TMI Blog2001 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 from Regal Papers Ltd. The assessee contended that the amount was not taxable being a capital receipt. The Income-tax Officer, however, treated it as revenue receipt and charged it to tax. The Appellate Assistant Commissioner in appeal upheld that as the assessment condition, the assessee had agreed to transfer complete technology including technical know-how processes and secret formulae for the manufacture of high gloss cast-coated papers and boards to Regal Papers Ltd. and to assist them to establish the plant for efficient production of the products for a period of five years wherefor the company agreed to pay the assessee an amount of Rs.2,50,000, and thus, the amount received, namely, Rs.2,50,000 was in the nature of a capital receipt. The Department went in appeal before the Tribunal. The Tribunal upheld the view taken by the Appellate Assistant Commissioner. It is appropriate to quote from the Tribunal's order: "3. The learned Departmental Representative submitted before us that the decision in the case of Hindustan Forests Co. Ltd. v. CIT [1966] 60 ITR 470 (Punj) was directly applicable but learned counsel for the assessee, however, stated that it had no applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture of the said products. 7. The company shall not communicate, code grant, disclose, dispose of or give away the technology including technical know-how, processes, secret formulae or specifications, formulations, critical conditions and other knowledge, information or date which may have been transferred by way of technology supplied or furnished by the consultant to the company under or by virtue of these presents to any person or persons whosoever, without the prior consent in writing of the consultant. This obligation shall survive the expiration or other sooner determination of this agreement. 8. In consideration of the consultant agreeing for the transfer of complete technology including the technical know-how, processes and secret formulae to the company to enable it to establish a plant for the manufacture of the said products and of the consultant agreeing during the continuance of this agreement not to himself manufacture nor impart, supply or render to any one also the technology, including supply of technical know-how, processes or secret formula for undertaking manufacture in India of the said products, the company shall pay to the consultant a sum of Rs.2,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35 ITR 707 (HL). Counsel said that it was ruled in that case by the majority of the House that money received by a taxpayer for making available to another person a right to technical 'know-how' is liable to be treated as a capital receipt. It must in the first instance be noted that the House of Lords was dealing with the true character of a receipt by a taxpayer who had made technical 'know-how' available to another in consideration of a certain payment. The nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays it. Again the view expressed by the majority of the House does not lay down any principle which may be of value in deciding this case." The apex court, upon consideration of Jeffrey v. Rolls Royce Ltd. [1962] 40 Tax Cas 443; [1965] 56 ITR 580 (HL); Musker v. English Electric Co. Ltd. [1964] 41 Tax Cas 556 (HL) and Evans Medical Supplies Ltd. v. Moriarty [1957] 37 Tax Cas 540; [1959] 35 ITR 707 (HL), held as under: "In the case in hand it cannot be said that the Swiss company had wholly parted with its Indian business. There was also no attempt to part with the technical knowledge absolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A question was posed by the Division Bench as to whether know-how can be properly described as a capital asset and upon consideration as to what know-how means, it was held: "The other point is that 'know-how', though very naturally looked upon as part of the capital equipment of a trade, is a fixed asset only by analogy and, as it were, by metaphor. The nature of receipts from it depends essentially, I think, upon the transaction out of which they arise and the context in which they are received." It was further held: "The legal position on these authorities, therefore, is that know-how is not strictly a fixed asset and the nature of receipts from the know-how would essentially depend upon the transactions out of which the receipts arise and the context in which the receipts are received. If the imparting of know-how is really in the nature of services rendered without anything more, the receipt must be treated as a revenue receipt. But when consideration is received for imparting, know-how in association with the disposal of a capital asset, then the receipt will have to be treated as a capital receipt. The position, in our view, is admirably summed up by Walton J. in John ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and upon the expiry of the period, the assessee had no relationship with the organisation and that the period of agreement between the assessee and distributors was contemporaneous with the agreement between the assessee and Charles Walker under which the assessee became entitled to use the registered trade marks, it must be considered to be a revenue expenditure." The question again came up for consideration as to whether a business expenditure would be a capital or revenue expenditure in Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224 ITR 342 (SC) wherein, upon consideration of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC), it was held: "It would thus appear that the courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one or dependant upon certain contingencies, the right to use the technical know-how of production or the activity even after the completio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee was approached by the company for transfer of complete technology including the technical know-how, process and secret formula. Clause (1) of the said agreement categorically states that the consultant would transfer the technology. The said transfer of technology is not an absolute one as the consultant could himself use or transfer the same after a period of five years. In addition to such transfer, the assessee was to render services, which had been enumerated in para. 2 thereof. The company of course had the absolute right to utilise technology including the technical know-how, process and secret formula to be supplied and rendered by the assessee, but such entitlement to utilise the technology is confined to five years only. Clause (6) provides for a negative covenant in terms whereof the assessee was precluded from himself manufacturing or supplying the technology to any other person during continuance of the said agreement only for a period of five years. It is important to note that the company was also not to transfer the said technology to any other person without the prior consent in writing of the assessee. The entire amount of consideration was to be paid ..... 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