TaxTMI 
TaxTMI 
2007 (8) TMI 261
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....firm and in terms of Deed of Partnership was carrying on the following business : (a) Designing, manufacturing and selling high pressure of burner and hearing system for boilers and furnaces ; (b) Manufacture of pressure vessels, beat exchangers etc. (c) Erecting of plant equipments; (d) Carrying on such other business as may be mutually agreed upon by the partners; 3. On 22-12-1977, the assessee firm entered into an agreement for sale of five different models of boilers and fuel firing equipments with different capacities based on different fuel systems identified by respective drawings, designs, layouts, specifications, technical data and write-up on manufacturing processes, more particularly described in schedule B to the agreement and forming part of the agreement. In the recital to the agreement it was set out that the assessee had decided to concentrate on its other activities to the entire exclusion and discontinuance of the manufacture of the boilers and fuel firing equipments and hence agreed to sell the five models developed and owned by it to the applicant for a total consideration and price of Rs.5,00,000/- (Rupees Five lacs only) on the terms and c....
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....f oil burners to the exclusion of these 5 models" 9. A further finding was recorded that, "both the purchaser and seller are in the field of same business activity and the assessee and the purchaser intended to exploit this technical date for the manufacture of oil burners and fuel firing equipments" and, therefore, held that the receipt would be revenue receipt and not a capital receipt. 10. As reference was sought for by the applicant, the learned Tribunal was pleased to refer it in terms of the questions as framed. 11. In answering the questions that are referred, the main question that we have to answer is whether the receipt of Rs.5,00,000/- in the hands of the assessee could be taxed as a capital receipt or revenue receipt ? 12. One of the tests to decide whether the receipt partakes of a revenue receipt or capital receipt is whether the receipts from the transfer of know-how are of capital or revenue nature. That would depend on the nature of the transaction out of which the receipts arose and the context in which the receipts are received. If the imparting of know-how is really in the nature of services rendered without anything more, the receipt must be treated....
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....f certain tools in India under the name "Wolf" and this arrangement was to continue till a new company was promoted and commenced business. On 31-10-1958, M/s.Ralliwolf Limited was incorporated in India on the condition that Rallis would be the majority shareholders. The issued capital of Ralliwolf was of 20,000 shares of Rs.100 each. There were various agreements between Rallis India Limited and Wolf Electric Tools (holdings) Limited. The main object of Ralliwolf was to manufacture and market in India, portable electric tools and components thereof. There were several agreements. By an agreement dated 16-02-1989, in consideration of the issue of 3,625 shares in the capital of Ralliwolf, the Wolf company was to provide and make available to Ralliwolf all present and future drawings, designs, schedules and technical knowledge and data necessary for the establishment, erection and installation of the factory and the production of selected tools. The agreement was to remain in force as long as the manufacturing and marketing agreement to be executed was put in force which was executed on 19-08-1959. Under this agreement, it was agreed that the tools manufactured or a....
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....eceipt will have to be treated as a capital receipt." 16. We may gainfully refer to the following observations in CIT V/s. Ciba of India Limited reported in [1968] 165 ITR 51 (SC) as to what is know-how. The Supreme Court observed as under (page 700): "Counsel for the Commissioner strongly pressed for acceptance of what he called the principle of the speeches of Viscount Simonds and Lords Tucker and Denning in Evans Medical Supplies Ltd. v. Moraarty [1957] 37 Tax Cas 540;[1958] 1 WLR66 ; [1959] 35 ITR 707 (HL). Counsel said that it was ruled in that case by the majority of the House that money received by a taxpayer for making available to another person a right to technical 'know-how' is liable to be treated as a capital receipt. It must in the first instance be noted that the House of Lords was dealing with the true character of a receipt by a taxpayer who had made technical 'know-how' available to another in consideration of a certain payment. The nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays it. Again the view expressed by the majority of the House does not lay down any princip....
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....his patent rights, but retains them and grants a non-exclusive licence. He does not then dispose of a capital asset. He retains the asset and he uses it to bring in money for him. A lump sum may in those cases be a revenue receipt" see Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioner [1948] 16 ITR (Suppl) 57 (CA), per Lord Greene M.R., who emphasises that it was a non-exclusive licence there. Similarly a lump sum for "know-how" may be a revenue receipt. The capital asset remains with the owner. All he does is to put it to use." (emphasissupplied) 18. It is, therefore, clear that there is no single determinative test to decide the nature of the receipt, whether capital or revenue. To answer the issue, one will have to examine the terms of contract, the nature of transaction or the terms of transfer of know-how. One of the tests would be is the agreement for transfer of the asset, a method of trading by which it acquires the source of income. If yes, then normally it would partake of a revenue receipt. If on the other hand there is a complete disposal of the asset with the know-how resulting in parting of the asset for a lumpsum, with no reference to anticipate....