2015 (9) TMI 1362 - HC - Income Tax

Sale of self-developed technical know-how - whether chargeable to tax - cost of acquisition is Nil - AO held as revenue receipt - ITAT held that appellant was liable for capital gains tax in view of the amendment made in section 55 with effect from the assessment year 1998-99 - whether the first agreement is a composite agreement or taking the said agreement as a whole, whether the clauses in it are severable? - Held that - Clauses of the first agreement, particularly Clauses 1,2,3,4,8 and 9 thereof, have to be scrutinized closely. To understand the actual effect of the first agreement, such through consideration is necessary. So far as Clause 1 is concerned we find that not only the appellant was to render, supply, furnish and provide said technical Know-how, advice, guidance to Truepack 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. In this connection it is worth mentioning that Clause 3 is near similar to Clause 1 as the appellant 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 appellant was to depute a technical person on the request of Truepack 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. In this context it is not material that the appellant had undertaken to bear the expenses for food and lodging of such technical person. From an analysis of the Clauses of the first agreement we find that mere parting by the appellant of the technical know-how to Truepack 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. In view of the discussion on the first agreement, no discussion is required on the subsequent agreement, the non-competition agreement, which refers to first agreement. Since Court has to look at the nature and substance of the transaction in the background of the agreement and as in the case in hand under the first agreement the appellant had transferred the know-how and had agreed to provide other services from renovation and installation of machinery till the commissioning of the plant as evident of the first agreement, on facts the judgments of the Supreme Court in CIT vs. B.C. Srinivasa Setty (1981 (2) TMI 1 - SUPREME Court), CIT vs. D.P. Sandu Bros. Chembur P. Ltd (2005 (1) TMI 13 - SUPREME Court) and the judgment of the Bombay High Court in CIT vs. Ralliwolf Ltd 1982 (7) TMI 48 - BOMBAY High Court are not applicable. Since payment of balance consideration of ₹ 44,00,000/- is linked with the installation and commissioning of machines at the transferee place and after trial production and as it appears that the installation had taken place in the assessment year 1998-99, the principles of law laid down in paragraph 8 of the judgment in Ajay Guliya v. Assistant Commissioner of Income-tax, New Delhi(2012 (7) TMI 530 - DELHI HIGH COURT) are not applicable. - order of ITAT confirmed - Decided in favour of the Revenue

Issues Involved:
1. Whether the transfer of technical know-how was an outright/absolute transfer.
2. Whether the consideration of Rs. 59 lakhs was solely for the transfer of technical know-how.
3. Whether the technical know-how was a capital asset.
4. Whether the Rs. 59 lakhs was a capital receipt or a revenue receipt.
5. The timing of the transfer of the capital asset for tax purposes.
6. Applicability of amended provisions of section 55 of the Income Tax Act, 1961.

Detailed Analysis:

1. Outright/Absolute Transfer of Technical Know-How:
The Tribunal held that there was no outright/absolute transfer of technical know-how by the appellant. The first agreement between the appellant and Truepack required the appellant not only to transfer technical know-how but also to provide assistance in the day-to-day operation and renovation of the plant. The Tribunal concluded that the transfer was not absolute as the appellant was still involved in providing ongoing services and assistance.

2. Consideration of Rs. 59 Lakhs:
The Tribunal found that the Rs. 59 lakhs received by the appellant was not solely for the transfer of technical know-how. The payment was also for other services such as assistance in the installation, commissioning, and renovation of the plant. The Tribunal interpreted the agreement as a composite one, where the payment was linked to various obligations, including the successful operationalization of the plant.

3. Technical Know-How as a Capital Asset:
The Tribunal concluded that the technical know-how was not a capital asset. The appellant failed to provide detailed descriptions of the self-developed designs, know-how, and secret processes. The Tribunal noted that the technical knowledge acquired in the course of business, which is ever-changing, cannot be considered a capital asset.

4. Capital Receipt vs. Revenue Receipt:
The Tribunal determined that the Rs. 59 lakhs was a revenue receipt. It reasoned that the payment was for ongoing services and assistance, not just for the transfer of a capital asset. The Tribunal emphasized that the appellant did not completely part with the technical know-how, as it continued to provide related services.

5. Timing of Transfer for Tax Purposes:
The Tribunal held that the transfer of the capital asset took place in the financial year 1997-98, relevant to the assessment year 1998-99. Although the technical know-how was handed over on March 31, 1997, the Tribunal found that the transfer was not complete until the appellant fulfilled its obligations under the agreement, which extended into the financial year 1997-98.

6. Applicability of Amended Section 55:
The Tribunal applied the amended provisions of section 55 of the Income Tax Act, 1961, which were effective from the assessment year 1998-99. Since the transfer was considered to have taken place in the financial year 1997-98, the amended provisions were applicable, making the sum of Rs. 59 lakhs chargeable to capital gains tax.

Conclusion:
The High Court upheld the Tribunal's findings, agreeing that the Rs. 59 lakhs was a revenue receipt and that the transfer of the technical know-how was not absolute. The Court affirmed that the transfer took place in the financial year 1997-98, making the amended section 55 provisions applicable. Consequently, the appeal was dismissed, and both substantial questions of law were answered in favor of the Revenue and against the Assessee.

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