SANDEEP ENTERPRISES P LTD Vs. INCOME TAX OFFICER
LAWS(IT)-1989-7-4
INCOME TAX APPELLATE TRIBUNAL
Decided on July 13,1989

Appellant
VERSUS
Respondents

JUDGEMENT

K.R. Dixit, Judicial Member - (1.)BOTH the above appeals are inter-connected and therefore, they are disposed of by this common order. For the asst. year 1981 -82 there is only one ground. It is as follows:-
The CIT erred in disallowing depreciation and investment allowance on the capitalised expenditure of Rs. 1,03,678 being technical fees paid to M/s. Liquid Nitrojen Processing Corporation, USA.

(2.)The assessee had entered into a collaboration agreement with a foreign corporation for the manufacture of certain products and the licence to sell the same. The material parts of that agreement are-
1. Under clause 2(a) the Corporation agreed to grant the assessee exclusive licence to use know-how and improvement to be disclosed by the corporation and practise the same for the manufacture, use and sale of licenced products.

2. Under clause 3(a) the corporation agreed to supply to the assessee all its present know-how to the extent practicable.

Under clause 4 of the agreement the assessee was to pay the corporation $ 18,000 as "technical fee" during the term of the agreement. The payment was to be made as follows:-

(i) Within 30 days of the effective date of the agreement the assessee was to pay the corporation an initial instalment of $ 6,000.

(ii) Within 30 days of the time of transfer of technical documentation the assessee was to pay the corporation the second instalment of $ 6,000.

(iii) Within 30 days after the end of the month in which commercial production was achieved the assessee was to pay the corporation a third instalment of $6,000.

The assessee also agreed to pay the corporation a royalty of 3% of the net ex-factory sale price of the product for a period of 5 years starting at the end of the month in which the first commercial production was achieved. The Income-tax Officer disallowed the assessee's claim of depreciation and investment allowance on the capitalised expenditure of the rupee equivalent of the first two instalments of the aforesaid payment of $ 18,000, i.e., $ 12,000 following the directions of the IAC Under Section 144B. The Commissioner has reproduced the directions Under Section 144B and agreed with the reasoning therein. We have, therefore, to consider those directions. Briefly stated the substance of the reasoning therein is that under the agreement the assessee got (a) the licence to produce and sell the licenced products, and (b) the know-how of the manufacture thereof. Since under the terms of payment there was no bifurcation specifying the payments for the licence and payment for the know-how a rule of logic had to be applied for the purpose. Beginning serially the first part of the agreement was regarding the grant of licence. Unless the assessee received that licence, know-how could not be purchased and therefore, the first part of the payment related to the licence and the second part, viz., royalty related to the know-how. There could not be "technical fee" for sale of technical know-how. The words used in the agreement 'technical fee' could not change the character of the payment. That fee is a lump sum amount related to the grant of licence while technical know-how being direct source of production and income was its price in terms of royalty. Thus, according to him, the lump sum payment of $ 18,000 was relatable to the licence and royalty was relatable to know-how. The second step is that the licence was not a part of machinery while technical know-how got translated into machinery and designs, production, process, materials, etc., and into something tangible. The third step is that the two instalments of $ 6,000 each were to be paid at the time of transfer of technical documentation. Therefore, at the point of time of payment of these two instalments no technical know-how passed to the assessee. Therefore, the payment of $ 12,000 equivalent to Rs. 1,06,678 was for the purchase of licence and not related to plant and machinery. Consequently, the claim of depreciation and investment allowance in respect of this amount could not be allowed.

3. On behalf of the assessee it was submitted that the IAC's method of interpreting the agreement was incorrect. The terms of payment could not be bifurcated according to some logical process. On the other hand, the learned Departmental Representative pointed out that under the terms of payment the lump sum payments were all to be paid within 90 days of the agreement.' The royalty payments were measured in terms of the value of the production and were for the know-how. He, therefore, submitted that if there was no specific allocation it had to be done on the basis of logic particularly because the licence was saleable and it was paid for separately.

(3.)IN our view, the last submission of the learned Departmental Representative is the very question which we have to consider viz. whether the licence is paid for separately. Now, this agreement is to be viewed as a whole. It cannot be divided in terms of licence and know-how. The licence to sell the goods produced as a result of know-how serves the purpose of obtaining the know-how. When a party obtains the know-how to produce certain goods, ultimately it is interested in selling those goods so as to earn a profit. The licence is given to the party by the very corporation which supplies the know-how and it is in respect of the goods for which the know-how is given that the licence to sell those goods is also given. Therefore, the licence cannot be separated from the know-how. Moreover, it is not correct to say that the licence is assignable as the learned Departmental Representative suggested. Clause 2(a) of this agreement clearly provides that the licence is personal to the assessee and can be transferred or assigned only with a prior written permission of the corporation. Clause 11 of the agreement also permits the assignment of the agreement as a whole and not the licence and the know-how separately. Looking to the terms of the payment the purpose of providing for the lump sum payment is that the corporation wishes to start collecting the payment from the assessee as soon as the agreement is entered into by stages before the production commenced. Part of the payment is in lump sum and the remaining is on the basis of percentage (called royalty). These are merely various stages in obtaining payment. Further, the second instalment of $ 6,000 is to be paid within 30 days of the transfer of the technical documentation. This means that it is paid after the know-how is given by the corporation to the assessee and not before that as wrongly stated by the IAC. So even on the basis of his own reasoning the second instalment has to be taken into account for depreciation and investment allowance. However, in view of our above reasons the entire sum of $ 12,000 equivalent to Rs. 1,03,678 has to be taken into consideration for this purpose.


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