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TMI Blog1989 (7) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... into a collaboration agreement with a foreign corporation for the manufacture of certain products and the licence to sell the same. The material parts of that agreement are---- 1. Under clause 2(a) the Corporation agreed to grant the assessee exclusive licence to use know-how and improvement to be disclosed by the corporation and practise the same for the manufacture, use and sale of licenced products. 2. Under clause 3(a) the corporation agreed to supply to the assessee all its present know-how to the extent practicable. 3. Under clause 4 of the agreement the assessee was to pay the corporation $ 18,000 as "technical fee" during the term of the agreement. The payment was to be made as follows :---- (i) Within 30 days of the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regarding the grant of licence. Unless the assessee received that licence, know-how could not be purchased and therefore, the first part of the payment related to the licence and the second part, viz., royalty related to the know-how. There could not be "technical fee" for sale of technical know-how. The words used in the agreement 'technical fee' could not change the character of the payment. That fee is a lump sum amount related to the grant of licence while technical know-how being direct source of production and income was its price in terms of royalty. Thus, according to him, the lump sum payment of $ 18,000 was relatable to the licence and royalty was relatable to know-how. The second step is that the licence was not a part of machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a whole. It cannot be divided in terms of licence and know-how. The licence to sell the goods produced as a result of know-how serves the purpose of obtaining the know-how. When a party obtains the know-how to produce certain goods, ultimately it is interested in selling those goods so as to earn a profit. The licence is given to the party by the very corporation which supplies the know-how and it is in respect of the goods for which the know-how is given that the licence to sell those goods is also given. Therefore, the licence cannot be separated from the know-how. Moreover, it is not correct to say that the licence is assignable as the learned Departmental Representative suggested. Clause 2(a) of this agreement clearly provides that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of Rs. 1,03,678 to be capitalised in the earlier year and so arrived at a lower figure for the WDV. This ground is merely consequential upon the earlier year's decision. Since we have held that the said amount is to be capitalised this ground is allowed for this year. 6. The next ground is that the Commissioner erred in confirming the Income-tax Officer's decision disallowing a sum of Rs. 15,353 being the royalty paid to the said Corporation treating it as capital expenditure. The details of payment regarding royalty has already been stated above. We have to consider whether this expenditure is of capital or revenue nature. For this purpose it is necessary to ascertain what this royalty amount was paid for and what advantage the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g processing recommendations --- settings and operation of above equipment. (vii) Quality Control --- recommended tests and procedures, expected test results and limits used for production specifications. (viii) Competitive products --- evaluation of such materials, as to physical properties and processability. (ix) Marketing information --- market forecasts and historical data showing volume of products sold by resin category and application area; pricing; samples of promotional literature and advertising. " Under clause 3(c) of the agreement of the know-how including all writings was to remain the sole property of the corporation and in case the agreement is terminated it has to be returned to the corporation at its request. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of that corporation. Secondly, the agreement is for a period of only 5 years from the date of the commencement of the production. Moreover, clause 8(b) also provides that within that period the assessee is to develop its own design and research so that it does not remain dependent upon the corporation beyond that period. Therefore, both these features of the agreement show that the assessee did not get an advantage for a long period. As stated above, the learned Departmental Representative has relied upon a Tribunal decision and in that connection pointed out the definition of know-how in the agreement which has been reproduced above. The Commissioner in that case had held the royalty payment to be of a revenue nature relying upon the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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