TMI Blog2019 (7) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... ier transfer of knowhow cannot be equated to a right to manufacture as contemplated by section 55(2)(a). The know-how when fully developed would nable manufacture or production or processing of an article or thing. However, it would not give any right in respect thereof. It is well settled position in law that know-how with respect to a product would give knowledge about how the product is to be manufactured. The said know-how is not registered. Therefore, it does not confer any rights on its owner. The said knowledge only enables the manufacture of the product but does not confer any manufacturing rights. In view thereof, transfer of know-how cannot be regarded as transfer of right to manufacture or produce or process an article or thing for the purposes of Section 55(2)(a) of the Act. What the section contemplates is the grant of a right to manufacture say by grant of a license to use a patent. Moreover, section 55(2)(a) of the Act makes no reference to know-how, which is the asset under consideration. Hence, the CIT(A) was not justified in holding that the capital gains should be computed with the cost of acquisition in respect of the said asset being taken as Nil. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have identifiable cost or acquisition and as such the consideration received on assignment of know-how is a capital receipt not chargeable to tax. 5. The brief facts of the case are that the assessee filed its return of income on 29.11.2006 declaring loss to the tune of ₹ 11,75,42,363/-. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and u/s 142(1) of the Act were issued and served upon the assessee. The assessee is engaged in the business of manufacture of Serums and Vaccines. The assessee is also engaged in the research activities in Bio-medical/Bio-technical Fields. It has got many patents to it s credit. The assessee company is an approved research-facility in the field of Biomedical and Biotechnical and is the owner of several patents. The total sales turnover of the company was to the tune of ₹ 90.50 crores as compared to ₹ 90.32 crores in last year. In the year under assessment, the assessee received in sum of ₹ 5.25 crores from BSV Research and Development Pvt. Ltd. as consideration for assignment of know how relating to scientific, medical and technical documents relating to development and manufacture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under Section 41(3) of the Act. In my opinion the provisions of Section 41(3) are attracted only if an asset representing expenditure of a capital nature on scientific research is sold Know-how assigned during the year is a self generated capital asset and was an asset acquired or purchased from outside, sources. Therefore, same could not have, been allowed as deduction under section 35 of the Act I am inclined to agree with the learned AR that amount received on assignment of know-how cannot treated as a revenue receipt chargeable to tax under section 41(3). 2.3.ii. Appellant no expenditure was incurred for acquiring said knowhow. In this context it is relevant 'to refer to Assignment Agreement dt. 26-10-2005 between the appellant company (the assignor) and the BSV Research and Development Pvt. Ltd. (the assignee). Relevant portion is reproduced hereunder: WHEREAS A) The Assignor manufactures and markets biological, pharmaceutical and biotechnology products and has a range of products based on strong research and development initiatives and efforts. B) The Assignor has developed and owns the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oticed that the assessee received a sum of ₹ 5,25,00,000/- from BSV Research and Development Pvt. Ltd. as consideration for assignment of know how relating to the scientific, medical and technical documents relating to development and manufacture of non-pegylated liposomal doxorubicin an oncology product under development. CIT(A) discussed the term and condition of the Agreement dt 26-10-2005 executed between Assessee and BSV research and development Pvt, Ltd. Accordingly, It is clear that the transfer was for commercial exploitation. On seeing the nature of the transaction,we are of the view that the provision of Section 55(2) of the Act is applicable to the facts of the present case. The section 55(2) is hereby reproduced as under.:- Provisions of Sec. 55(2) are reproduced as under: Section 55(2)(a) (a) in relation to a capital asset, being goodwill of a business (or a trade mark or brand name associated with a business) (or right to manufacture, produce or process any article or thing) (or right to carry on any business), tenancy rights, stage carriage permits or look hours (emphasis supplied) 8. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary being BSV Research and Development Private Limited. On 26.10.2005, the assessee entered into an agreement with BSV Research and development Private Limited for assignment of technical know-how with respect to Non-Pegylated Liposomal Doxorubicin , which was still under the development stage for a consideration of ₹ 5,25,00,000/-. On 18.11.2005, Cadila Healthcare Ltd. acquired 50% stake in BSV Research and Development Private Limited, and hence, the transferee Company become a 50:50 Joint Venture between the assessee and Cadila Healthcare Ltd. 11. In its return of income the amount of ₹ 5,25,00,000/- was treated as a capital receipt not chargeable to capital gains as the know-how was a self-generated asset and its cost of acquisition thereof was not ascertainable. It is an undisputed fact that the asset which was the subject matter of transfer was research that was under development in respect of Non-Pegylated Liposomal Doxorubicin . Hence, the said transaction should normally give rise to capital gains chargeable to tax under section 45 of the Act. However, as held by the Hon ble Supreme Court in CIT Vs. B.C. Srinivasa Setty 128 ITR 294, the compu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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