1979 (3) TMI 36 - HC - Income Tax

Issues Involved:
1. Whether the agreement between the petitioner-company and Hindustan Steel Ltd. qualifies for approval under Section 80MM of the Income Tax Act, 1961.
2. Whether the technical know-how was transferred by the petitioner to Hindustan Steel Ltd.
3. Whether the contract drawings amount to the provision of technical know-how.
4. Whether the transfer of technical know-how was for consideration.

Detailed Analysis:

1. Qualification of the Agreement under Section 80MM
The court examined whether the agreement between the petitioner-company and Hindustan Steel Ltd. qualifies for approval under Section 80MM of the Income Tax Act, 1961. Section 80MM deals with deductions from income claimed by an Indian company in respect of royalties, etc., received from any person in India for the provision of technical know-how. The court noted that the agreement must be approved by the Central Government and must involve the provision of technical know-how likely to assist in the manufacture or processing of goods or materials or in the installation or erection of machinery or plant for such manufacture or processing.

2. Transfer of Technical Know-How
The court analyzed the relevant parts of the agreement to determine if technical know-how was passed on by the petitioner. It was noted that the petitioner was to design, construct, and install a plant for the manufacture of sulphuric acid, including a know-how and design fee. However, the court found that the petitioner did not convey the knowledge of how the work should be done to Hindustan Steel Ltd., as the petitioner itself performed the work. The agreement was a turnkey contract, meaning the contractor used its own know-how for the execution of the contract, retaining the know-how. Therefore, no technical know-how was transferred to assist in the installation or erection of the plant.

3. Contract Drawings as Technical Know-How
The court considered whether the transfer of contract drawings amounts to the provision of technical know-how likely to assist in the manufacture or processing of goods or materials. The petitioner claimed that technical know-how was imparted through close association with Hindustan Steel Ltd. and by providing drawings, data sheets, technical specifications, and other documents. However, the court noted that this fundamental question was not considered by the CBDT in its impugned order. The court emphasized that the mere supply of drawings does not constitute the provision of technical know-how unless it directly assists in the manufacture or processing of goods or materials.

4. Consideration for the Transfer of Technical Know-How
The court addressed whether the transfer of technical know-how was for consideration. The agreement included a clause stating that the contract price covered the design and execution of the work, including the supply of necessary drawings. The court noted that a contract without consideration would be void, and it was not the case that the contract was without consideration. The expression "free of charge" referred to the supply of various copies of drawings in stipulated forms, not the supply of the drawings themselves. The court directed the CBDT to consider whether the contract drawings directly assist in the manufacture or processing of goods or materials and, if so, to determine if the drawings were supplied for consideration.

Conclusion:
The court allowed the writ petition, quashed the impugned order, and directed the CBDT to reconsider the application for approval under Section 80MM of the Income Tax Act, 1961, in light of the court's observations. The court emphasized the need for the Board to carefully consider whether the contract drawings constitute technical know-how and whether the transfer was for consideration. There was no order as to costs.

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