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TMI Blog1997 (9) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... e associate company. 3. The facts relating to the issue are that the assessee has been in the business of making rivets of different metals since long and as per an agreement dt. 18th Feb., 1986, between the assessee and its associate concern, Precision Gears (P) Ltd., Bombay, the assessee obtained right to manufacture blister packing machines for which the associate concern had originally obtained a licence from West Germany under an agreement dt. 26th Feb., 1973. The associate concern was entitled to sub-licence the know-how so obtained and accordingly the assessee-company was allowed to manufacture the packing machines and the assessee was required to pay a royalty of 5 per cent of ex-factory price. During the course of assessment it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er making the payment of royalty to a foreign company, with the permission to sub-licence of the same technical know-how, the said technical know-how can be used by the sister concern and the settled royalty can be debited in the P&L a/c of the sister concern, but there is no justification for making the payment of royalty at a higher rate by one sister concern to another sister concern. She has invited our attention to the list of directors in both the companies which are placed at pp. 16 and 18 of the compilation of the assessee and as per the list Shri P.C. Rao and Anil Rao are the common directors in both the companies, but as per the details of share-holdings it is quite evident that out of the total shares i.e. 5,000 shares, 4,700 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-how on payment of royalty from the other company whereas some of the directors are common. He further argued that while making the addition the AO has relied on the order of the collector of excise, which was passed on 6th March, 1989, under the Excise Act on different footings. Both these companies are entirely separate companies having their own constituents and registered with the Registrar of Companies separately. Since no set-off of business loss of one company is allowable against the profit of the other company under the principles of accountancy and as per the IT Act, there is no justification in disallowing the royalties paid by one company to other company on account of technical know-how obtained by the assessee-company. Out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has obtained the said technical know-how against a royalty @ 5 per cent of the ex-factory value of the machines so sold. From a perusal of the list of directors of the assessee-company, we find that its director, P.C. Rao and Anil Rao are also directors in the Bombay company and from the shareholdings of the company, it is quite obvious that out of the total 5,000 shares, 2,000 shares were owned by the Bombay company and other 2,700 shares were owned by the directors and their family members of the Bombay company. Only 300 shares out of 5,000 shares of the assessee-company were owned by Konde family. Keeping in view these facts, it is abundantly clear that the assessee-company is fully controlled by the Bombay company as the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any by the Bombay company. When the management is the same, the technical know-how obtained by the Bombay company can very well be used by the assessee-company to improve its quality. At the most the assessee-company should be liable to pay the original rate of royalty which was settled between the Bombay company and the foreign company. There is nothing on record to evince that the Bombay company was under any obligation to charge higher rate of royalty while sub-licensing its technical know-how obtained from the foreign company, to any company in India or even to its sister concern. Though both these companies are separate juristic entities for legal purposes but they are being controlled by the same management for all practical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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