TMI Blog1995 (7) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... , p.a., a company incorporated in Italy (hereinafter referred to as the Italian Company) on 24-4-1990. According to the terms and conditions of the agreement, the Italian company was to supply the technical know-how in relation to the furnace to be installed by the assessee at the Jamshedpur plant of TISCO. The assesee was required to pay and did pay the fees for obtaining the know-how in an amount of Rs. 1,66,45,542. The amount was payable in three instalments and was thus paid. We shall refer to the terms and conditions of the aforesaid agreement in some detail presently. 4. In the profit and loss account, the assessee debited the technical know-how fees and claimed deduction in respect thereof in the income-tax assessment. The ITO was of the opinion that the claim was one to which the provisions of section 35AB were attracted and under the said provisions only 1/6th of the claim can be allowed during the relevant accounting year and the balance of 5/6th will be allowed equally in the subsequent five assessment years. In this view of the matter, he allowed Rs. 27,74,257 in the assessment and the balance of Rs. 1,38,71,285 was disallowed. While disallowing the claim, the ITO obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal know-how and information, which was allowable as revenue expenditure. We may refer only to three decisions of the Supreme Court on this point as laying down the law in this behalf. The first is the decision, in CIT v. CIBA of India Ltd [1968] 69 ITR 692 where it was held that payments made for the right to have access to the technical knowledge and the fruits of continuing research and experience of a foreign company and to use its patents and trade marks were on revenue account. In CIT v. British India Corpn. Ltd. [1987] 165 ITR 51, the Supreme Court held that a lump sum payment made to a distributor nominated by the foreign collaborator of the assessee as a condition of an agreement which entitled the assessee to the benefit of using the trade marks and special processes of the collaborator, to be revenue expenditure. In Alembic Chemical Works Co. Ltd v. CIT [1989] 177 ITR 377, the Supreme Court again held that a lump sum consideration paid for obtaining technical know-how in order to achieve higher levels of production by better technology was allowable as revenue expenditure. The emphasis in all these cases was that if the payment is made for exclusive acquisition of the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dum explaining the Finance Bill, 1985 reported at 152 ITR, Statutes, page 155 at page 166. The Circular No. 421 dated 12-6-1985 issued by the C.B.D.T. explaining the provisions of the Finance Act, 1985 also sets forth the same view (see 156 ITR, Statutes, 130 at pages 140 and 141 paragraphs 15.1. to 15.3). Having regard to the state of law which existed prior to the introduction of section 35AB, it must be construed that the Legislature wanted to provide for writing off of even payments made for the acquisition of technical know-how despite the fact that the judicial interpretation was not in favour of such view. The write-off was, however, to be spread over a period of six assessment years. The only condition imposed by section 35AB was that the consideration for acquiring the know-how should be of a lump sum and further that the know-how should be acquired for use for the purpose of the assessee's business. The Ld. authors, Kanga and Palkhivala in their Treatise in Law of Income-tax, 8th Edn., Vol. I at page 573 observe that the section, which is an enabling section and not a disabling one, should be confined to that consideration which would otherwise be disallowable as being on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacture, construct and assemble the furnace in accordance with the design, drawings, specifications and other technical data of the Italian company and that the copies of these shall be transferred and provided to the assessee. Clause 5 provides for the grant of a non-assailable licence in India by the Italian company to the assessee for the exploitation of any patent owned by the Italian company, which may be involved in respect of the furnace. The licence shall be valid till the life of the patent or till the duration of the agreement, whichever is earlier. Clause 6 provides for the payment of a lump sum engineering fees of U.S. Dollars 6,39,000 net of Indian Income-taxes, etc., to the Italian company as consideration for the transfer of the technical know-how by the Italian company covered by clauses 3 and 4 of the agreement. Clause 7 provides that the drawings, designs, technical information and data supplied by the Italian company are " to be used only in connection with the product ". Clause 12 provides for secrecy of the information supplied under the agreement and prohibits the assessee from disclosing the same except to those who are engaged in the erection of the furnac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Italian company. 11. We may now refer to the tests laid down by judicial pronouncements to judge whether in a given case there has been an exclusive acquisition of the know-how or whether there has been only the grant of a right to use the know-how. In Alembic Chemical Works Co. Ltd's case, the Supreme Court pointed out that if the agreement places limitations on the right of the assessee in dealing with the know-how and also imposes conditions prohibiting the assessee from parting with the information and if the agreement contains secrecy and confidentiality clauses, the conclusion should be that the right is only for the use of the know-how. The Calcutta High Court held in B.N. Elia's Co. (P.) Ltd.'s case that if the assessee has only the right to use the technical know-how during the continuance of the agreement and not for all times to come, the conclusion should be that there is no transfer of the property in the know-how. Applying these tests to the present case, we find that clause 7, as already stated, places limitation on the assessee in using the know-how in the sense that the assessee can use it only in connection with the particular furnace which it has undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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