TMI Blog2015 (9) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out any cost of acquisition for the consideration of ₹ 59 lakhs; (ii) the consideration of ₹ 59 lakhs was not only for the transfer of the self-developed technical know-how, (iii) there was no such transfer in association with disposal of the appellant's business/capital asset; (iv) such technical know-how was not a capital asset; (v) the said sum was revenue receipt and not a capital receipt outside the purview of taxation; and its purported findings in that behalf are without and/or in excess of jurisdiction, arbitrary, unreasonable and perverse? (b) Whether the Tribunal was justified in law in holding that transfer of the capital asset took place not during the previous year relevant to the assessment year 1997-98 but during the previous year relevant to the assessment year 1998-99 or that the sum of ₹ 59 lakhs was chargeable to capital gains tax in the assessment year 1998-99 in view of the amended provisions of section 55 of the Income Tax Act, 1961 and its purported findings in that behalf are arbitrary, unreasonable and perverse? The facts in brief are as follows:- The appellant, the assessee was engaged in the manufacture of closure system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the staff of Truepack for a separate consideration including the expenses for travel, lodging and boarding of such person. On March 31, 1997 another agreement (for short 'subsequent agreement') was entered into between the appellant and Truepack in terms of which the appellant agreed not to compete in the manufacture and/or sale and/or trading of the goods or similar products for a period of four years for a consideration of ₹ 10,000/-. The appellant on March 31, 1997 made over the self-developed technical know-how comprising drawings, designs, manuals, process know-how, technical information and guidelines, etc. to Truepack and became entitled to a sum of ₹ 15 lakhs out of the agreed consideration of ₹ 59 lakhs. It appears upon request by Truepack, the appellant agreed to a short postponement in the payment of the said sum of ₹ 15 lakhs. Subsequently Truepack paid the sum of ₹ 15 lakhs in May, 1997 along with interest @18% p.a. for the delay in payment. The balance sum of ₹ 44 lakhs was subsequently paid by Truepack after the trial production along with interest for the delay in payment. The case of the appellant is as the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1998-99, the amount was chargeable to capital gains tax in the said assessment year having regard to the amended provisions of section 55. It is to be noted that the appellant had filed an application for rectification before the CIT (A) since the appellate order suffered from several mistakes apparent on the face of the record, which has not yet been dealt with by the Commissioner of Income Tax (Appeals). Being aggrieved, the appellant preferred further appeal before the Income Tax Appellate Tribunal. However, the Tribunal by order dated 23rd April, 2004 upheld the order of the CIT (A) and dismissed the appeal, holding that the sum of ₹ 59 lakhs received by the appellant was a revenue receipt. The Tribunal held that even if there was a transfer of any capital asset, such transfer took place finally during the previous year ended 31st March, 1998 relevant to the assessment year 1998-99 and the appellant was liable for capital gains tax in view of the amendment made in section 55 of the Act with effect from the assessment year 1998-99. Mr. J.P. Khaitan, learned senior advocate appearing for the appellant submitted that the real issue is whether there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consider that the fact that the balance sum of ₹ 44 lakhs was payable by Truepack upon installation and commissioning the plant and machinery and after trial production was entirely irrelevant for the purpose of deciding when the transfer of the technical know-how took place. Moreover the Tribunal exceeded its jurisdiction in holding that the sum of ₹ 59 lakhs was a revenue receipt or that the technical knowhow was not a capital asset, as no such case was made out either before the Assessing Officer or the CIT(A). The Tribunal failed to consider that the selfdeveloped technical know-how was undoubtedly appellant's capital asset and was not stock-in-trade and the amount received upon transfer thereof constituted a capital receipt. Though the Tribunal in its order held that the appellant did not provide details regarding the nature of the own designs and how it was developed, however, the Tribunal failed to consider that the appellant was never required by the adjudicating authorities below to furnish details of the nature of the selfdeveloped designs, know-how, mechanism, secret process, and it was accepted that the appellant had in fact developed such know-how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ampsafe Dropper Bottles: hereinafter as follows:- 1) The TRANSFEROR shall render, supply, furnish and provide said technical know-how, advice, guidance and shall provide information, assistance and services for day to day operation production and manufacture of Tampsafe Dropper Bottles. 