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2015 (9) TMI 1362 - CALCUTTA HIGH COURT

2015 (9) TMI 1362 - CALCUTTA HIGH COURT - TMI - Sale of self-developed technical know-how - whether chargeable to tax - cost of acquisition is Nil - AO held as revenue receipt - ITAT held that appellant was liable for capital gains tax in view of the amendment made in section 55 with effect from the assessment year 1998-99 - whether the first agreement is a composite agreement or taking the said agreement as a whole, whether the clauses in it are severable? - Held that:- Clauses of the first agr .....

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us this Clause, a composite provision, provided not only for transfer of technology for manufacture of bottles but also to 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 .....

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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 in renovation, in installing and in commissioning the plant. It is clear from the language of the Clauses of the first agreement that the sale of know-how and the .....

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om renovation and installation of machinery till the commissioning of the plant as evident of the first agreement, on facts the judgments of the Supreme Court in CIT vs. B.C. Srinivasa Setty (1981 (2) TMI 1 - SUPREME Court), CIT vs. D.P. Sandu Bros. Chembur P. Ltd (2005 (1) TMI 13 - SUPREME Court) and the judgment of the Bombay High Court in CIT vs. Ralliwolf Ltd: [1982 (7) TMI 48 - BOMBAY High Court] are not applicable.

Since payment of balance consideration of ₹ 44,00,000/- i .....

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Pal And Mir Dara Sheko, JJ. For the Appellant : Mr J P Khaitan, Sr Adv., Mr Sanjoy Bhowmick, Adv. and Mr C S Das, Adv For the Respondent : Mr Siddhartha Bhattacharyya, Adv JUDGMENT Soumitra Pal, J This appeal, preferred by the assessee against the order dated 23rd April, 2004 passed by the Income Tax Appellate Tribunal 'C' Bench Kolkata for the assessment year 1998-99, was admitted on the following substantial questions of law:- "a) Whether on a true and proper construction of the a .....

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ess/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 rele .....

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of the said goods were imported. In the course of carrying on the said business over a period of 13 years, the appellant developed its own fool proof system and got the manufacturing process relating thereto registered in India and thus acquired patent rights for manufacture of the closures. The appellant in the course of its said business developed its own designs, know-how, etc. in respect of the manufacturing process and used such self-developed technical know-how along with patent rights fo .....

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with certain other plant and machinery belonging to SPBP. For the sale of the self-developed technical know-how, comprising drawings, designs, manuals, process know-how, etc. the appellant entered into an agreement dated March 29, 1997 ('first agreement' for short) with Truepack. The consideration for the said transfer was agreed at ₹ 59 lakhs out of which a sum of ₹ 15 lakhs was to be paid upon handing over of the drawings and related technical information. The balance sum .....

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a loan by the appellant to Truepack carrying interest @18% per annum repayable within a period of three years. The first agreement further provided that on request the appellant would depute a technical person for providing supervision, guidance and assistance in areas pertaining to manufacture and also to guide, assist and train 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 sho .....

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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 a .....

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ment year 1998-99, the said sum was included under the head Reserves and Surplus in its balance sheet as a capital receipt. The sale of the plant and machinery including imported moulds to SPBP was duly reflected in the accounts of the appellant for the previous year ending on March 31, 1997 and the loss arising upon such sale was duly claimed in the computation of income for the assessment year 1997-98 of the appellant. It appears that Truepack deducted income tax at source amounting to ₹ .....

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ear. It appears from the reassessment order that the reassessment proceedings were initiated because the appellant had claimed credit for the tax deducted at source of ₹ 2,95,000/- but had not shown the receipt of ₹ 59 lakhs as part of its income. In the reassessment proceedings the appellant contended that there was no cost of acquisition in respect of the selfdeveloped technical know-how which was transferred during the previous year relevant to the assessment year 1997-98 and that .....

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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 .....

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aitan, learned senior advocate appearing for the appellant submitted that the real issue is whether there was transfer of technical knowhow by the appellant to Truepack which took place on 31st March, 1997. Referring to the first and subsequent agreement between the appellant and Truepack for transfer of technical know-how and the non-competitive agreement respectively and the letter dated 31st March, 1997 written by Truepack to the appellant confirming receipt of technical Know-how, it was subm .....

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finally taken place in the financial year relevant to the assessment year 1998-99 was not on proper appreciation of the first agreement as clauses 1, 3 and 8 thereof have to be read together and not with Clause 2 dealing with the running of the factory and Clause 9 with regard to cost of renovation not related to the transfer of technology. Submission was the Tribunal proceeded on an erroneous construction of the agreements between the appellant and Truepack and other related documents in holdi .....

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g regard to the well settled legal position that taxability or otherwise was required to be considered in the year in which the transfer took place and could not be postponed to the year of payment of the consideration for such transfer. The Tribunal failed to consider that transfer of the technical know-how having taken place during the previous year relevant to the assessment year 1997-98, the question of taxability or otherwise thereof arose only in the said assessment year. The Tribunal fail .....

