TMI Blog2000 (6) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. (b) The ld. Appellate Officer has failed to appreciate that in terms of clause 3(b) of the, agreement dated 18-1-1993, the appellant is bound to refund, amount of Rs. 40 lakhs now taxed as 'Revenue Receipts' if the appellant give to others the "process invented" or leaked out if any by the-appellant. (c) The Appellate Officer has erred in holding as revenue receipt, the amount of Rs. 40 1akhs received by appellant, being the consideration received for assigning to Recon Pharma (P.) Ltd. the ownership of Technical know-how/process to "Manufacture of Pharmaceutical Products" in sustained release form. (d) Hence, the amount of Rs. 40 lakhs now added as revenue receipt be deleted. (iii)(a) The ld. Appellate Officer has erred in-concluding the amount of Rs. 40 lakhs is received by the appellant for rendering 'services' to the company Recon Pharma (P.) Ltd., and as such it is a revenue receipt when no "service" has been done by appellant. (b) The ld. Appellate officer has erred in concluding the assignment of technical know-how the process of manufacture of Pharmaceutical products in sustained form--is like consultation/professional advice given by Engineer, Doctor, Scienti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee and a co-inventor for a period of 27 years from the date of release of first product so manufactured but later on they entered into another agreement dated 31-3-1989 placed at page Nos. 11 to 15 of the paper book wherein vide para Nos. 4 5, the manufacturer had put a provision that inventor shall not give the technical know-how of the products mentioned in Annexure 'B' to any other person during the period of 27 years upto 31-3-2016. 3. The ld. AR further submitted that the manufacturer later on could realise that with the technical know-how given by the inventors, the company had developed many more products and if those products were released in the market as per programme projected by the company, the company will have to pay to the inventors more than Rs. 8 crores as a royalty and therefore the manufacturer negotiated with the inventors to purchase the know-how, for a lump sum amount as consideration for a outright sale of their technical know-how suspending the earlier agreements for payment of royalty. In the process, the manufacturer succeeded and they purchased the technical know-how from the inventors for an agreed consideration of Rs. 80 lakhs while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time to come, with this condition that the inventors would not part with the know-how to others and in case of violation of this condition, the inventors would have to return the entire amount to the manufacturer and thus the inventors had lost their source of income. He also referred to the provisions of section 180A and section 55(2A) of the I.T. Act and submitted that the provisions of the said section of the Act are not applicable as the section 55(2A) was not effective in the assessment year in question and provisions of section 180A of the Act are regarding to non-exclusive thing borne together several persons to use. 6. Sri Lucas Peter the ld. DR on the other hand relied upon the order of the ld. CIT(A) and submitted that the assessee was a founder of Recon Pharma, a partnership firm wherein he was also a partner. He referred page No. 2 of the order of the CIT(A) in support. He submitted further that before entering into the last agreement, the assessee had entered into several agreements wherein number of medicines to use the know-how was increased and finally to get over the provisions of section 180A of the Act the assessee has been stated to have sold the know-how fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein as to whether the capital gains tax is leviable on the receipt of Rs. 40 lakhs by the appellant or not as the Assessing Officer has not levied capital gains tax nor anything has been uttered by him in this regard as it was the next step for him when it could have been held by the Assessing Officer that the receipt was capital one. It appears from the order impugned that the CIT(A) has denied the claim of the assessee mainly on the ground that, (i) The knowledge gathered by the inventors (assessee and co inventor) was like knowledge gathered by any other professional such as an Engineer, Doctor, Scientist, Advocate etc., and receipt of the appellant can very well be termed as fees for prescribing know-how to a limited company; (ii) In the present case no capital asset was transferred as a matter of fact that there was no capital asset associated with the know-how of the appellant and, mainly because substantial amount has been received by him and merely because for the present, it is a solitary transaction, it does not become a transaction in a capital asset; and (iii) The prohibition contained in the agreement cannot prevent the appellant from using his technical knowled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar advice or treatment to their different clients. 10. Thus the Bombay High Court in the case of Ralliwolf Ltd. has held that the know-how is not strictly a fixed asset and the nature of receipts from know-how would essentially depend upon the transactions out of which the receipts arise and context in which the receipts are received. 