TaxTMI 
TaxTMI 
1989 (7) TMI 138
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....n agreed to supply to the assessee all its present know-how to the extent practicable. 3. 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 direct....
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....erms 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. 4. 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 prov....
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....ow means drawings, plans, design, quality controls, machine and mechanical specifications, engineering data, production techniques, tooling information, installation data, application data, inventions, processes, sources of supply, marketing data, and sales techniques all relating to the Field of this Agreement, and shall include, by way of illustration, but not limitation : (i) Product formulations --- specific basic resing, colorants, glass, asbestos fibres or other ingredients (including fibre length, sizing agents) plus coupling agents and/or lubricants, as appropriate. (ii) Product characterizations --- physical property data on commercial and development products. (iii) Product processing recommendations --- plastic processing equipment settings and conditions, mold design recommendations, and, to a limited degree, the effect of varying settings on finished piece properties. (iv) Product application data --- recommended design features peculiar to fortified thermoplastics, application descriptions and case histories. (v) Manufacturing equipment design --- including resin-fortified blending and feed systems, extruders, screws, drives, venting systems, extrusion ....
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....t was to remain the property of that corporation. Secondly, the agreement is for a period of only 5 years from the date of the commencement of the production. Moreover, clause 8(b) also provides that within that period the assessee is to develop its own design and research so that it does not remain dependent upon the corporation beyond that period. Therefore, both these features of the agreement show that the assessee did not get an advantage for a long period. As stated above, the learned Departmental Representative has relied upon a Tribunal decision and in that connection pointed out the definition of know-how in the agreement which has been reproduced above. The Commissioner in that case had held the royalty payment to be of a revenue nature relying upon the following services the collaborators were to render :---- (i) Inspection of out-existing machinery and instruction regarding general plant lay-out and scope drawing. (ii) Detailed specification of the equipments. (iii) Periodic inspection of equipments during their several visits. (iv) Witnessing tests for equipments where necessary. (v) Drawings for structural supports for equipments, piping, electricals, a....