1995 (4) TMI 114 - AT - Income Tax

Tribunal upholds applicability of section 35AB to technical know-how fees in manufacturing.

The Tribunal upheld the decision that section 35AB applied to technical know-how fees paid by the assessee under section 37(1) of the Income-tax Act, ... Processing Of Goods Issues:1. Applicability of section 35AB to technical know-how fees paid under section 37(1) of the Income-tax Act, 1961.2. Interpretation of 'manufacturing or processing' in the context of Metalock technique and processes.3. Determination of whether the technical know-how obtained by the assessee falls within the category of a lump sum consideration paid for acquiring know-how.Analysis:1. The case involved the applicability of section 35AB to technical know-how fees paid by the assessee under section 37(1) of the Income-tax Act, 1961. The Assessing Officer held that the case fell under section 35AB, which allows deduction of lump sum consideration paid for acquiring know-how over a specific period. The CIT (Appeals) upheld this decision, stating that the know-how obtained was likely to assist in the manufacture or processing of goods required for ship repairs.2. The interpretation of 'manufacturing or processing' in the context of Metalock technique and processes was crucial. The CIT (Appeals) determined that the Metalock technique, used for repairing cracked, fractured, and weakened machine parts in ship repairing and other industries, involved manufacturing or processing of goods required for ship repairs. The agreement provided for payment based on business transacted utilizing Metalock process, indicating a connection to manufacturing or processing activities.3. The key issue was to determine whether the technical know-how obtained by the assessee fell within the category of a lump sum consideration paid for acquiring know-how. The Tribunal analyzed the agreement terms, which included provisions for obtaining and applying Metalock process exclusively in India, future know-how accessibility, and royalty based on production volume. The Tribunal concluded that the technical know-how obtained was linked to the production or manufacture of industrial products, supporting the applicability of section 35AB.4. The Tribunal referenced a relevant case to support its decision, emphasizing that the know-how should be required for business purposes to qualify for deduction under section 35AB. The Tribunal rejected the contention that only patchwork was involved, highlighting that the Metalock technique could be utilized for manufacturing or processing of goods beyond mere repairs. The Tribunal upheld the order of the CIT (Appeals) and dismissed the appeal, affirming the applicability of section 35AB to the technical know-how fees paid by the assessee.5. In conclusion, the Tribunal's detailed analysis and interpretation of the relevant provisions and agreements supported the decision regarding the applicability of section 35AB to the technical know-how fees paid by the assessee. The judgment emphasized the importance of considering the nature of know-how acquired and its connection to business activities in determining the eligibility for deductions under the Income-tax Act, 1961.