2) The TRANSFEROR shall on request of the TRANSFEREE depute a technical person for providing supervision, guidance and assistance in the areas pertaining to manufacture of Tampsafe Dropper Bottles and also to guide, assist train designated staff of the TRANSFEREE in running/operating and maintaining the machines and associated facilities and for optimisation of methods of operation as required for manufacturing the Dropper Bottles. It is agreed that the expenses for travel lodging and boarding as also remuneration on per day basis of such person as may be agreed upon shall be borne by Transferee. 3) The TRANSFEROR shall provide all the relevant information, date, documents, drawings, design, manuals pertaining to technical know-how for the product and manufacture of Tampsafe Dropper Bottles and shall provide its expert advice on all aspects so as to enable the Transferee to have the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shall be carried out by the parties hereto in consultation with each other and it is agreed that any expenses in excess of the aforesaid cost to achieve production of 3 million bottles per month of acceptable quality will be funded by the Transferor and shall be treated as loan by the Transferor to the Transferee. The said amount of loan shall carry the interest at the rate of 18% per annum and shall be repayable within a period of 3 years . In this regard it is also appropriate to refer to the relevant clauses of the subsequent Agreement between the appellant and M/s Truepack Pvt Ltd. which are as under:- WHEREAS the TRANSFEREE has agreed to purchase the plant, machinery and equipment for the manufacture of Dropper Bottles as per separate Asset Acquisition Agreement arrived at and executed by and between the SPBP Tea (India) Ltd. of the one part and the TRANSFEREE herein of the other part. AND WHEREAS the TRANSFEROR has agreed to provide technical know how to the Transferee for the consideration and on the terms conditions agreed to by and between the parties hereto as recorded in a separate agreement AND WHEREAS the Transferor has agreed not to compete in the manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital asset or business of the assessee-company are liable to be taxed as revenue receipt. Even otherwise, it is also clear that there had been no absolute parting by the assessee with his socalled self generated technical know-how to the transferee. The assessee-company has also failed to provide and furnish details, particulars and nature of alleged fool-proof mechanism of manufacturing plastic bottles and has also failed to describe and specify those designs and know-how that were developed by it. The assessee has also not been able to specify and describe the secret process of manufacturing plastic bottles that were claimed to have been developed by it. The technical knowledge acquired in the course of carrying on business activities, which is overgrowing and everchanging, cannot be held in the nature of a capital asset. The assessee has not been able to establish and prove that alleged technical know-how was in the nature of a capital asset and it was transferred absolutely once for all. It is also not the assessee's case that the assessee's right to manufacture, produce or process the plastic bottles was transferred. The facts of the case as discussed above clearly s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction and manufacture of said bottles and for renovation and installation of machineries etc. so as to achieve minimum production of 3 million numbers of the said bottles of acceptable quality. To decide this question, the agreement in question has to be read as a whole. So read, it is clear that the transfer had taken place in the financial year 1997-98. In this connection, we may refer to the balance-sheet of the transferee company. It can be seen from the statement of account for the financial year 1997-98 that process of installing plant and machinery has been completed in the financial year 1997-98 and the transferee company started its production of plastic bottles and sets in the financial year 1997-98. This position has been given by the assessee-company in its written submission filed before us. In this view of the matter, even otherwise the assessee is not entitled to exemption from capital gain in view of the amendment made in section 55 of the Act effective from assessment year 1998- 99 . As the Tribunal, relying on the agreements had denied the claim of the appellant, the agreements require examination. The crucial question which requires consideration is whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken to bear the expenses for food and lodging of such technical person. Again Clause 9 assumes significance as it is evident that the appellant had represented that the plant and machinery required renovation so as to achieve maximum production. The extent of the said renovation required was to be conveyed to Truepack, the transferee, and renovation was to be completed at a total cost of ₹ 28,00,000/- which included dismantling, transportation, installation and commissioning in consultation with each other. Significantly under Clause 8(b) the balance amount of ₹ 44,00,000/- lakhs for transfer of know-how was payable on installation and commissioning of the plant and trial production. Therefore, Clause 4 of the first agreement regarding transfer of technology at a cost of ₹ 59 lakhs cannot be read in isolation and has to be read as a whole as correctly interpreted by the Tribunal. 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 comm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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