2005 (12) TMI 536 - HC - VAT and Sales Tax

Transfer of Technical Know-How via Personnel is Taxable; Non-Maintenance of Accounts Justifies Turnover Estimation.

Mechanical Assembly Systems (India) Pvt. Ltd. Versus State of Kerala

The HC dismissed the revision petitions, affirming the Tribunal's findings. It held that the transfer of technical know-how, even by deputing personnel, ... Goods or not - technical know-how can be considered as goods unless it is copied or incorporated into any media and then transferred? - rejection of accounts and restoration of turnover estimation made by the assessing authority, though the only purchaser of the commodity was the Government of India? - HELD THAT:- Petitioner has transferred the technical know-how to another company, i.e., M/s. Combustible Pack Ltd., for consideration. M/s. Combustible Pack Ltd. have expressed their willingness to purchase the technology for production of CCC from the petitioner-company. For transfer of technical know-how petitioner received Rs. 1,24,19,567 for the year 19992000, Rs. 56,59,506 for the year 2000-01 and Rs. 13,36,896 for the year 2001-02. Intention of the parties is clearly reflected in the agreement. One party has expressed its willingness to purchase technology required for the production of CCC from the other party and other party has agreed to part with technical know-how for consideration. The term 'goods' used in the Kerala General Sales Tax Act has got a broad and wide meaning. 'Goods' have been defined to mean all kinds of movable properties except those specified, namely, newspapers, actionable claims, stocks, shares, etc. Goods which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc., are 'goods' for the purposes of sales tax. Technical know-how can also be transmitted, transferred, delivered, stored or possessed, etc. Agreement would definitely indicate that there is a transfer of technology for the manufacture of CCC deputing personnel for consideration, i.e., through human media. Transfer of technology in any manner either through floppy disc, CD or through deputing personnel, etc., would constitute sale within the meaning of section 2(xxi) of the Kerala General Sales Tax Act. Reference made to the judgment of the Supreme Court in ASSOCIATED CEMENT COMPANIES LTD. VERSUS CC [2001 (1) TMI 248 - SUPREME COURT] where Apex Court held Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of 'goods' within the meaning of the term as defined in the said Act. The term 'all materials, articles and commodities' includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes. The division Bench of this Court of which one of us (K.S. Radhakrishnan, J.) is a party in PAN INDIA NETWORK INFRAVEST PVT. LTD. VERSUS STATE OF KERALA AND OTHERS (AND OTHER CASES) [2004 (12) TMI 656 - KERALA HIGH COURT] held that selling of online lottery tickets which is intangible goods and transfer of which would constitute sale within the meaning of sale under the Kerala General Sales Tax Act. Principles enunciated above would positively show that transfer of technical know-how either through technical personnel by undertaking the work would satisfy the definition of 'sale' under section 2(xxi) of the KGST Act - We therefore fully concur with the view of the Tribunal that the transfer of technical know-how by deputing personnel would amount to sale of goods and exigible to tax under the KGST Act. Rejection of accounts - HELD THAT:- Admittedly, assessee has not produced the manufacturing accounts before the assessing authority. Rule 32(15) of the KGST Rules specifically states that every manufacturer of goods shall maintain daily production accounts, showing quantitative details of the various raw materials used for the manufacture and the quantitative details of the goods so manufactured. It is settled law that non-maintenance of manufacturing account is a valid ground for rejection of accounts and estimation of turnover. All revision petition dismissed. Issues Involved:1. Whether the technical know-how can be considered as 'goods' unless it is copied or incorporated into any media and then transferred.2. Whether the Tribunal is justified in rejecting the accounts and restoring turnover estimation made by the assessing authority, though the only purchaser of the commodity was the Government of India.Issue-wise Detailed Analysis:1. Technical Know-how as 'Goods':The petitioner, a private limited company, entered into an agreement with another company to provide technology for the production of combustible cartridge cases (CCC) and to assist with repairs and maintenance. The petitioner received Rs. 1,24,19,567 as royalty for the assessment year 1999-2000. The Sales Tax Officer issued a notice proposing to levy tax on this amount, treating the income from royalty as taxable turnover under the Kerala General Sales Tax Act, 1963 (KGST Act). The petitioner contended that the royalty received for providing technical know-how does not constitute 'goods' and thus cannot be taxed.The Tribunal rejected this contention, holding that technical know-how, whether transferred through tangible media or by deputing personnel, constitutes 'goods' under the KGST Act. The court referred to the definition of 'goods' under section 2(xii) of the KGST Act, which includes all kinds of movable property. The court also cited the Supreme Court's judgment in *Associated Cement Companies Ltd. v. Commissioner of Customs* and *Tata Consultancy Services v. State of Andhra Pradesh*, which held that intellectual property, once put on a medium and marketed, becomes 'goods' susceptible to sales tax. The court concluded that the transfer of technical know-how by deputing personnel amounts to the sale of goods and is exigible to tax under the KGST Act.2. Rejection of Accounts and Turnover Estimation:The petitioner also challenged the addition of Rs. 1 lakh to the conceded turnover and Rs. 70,000 under section 5A of the KGST Act for non-maintenance of manufacturing accounts. The first appellate authority had deleted these additions, but the Tribunal restored them, justifying the addition due to the petitioner's failure to maintain manufacturing accounts as required under Rule 32(15) of the KGST Rules.The court upheld the Tribunal's decision, stating that non-maintenance of manufacturing accounts is a valid ground for rejecting accounts and estimating turnover. The court referred to its previous decision in *Deputy Commissioner (Law), Commercial Taxes, Ernakulam v. Krishna Plastics*, which supported this view.Conclusion:The court dismissed the revision petitions, concurring with the Tribunal's findings that:1. The transfer of technical know-how, even if through deputing personnel, constitutes the sale of goods and is taxable under the KGST Act.2. The addition to the conceded turnover due to non-maintenance of manufacturing accounts was justified.Petitions Dismissed.