11. The facts of the case in the case of Ralliwolf Ltd. are different from the present case as in the present case the inventor is not a trader rather he himself has sold the invention for all the time to a trader/manufacturer with this condition that if the invention/assessee passes this know-how to others then he would be liable to return the amount in consideration to them. The principles laid down in the aforesaid decisions nevertheless help the assessee. The invention of the assessee is towards manufacturing technique, a know-how to prolong the effect of medicine. The observations of Lord Denning Musker v. English Electric Co. Ltd. [1964] 41 TC 556 (HL) in this regard, discussed by the Hon'ble Bombay High Court in the aforesaid case is very relevant, which is as under:-- "Know-how' is an intangible asset, just as intangible as goodwill a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was managing a hotel belonging to another person, there was agreement between the two giving assessee first option of purchase or lease of hotel, the assessee received some amount for giving up such option, the question arose as to whether the amount received in compensation for loss of source of income was capital receipt or income. The Hon'ble Court decided it as a capital receipt. 14. In the case of CIT v. Seshasayee Bros. (P.) Ltd [1999] 239 ITR 471, the Hon'ble Madras High Court was pleased to hold that the amount received by the assessee on cancellation of consultancy agreement resulted into loss of source of income of assessee was a capital receipt as the agreement was one for consultancy services and there was no principal and agent relationship between the parties. 15. And in the case of Chander Mohan in an almost identical facts with the instant case, the Third Member of the ITAT has agreed with the view of the Accountant Member who had held as under:-- "1. A patent was a capital asset and patent royalties were payments, periodical or lumpsum made for the user or assignment of a patent. Royalties for the user, past, present or future of a patent, were taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Hon'ble Orissa High Court has discussed and defined the word 'use'. The Hon'ble Court was of the view as 'In essence, therefore, there is a grain of the ingredient of the 'right' which a purchaser acquires on a completed transaction of sale...." The ld. counsel for the assessee has cited this judgment in relation to use of an article in the context of know-how. Regarding the meaning 'of 'use' the Hon'ble Court has observed as under:-- "...I respectfully agree, that although a change in the article would be indicative of 'use' there may be user also without any noticeable change as in the instances mentioned earlier. Whether or not, there would be a change in the article would depend upon the nature of the article and the purpose of its employment or use. It may well be that the article is such and the purpose for which it is brought in is such that a change in the article is to be expected if it is used. The relevant factors to be considered whether or not there has been user of an article therefore are the nature of the article and the manner in which it is dealt with or the purpose for which it is employed." 17. The judgments cited on behalf of the Deptt., are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange its character according to the use to which the owner decides to put it. In the case reported in Evans Medical Supplies, the appellant-company carried on the business of manufacturing chemists and wholesale druggists entered into an agreement with the Government of Burma, by which the company agreed to assist the Government in the establishment and operation of a pharmaceutical industry, under the terms of Part-I of the agreement entered into on October 20, 1953 the company was to supply technical data and designs for the erection of the factory and the installation of machinery required for the manufacture of the pharmaceutical products, they were also to disclose to the Government, the secret processes used by them in the preparation, storage and packaging of the various pharmaceutical products. These processes had never been disclosed before to anyone else, and during the seven years' currency of the agreement the company agreed not to disclose them to anyone else in Burma. By Part II of the agreement the company agreed to manage the factory, to train native personnel and to provide the necessary staff meanwhile. The company was permitted to continue its agency in Burma, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the knowhow of manufacturing pharmaceuticals products in sustained release form for a lump sum amount superseding the earlier agreement of payment of royalty. The inventors agreed to sell the know-how to the company for an amount of Rs. 80 lakhs (Rs. 40 lakhs to each inventors). With this condition, the company shall be entitled to hold and use the said process exclusively so long as they desire and earn and enjoy the profits or income therefrom peaceably and without any objection or interruption on the part of the inventors or persons claiming under them and with this further condition that the inventors would not give to others the information of the process invented by them and if it is found the process has been leaked by the inventors, the inventors shall refund the amount of Rs. 80 lakhs hereby given and accordingly a written agreement dated 18-1-1993 was executed and entered into between the parties. It appears from this document that the inventors had sold their know-how to the company for all the time to come for a lump sum amount and the inventors were not entitled to sell or pass the said know-how to others as they were no more the owner of the said know-how. We therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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