TaxTMI 
TaxTMI 
TaxTMI 
2005 (12) TMI 247
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....ase are that the assessee entered into an agreement with M/s. Indo Tech Transformers Ltd., on 15-7-1994 for transfer of the firm as a going concern for a consideration of Rs. 4,70,65,056. The component and payment of this amount works out as follows:- ---------------------------------------------- (A) Value of net assets ... Rs. 2,76,49,617 (B) Value of technical know-how ... Rs. 1,25,00,000 (C) Compensation for pending orders i.e., for not to compete and indulge in transformers business by the firm ... Rs. 36,16,139 (D) Compensation for expected orders under negotiations (i.e., for not to compete and indulge in transformers business by the Firm). &nbs....
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....or process of article and there was no provision at that prevalent time to tax such nature of technical know-how fee. Accordingly, he deleted the addition. Further, a sum of Rs. 36,16,139 received by the assessee towards compensation for pending orders and for non-competition was also deleted holding that there was a practice in the field of business that while transferring the asset, to keep up the secured orders and for not allowing other parties to compete in the future business of the transferor-company, such compensation is paid. Against these findings of the CIT (Appeals), the revenue is in appeal. The CIT (Appeals), however, has confirmed the addition of Rs. 33 lakhs received by the assessee as compensation towards future expected orders as these are only imaginary in nature. Against this finding the assessee is in appeal before us. 5. As regards the deletion of Rs. 1.25 crores claimed as technical know-how fee, the learned departmental representative submitted that the assessee-company was sold as a going concern and the promoters of the new company were the two partners of the transferor-company who were holding majority of shares. Till the date of transfer of the busines....
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....company can be lifted for the purpose of ascertaining the real character of the transaction and to ascertain whether a transaction is genuine or not. He also relied on the judgment of Hon'ble Supreme Court in the case of Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 and submitted that it is the duty of the Court in every case where ingenuity is expended to avoid taxing and welfare legislations to get behind the smoke screen and discover the true state of affairs. If the Assessing Officer is not satisfied with the form, go into the substance of the transaction and submitted that there is no basis for valuation of non-existing asset as technical know-how fees at Rs. 1.25 crores. He further relied on the judgment of Hon'ble Jurisdictional High Court in the case of CIT v. Mineral Mining Co. (P.) Ltd. [1992] 194 ITR 258 (Mad.) and submitted that incomplete or uncomprehensive data said to have been transferred cannot be considered as know-how. Further, he relied on the judgment of Hon'ble Delhi High Court in the case of CIT v. Dr. R.L. Bhargava [2002] 256 ITR 422 and submitted that a contract or an agreement must be construed having regard ....
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....he MOU and the licensee agreement with M/s. Allied Signals, USA in 1995. Indo Tech Electric Company's technology bank, i.e., complete comprehensive designs were available for:- (a) distribution transformers of 25, 40, 63, 100, 160, 250, 315, 400, 500KVA in 11KV, 22KV and 33 KV with different losses and different specifications. (b) Industrial transformers of 100, 160, 200, 250, 315, 400, 500, 630, 750, 800, 900, 1,000, 1,250, 1,500/1,600, 2,000, 2,250, 2,500, 3,000, 3,150, 3,600, 4,000, 4,500, 5,000, 6,300, 7,500, 8,000KVA in 11KV/22KV/33KV class with various different options, features as per different customer requirements. (c) Arc Furnace transformers from 750 KVA to 10,000 KVA up to 33 KV ranges. (d) Induction Furnace transformers from 250 KVA up to 5,000 KVA 11/22 and 33 KV class. (e) Fail safe Distribution transformers up to 630 KVA/11KV ratings. (f) Other special application transformers which includes basic designs, complete manufacturing designs for costings, various material specifications. Most of the designs are proven with successful tests conducted on transformers at various laboratories like CPRI, IIT, etc. for Short Circuit and impulse Voltage Withstand Capabi....
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....that the taxability of such compensation under the IT Act depends upon the nature and circumstances of each case with reference to the agreement in question. The first issue that may have to be decided in such cases is whether the capital asset in question is goodwill of a business or a right to manufacture, produce or process any article or thing. This is because the amendment made by the Finance Act, 1997, in section 55(2) enlarging the scope of a capital asset is structured in such a manner that it is either "goodwill" or "a right to manufacture produce or process an article or thing"- (i) where the capital asset transferred is in the nature of goodwill of a business, recourse to section 55(2) can be made only from assessment year 1988-89 and subsequent assessment years. (ii) Where the capital asset transferred is in the nature of a right to manufacture produce or process an article or thing, recourse to section 55(2) can be made only from assessment year 1998-99 in respect of any consideration received for the transfer thereof which includes extinguishment or curtailment of such right. In this connection, attention is invited to clause 19 of the memorandum explaining the prov....
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....y at the time of signing the transfer agreement for transfer of the firm as a going concern. This leaves a big question in the minds of the authorities as to from where this element of know-how suddenly appeared. Has it come from vacuum? 11. The 'Technical know-how' is defined as an intangible revenue producing asset which can be put to use so as to produce revenue in two ways. The manufacturer can use it himself to make things for sale and make profit in that way, or he can teach it to others, so that they can make their own things, in which case he gets paid for the knowledge and information which he imparts to them. His fees and rewards are then revenue in his hands. Under the Income-tax Act, transfer of Technical know-how is subject to tax only from the assessment year 1998-99 by the amendment through Finance Act, 1997. 12. On the other hand, "Goodwill" means, it is the benefit and advantage of the good name, reputation and connection of the business. It is the attractive force which brings the customer. If the business is destroyed, the goodwill perishes with it, though elements remain which may be gathered up and revived again. Goodwill is affected by everything relating to....
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....t, then its power to find out real intention of the parties, ignoring the apparent has to be, and has always been conceded. It is difficult to imagine whether this is possible, except in cases of a make believe arrangement, or devices adopted to evade tax. In such an event, the authorities will be removing the cover to expose the real intention of the parties intelligently cloaked and if that intention is discovered, which is meant to evade the tax, it cannot be acted upon because all the steps taken as a component part of the arrangements are legally correct or valid. This is not the rewriting of the agreement for the parties or importing something outside from the agreement. The question of rewriting arises when the Income-tax authorities have not doubted the genuineness of the agreement, however, add or delete new terms to the agreement as they think with an intention to interpret the agreement in their favour to collect more tax. The assessee has every right to enter into agreement according to its free will or choice, but the professed intention and real intention should be the same. The taxation authorities must consider that the apparent is real until it is shown that there ....
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....not to the partner of the Transferor-firm. When the new company has come into existence, the Transferor-firm got dissolved and the partners of the Transferor-firm are the promoters/Directors of the Transferee-company. There is no potential threat to the transferee. Hence, there is no question of paying non-competing fees. He relied on the judgment of Hon'ble Jurisdictional High Court in the case of K. Ramaswamy v. CIT [2003] 261 ITR 358 (Mad.) wherein it was held that in cases where the same persons enter into transactions though by introducing a corporate personality into some of those transactions, the income-tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction. 16. On the other hand, the learned Counsel for the assessee submitted that clause (va) of section 28 was inserted, which provides that in some receipt for not carrying out any activity in relation to any business, shall be chargeable to tax under the head 'Profits and gains of business and profession'. Further, section 55(2)(b)(i) and section 55(2)(a) were also amended by the Finance Act with effect from 1-4-2003 to deem the cost of improvement and acquis....