TMI Blog2004 (10) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... food supplement product manufactured and sold by Pfizer India, another group company, under the 'Protinex' and 'Dumex' trade marks. Both the trade marks are registered in India. Under an arrangement, Indian company has been using the technology information in respect of the above mentioned products without payment of any royalty. 2. In November, 2003, the EAC Nutrition Limited, A/s, Denmark (EAC) acquired from the applicant the trade marks and technology information related to the said products by two separate agreements. A separate agreement was entered into between EAC Denmark and Pfizer India for early termination of the license granted to Indian company to manufacture under the said trademarks. A sum of US $ 7 million was paid as consideration for extinguishment of licence. The technology information, which is the subject matter of this application was sold for US $ 5 million. Clause 2(2.5) of the agreement stipulates that in exchange for the purchase consideration, the applicant shall on the effective date, deliver, transfer or make available to EAC, the Technology Information in the form of a dossier with Technical Information and contents as outlined in Schedule 1 to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uying and selling know-how. Reference has also been made to the Bombay High Court's judgment in the case of CIT vs. Ralliwolf Ltd.( 1983) 143 ITR 720 and House of Lord's order in the case of Moriarty Vs. Evans Medical Supplies Ltd. (1959) 35 ITR 707 wherein it has been observed that where the owner of an intangible asset like know-how or a patent sells it or grants an exclusive licence to another which pro tanto disentitles the owner from exercising his rights therein, the transaction amounts to an assignment of capital rights and the payment is regarded as a Capital receipt. During the course of hearing, the counsel quoted extensively from the Supreme Court's judgment in the case of Scientific Engineering House P. Ltd. (1986) 157 ITR 86 to support his contention that expenditure incurred by way of purchase price of the drawings, designs, charts, plans, processing data and other literature was undoubtedly of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature etc. was acquired by the assessee. Reliance was also placed on the Supreme Court's judgment in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at since payment for an out and out sale of know-how is regarded as a capital receipt it cannot be deemed as royalty income under Section 9(1)(vi) of the Act. It is stated that the definition of the term 'Royalty' under Explanation 2 to Section 9(1)(vi) clearly excludes any consideration which would be income of the recipient chargeable under the head capital gains. In the instant case, the Technology information constitutes capital asset in the hands of the applicant and any gain on its outright sale would be chargeable only under the head 'capital gains', which is excluded from the definition of 'Royalty'. Reliance has also been placed on the Advance Ruling in the case of Pro-quip Corporation vs. CIT (2002) 255 ITR 354. In the case, the Authority held that there is well known distinction between the out and out sale of property and allowing use of the property or technical know-how. In the former case property which may include persons' business transferred unconditionally and becomes property of the purchaser. In the latter case the purchaser only gets the right to use the property. The payment in this latter case may be treated as licensing fee or royalty but the payment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as situated in India, both in tangible and intangible form since the process was being used in India for a long time and was developed in India. It would not make a difference simply because another copy of the information was also available outside India. 11. In reply the counsel of the applicant reiterated his arguments made earlier. It was admitted that a copy in intangible form was available in India, but another copy was available outside India to the applicant which was transferred to EAC at Bangkok. The counsel pleaded that law on situs of intangible asset is not very clear because it can be present at different places at the same time. 12. The written submissions were received vide letter dated 12 th August, 2004 from the applicant's counsel. The arguments advanced therein have already been dealt with in the preceding paragraph. However, the counsel has also raised one plea which was neither mentioned in the application nor raised in the course of hearing. Reliance has been placed on the observations of Mumbai High Court in the case of Cadell Weaving Mill Co. (P) Ltd. vs. CIT (2001) 249 ITR 265 and it is stated that the capital gains not chargeable for any reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or diskettes or any other thing, that which is supplied becomes chattel." We are, therefore, of the view that transfer of technical information in the form of a dossier was transfer of a capital asset. 16. As regards the situs of the asset which is subject matter of transfer, it is admitted that the said asset was available in India, both in tangible as well as intangible form before the transfer to EAC (Denmark). It is also not disputed that for a very long time the said information was almost exclusively used in India and improvements and improvisations in the said information were made in India. However, it is also not disputed that Indian company was only a licencee and original technical know-how was always available with the owner i.e. the applicant. Once the Indian company entered into an agreement with EAC Denmark for early termination of licence to manufacture these products the technical know-how reverted back to the owner and there was extinguishment of right to manufacture for which consideration has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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