transfer, a part was to be paid upon handing over of the drawings and related technical information. The balance sum was payable after the installation and commissioning of the plant and machinery purchased by T from SPBP and trial production. Another agreement (subsequent agreement) was entered into between the assessee and T in terms of which the assessee agreed not to compete in the manufacture and/or sale and/or trading of the goods or similar products for a period of four years for consideration. The assessee made over the self-developed technical know-how comprising drawings, designs, manuals, process know-how, technical information and guidelines, etc. to T and became entitled to a sum out of the agreed consideration. Subsequently T paid the sum of Rs.15 lakhs along with interest @18% p.a. for the delay in payment. The balance sum was subsequently paid by T after the trial production along with interest for the delay in payment. The sale of the plant and machinery including imported moulds to SPBP was duly reflected in the accounts of the assessee for the previous year ending on March 31, 1997 and the loss arising upon such sale was duly claimed in the computation of income for the assessment year 1997-98 of the assessee.
T deducted income tax at source from the sum of Rs.59 lakhs paid to the assessee for purchase of its self-developed technical Know-how. The assessee claimed credit for the said amount of tax deducted at source in its return for the assessment year 1998-99. The return for the assessment year 1998-99 was dealt with by the Assessing Officer under section 143(1)(a) accepting the returned loss. However, subsequently the Assessing Officer initiated proceedings under section 147 for the said assessment year on the ground that the assessee had claimed credit for the tax deducted at source but had not shown the receipt of Rs.59 lakhs as part of its income. In the reassessment proceedings the assessee contended that there was no cost of acquisition in respect of the self-developed technical know-how which was transferred during the previous year relevant to the assessment year 1997-98 and that there was no liability for any capital gains tax. Though the Assessing Officer accepted there was no cost of acquisition, he treated the sum of Rs. 59 lakhs as chargeable to capital gain tax.
In appeal, the CIT(A) dismissed the appeal holding that the transfer took place during the previous year relevant to the assessment year 1998-99, and the amount was chargeable to capital gains tax in the said assessment year having regard to the amended provisions of section 55. Tribunal upheld the order of the CIT (A).
Having heard the parties, the Court held that,
++ not only the assessee was to "render, supply, furnish and provide said technical Know-how, advice, guidance" to T but was also under an obligation to "provide information, assistance and services for day to day operation, production and manufacture" of bottles. Thus this Clause, a composite provision, provided not only for transfer of technology for manufacture of bottles but also to provide assistance for running the factory on a daily basis. Clause 3 is near similar to Clause 1 as the assessee was not only to provide "all the relevant information, data, documents, drawings, design, manuals pertaining to technical know-how for the product and manufacture" of bottles but was also to "provide its expert advice on all aspects so as to enable the transferee to have the sufficient information to run the operations of manufacturing" the bottles;
The assessee was engaged in the manufacture of closure systems required for plastic bottles. The moulds required for the manufacture of the said goods were imported. With the object of going out of the said business, during the financial year ended 31st March, 1997 the assessee sold its plant and machinery including the imported moulds to SPBP, a sister concern, and the self-developed technical know-how to M/s. T. T purchased the said plant and machinery and moulds from SPBP along with certain other plant and machinery belonging to SPBP. For the sale of the self-developed technical know-how, comprising drawings, designs, manuals, process know-how, etc. the assessee entered into an agreement (first agreement) with T. Out of the consideration of Rs. 59 lakhs for the said transfer, a part was to be paid upon handing over of the drawings and related technical information. The balance sum was payable after the installation and commissioning of the plant and machinery purchased by T from SPBP and trial production. Another agreement (subsequent agreement) was entered into between the assessee and T in terms of which the assessee agreed not to compete in the manufacture and/or sale and/or trading of the goods or similar products for a period of four years for consideration. The assessee made over the self-developed technical know-how comprising drawings, designs, manuals, process know-how, technical information and guidelines, etc. to T and became entitled to a sum out of the agreed consideration. Subsequently T paid the sum of Rs.15 lakhs along with interest @18% p.a. for the delay in payment. The balance sum was subsequently paid by T after the trial production along with interest for the delay in payment. The sale of the plant and machinery including imported moulds to SPBP was duly reflected in the accounts of the assessee for the previous year ending on March 31, 1997 and the loss arising upon such sale was duly claimed in the computation of income for the assessment year 1997-98 of the assessee.
T deducted income tax at source from the sum of Rs.59 lakhs paid to the assessee for purchase of its self-developed technical Know-how. The assessee claimed credit for the said amount of tax deducted at source in its return for the assessment year 1998-99. The return for the assessment year 1998-99 was dealt with by the Assessing Officer under section 143(1)(a) accepting the returned loss. However, subsequently the Assessing Officer initiated proceedings under section 147 for the said assessment year on the ground that the assessee had claimed credit for the tax deducted at source but had not shown the receipt of Rs.59 lakhs as part of its income. In the reassessment proceedings the assessee contended that there was no cost of acquisition in respect of the self-developed technical know-how which was transferred during the previous year relevant to the assessment year 1997-98 and that there was no liability for any capital gains tax. Though the Assessing Officer accepted there was no cost of acquisition, he treated the sum of Rs. 59 lakhs as chargeable to capital gain tax.
In appeal, the CIT(A) dismissed the appeal holding that the transfer took place during the previous year relevant to the assessment year 1998-99, and the amount was chargeable to capital gains tax in the said assessment year having regard to the amended provisions of section 55. Tribunal upheld the order of the CIT (A).
Having heard the parties, the Court held that,
++ not only the assessee was to "render, supply, furnish and provide said technical Know-how, advice, guidance" to T but was also under an obligation to "provide information, assistance and services for day to day operation, production and manufacture" of bottles. Thus this Clause, a composite provision, provided not only for transfer of technology for manufacture of bottles but also to provide assistance for running the factory on a daily basis. Clause 3 is near similar to Clause 1 as the assessee was not only to provide "all the relevant information, data, documents, drawings, design, manuals pertaining to technical know-how for the product and manufacture" of bottles but was also to "provide its expert advice on all aspects so as to enable the transferee to have the sufficient information to run the operations of manufacturing" the bottles;
++ then under Clause 2 assessee was to depute a technical person on the request of T to train the staff to run the factory and maintain the machines and to optimize the methods of operation required for manufacture of bottles which was essential "for day to day operation" under Clause 1. Again Clause 9 assumes significance as it is evident that the assessee had represented that the plant and machinery required renovation so as to achieve maximum production. The extent of the said renovation required was to be conveyed to T, the transferee, and renovation was to be completed at a total cost of Rs.28,00,000/- which included dismantling, transportation, installation and commissioning in consultation with each other. Significantly under Clause 8(b) the balance amount of Rs. 44,00,000/- lakhs for transfer of know-how was payable on installation and commissioning of the plant and trial production. Therefore, Clause 4 of the first agreement regarding transfer of technology at a cost of Rs.59 lakhs cannot be read in isolation and has to be read as a whole as correctly interpreted by the Tribunal. Thus, mere parting by the assessee of the technical know-how to T was not the sole object with which the said agreement was entered into but was also to assist the transferee in renovation, in installing and in commissioning the plant. It is clear from the language of the Clauses of the first agreement that the sale of know-how and the renovation, installation and commissioning of the plant were interlinked. Significantly it is to be noted that the transferee company had started its production in the financial year 1997-98 and the services to be provided under the first agreement were from renovation to commissioning of the factory;
++ the question no. (a) and question no. (b) answered in the affirmative, against the Assessee and in favour of the Revenue.
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