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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 adjud .....

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had in fact developed its own technical know-how, which for acquiring Truepack agreed to pay ₹ 59 lakhs. Since there was no of acquisition, capital gains cannot be computed. Referring to the assessment order submission was though the Assessing Officer in his order had imposed a minimum capital gains tax at 20 per cent, the revenue did not make out a case that it was a business receipt, a finding confirmed by the CIT(A). However the Tribunal held it was a revenue receipt which was neither .....

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ingle transaction rather a package. Moreover the non compete agreement, the subsequent agreement, gave the appellant to manufacture and sell similar products after four years. Since it was not a complete transfer and it was not a capital receipt, the provisions contained in the amended section 55 comes into operation. In order to appreciate the issue it is necessary to set out the relevant portions of the first agreement between the appellant and M/s Truepack Pvt Ltd, which are as under:- " .....

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ery and equipment and maintenance of necessary plant and equipment and for manufacture and production of Tampsafe 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, .....

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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 sufficient information to run the operation of manufacturing Dropper Bottles. 4) The TRANSFEROR shall not divulge, convey or inform at all times during and after cessasion of this agreement of any information r .....

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which may have effect of violating the terms and conditions of this agreement. The intent being that neither TRANSFEROR nor any of its servants, agents or associated companies, or others directly or indirectly violate any of the terms of conditions of this agreement or commit any breach thereof in any manner whatsoever or otherwise adversely affect the rights of TRANSFEREE. 7) …………………………. 8) In consideration of the receipt of .....

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ion (b) ₹ 44,00,000/- being the balance amount payable when the said machines are installed & Commissioned at the transferee place of manufacturing and after trial production. 9) The Transferor represents and assures that the said Plant & Machinery, equipment requires renovation so as to achieve minimum production of 3 million numbers of the said product per month of acceptable quality and such area of renovation shall be conveyed to the Transferee and the Transferor has further re .....

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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 ma .....

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sale of the said products and the Transferor has agreed to the said arrangement for the consideration and on the terms and conditions agreed to by and between the parties hereto as hereinafter appearing; NOW, THEREFORE, THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED AND RECORDED AS FOLLOWS: 1) The TRANSFEROR agrees not to compete in the manufacture and/or sale and/or trading of the said Dropper Bottles and/or similar products within the territory of India for a period of four years from the d .....

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n. Accordingly, the technical know-how, drawings, design, manuals, process Knowhow, information and details for the manufacture of bottles were handed over by the appellant which by letter dated 31st March, 1997 Truepack had confirmed. The appellant submitted that it had not incurred any cost with regard to the technical know-how developed by it and as there was transfer of the said knowhow during the previous year relevant to the assessment year 1997-98, there are no liability of capital gains .....

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eipt of ₹ 59 lakhs received by the assessee for imparting, providing, furnishing, rendering and supplying the benefit of technical know-how, advices, guidelines, information, assistance and services for day-to-day operation of plant and machinery and equipments and for manufacturing and producing Dropper Bottles and that too not in association with the disposal of any capital asset or business of the assessee-company are liable to be taxed as revenue receipt. Even otherwise, it is also cle .....

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t 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 plast .....

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o manufacture, produce or process plastic bottles by way of imparting, rendering, providing, supplying and furnishing alleged self-generated technical know-how, advice, guidance and services, the consideration received by the assessee is exigible to tax inasmuch as the alleged transfer had finally taken place in the financial year 1997-98 relevant to the assessment year 1998-99 as would be established and evident from the nature of services or guidance or advices rendered by the assessee to the .....

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ete the transfer unless and until the services or advices referred to in clause (1), (2), (3), (8) and (9) of the Agreement dated 29-3-97 are completely and fully rendered provided and/or furnished. The rendering, supplying, furnishing and providing technical know-how, advices, guidance, services were for day to day operation, production and manufacture of Tampsafe Dropper Bottles and also for renovation and installation of machineries so as to achieve minimum production of 3 million numbers of .....

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id 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 .....

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Tribunal, relying on the agreements had denied the claim of the appellant, the agreements require examination. The crucial question which requires consideration is whether the first agreement is a composite agreement or taking the said agreement as a whole, whether the clauses in it are severable. It is to be noted in order to derive the meaning of any particular expression, the agreement has to be read as a whole to find out the true meaning of its Clauses. While interpreting an agreement Cour .....

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be examined. In order to delve into the issues, Clauses of the first agreement, particularly Clauses 1,2,3,4,8 and 9 thereof, have to be scrutinized closely. To understand the actual effect of the first agreement, such through consideration is necessary. So far as Clause 1 is concerned we find that not only the appellant was to "render, supply, furnish and provide said technical Know-how, advice, guidance" to Truepack but was also under an obligation to "provide information, assi .....

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ical 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 .....

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l 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 .....

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