Harbour Engg. (P.) Ltd. Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. this appeal by the assessee which is directed against the order of the cit (appeals) dated 8-8-1989 pertains to assessment year 1986-87 wherein he has held that manufacturing or processing is involved while applying metalock technique or processes and thereby section 3 5ab was applicable. the assessee has taken grounds to urge that the cit (appeals) erred in his decision and he ought to have allowed the technical know-how fees paid under section 37(1) of the income-tax act, 1961.2. the relevant facts are that the assessee is a company in which public are not substantially interested. the assessee is engaged in ship repairing. the assessment year involved is 1986-87 for which the accounting year ended on 31-3-1985. the assessee paid technical know-how fees of rs. 1,58,202 to m/s......

Judgment:
1. This appeal by the assessee which is directed against the order of the CIT (Appeals) dated 8-8-1989 pertains to assessment year 1986-87 wherein he has held that manufacturing or processing is involved while applying metalock technique or processes and thereby section 3 5AB was applicable. The assessee has taken grounds to urge that the CIT (Appeals) erred in his decision and he ought to have allowed the technical know-how fees paid under section 37(1) of the Income-tax Act, 1961.

2. The relevant facts are that the assessee is a company in which public are not substantially interested. The assessee is engaged in ship repairing. The assessment year involved is 1986-87 for which the accounting year ended on 31-3-1985. The assessee paid technical know-how fees of Rs. 1,58,202 to M/s. Metalock International Association Ltd., U.K. and claimed as a deduction under section 37(1).

The Assessing Officer held that the case of the assessee fell under section 35AB inserted by the Finance Act, 1985 with effect from 1 -4-1986 according to which any lump sum consideration paid for acquiring any know-how for use for the purpose of the business 1 /6th of the amount so paid shall be deducted in computing the profits and gains of business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. The Explanation to Sub -section 35AB(2) provides that 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). Accordingly, the Assessing Officer has allowed only 1 /6th of the lump sum amount paid.

3. On appeal before the CIT (Appeals) it was claimed that the agreement was for obtaining information regarding the latest techniques for repairing ships. The CIT (Appeals) approached the issue from the point of view of Explanation to Section 35AB(2). He also noted that the agreement provided for payment of royalty based on the business transacted by the appellant by utilising metalock process and techniques. This technique is for effecting cold repairs to cracked, fractured and weakened machine parts or pressure vessels of cast or forged metal which techniques are being successfully applied in ship repairing and other industries. The CIT (Appeals) also noted that the appellant was running an engineering workshop for carrying out ship repairs and also machinery repairs at Madras. He has given a finding that the know-how obtained as a result of the agreement was for manufacturing or processing of goods required for effecting repairs in the ship. He also stated that the effecting of repairs in ocean going vessels did not merely confine itself to the removal of wear of tear.

It would also employ processing or manufacture of various parts required in the ship. Therefore, he has concluded that it is for the manufacture/or processing of these parts that relative techniques and processes were utilised according to the established quality/standard and specification of metalock. Therefore, he held that the fees paid by the appellant falls within the category of a lump sum consideration paid for acquiring know-how which is likely to be of assistance in the manufacture or processing of goods required to be used in the course of ship repairs. Accordingly, he upheld the assessment made by the Assessing Officer.

4. At the time of hearing the learned counsel for the assessee vehemently contended that no manufacture or processing was involved except doing patch up work done on the ship. It was urged that the assessee obtained a licence to use Metalock technique and processes and, therefore, Section 35 AB did not apply in this case. It was also for a fixed period beyond which the techniques could not be used. He re-iterated the fact that the job only involved joining or patching the cracked, fractured or weakened parts using Metalock techniques. A copy of the agreement dated 24-5-1982 was filed along with the paper compilation. He urged that no manufacturing or processing was involved except doing patch up work.

5. The learned departmental representative, on the other hand, strongly supported the order of the CIT (Appeals). He also submitted that the earlier order of the Tribunal in the case of Rane Brake Lining Ltd. in ITA No. 1588/Mds/88 dated 17-2-1992 is not relevant.

6. We have duly considered the rival submissions and considered the impugned orders of the authorities and the paper compilation filed. The preamble of the agreement clearly states that the assessee has set up and has been running an engineering workshop for carrying out ship repairs and also machinery repairs at Madras. The agreement provides for obtaining and applying the Metalock process exclusively in India and for the transfer of technical information and also provision of accessibility to the assessee at all times to the technical information on the Metalock process. In other words, not only the existing know-how of Metalock process has been obtained but also future-know-how was accessible to the appellant. Royalty is also fixed as payable on the basis of net ex-factory sale price of the product exclusive of excise duties, etc. It is also based on the registered capacity plus 25% in excess thereof or on such capacity as is specified in the approval letter obtained from Government of India. In case of production in excess of this quantum prior approval of the Government would be obtained regarding the terms of payment of royalty in respect of such excess production. The royalty payable was worked out on different slab basis depending upon the volume of business done. The technical know-how fees of 10,000 is payable in three instalments, namely, first instalment after agreement, second instalment on delivery of technical documentation and third and final on the commencement of commercial production or 4 years after the agreement is taken on record whichever is earlier. Thus both the payment of technical know-how fee as well as royalty are based on commercial production or net ex-factory sale price of the product. The duration of the agreement shall be for a period of 5 years from the date of agreement is taken on record or five years from the date of commencement of commercial production. From these data, it is clear that the technical know-how obtained by the assessee is linked with the production or manufacture of industrial products. In this connection, the decision of the 'A' Bench, Hyderabad in the case of V.B.C. Industries Ltd. v. Dy. CIT [1994] 48 ITD 292 is relevant for deciding this appeal. In that case, an assessee engaged in the manufacture of soft drinks and aerated water claimed deduction of payments made for acquisition of know-how relating to manufacture of ammonium nitrate for use in its business. While the Assessing Officer denied the claim of deduction, the Tribunal held that both the units were to be considered as one business because of unity of management and the assessee was entitled to deduction under Section 35AB. The Tribunal held that the intention of Legislature was to allow deduction if only one condition was fulfilled i.e. the know-how is required for business purposes. This deduction was admissible only from out of profits and gains in the business carried on by the assessee.

7. In the case of the assessee mere patch up work alone was not required to be done but as contemplated by the agreement, the Metalock technique could be used for repairing cracked, fractured and weakened machine parts or pressure vessels of cast or forged metal and which process could be utilised in ship repairing and other industries. If the version of the assessee, viz., only patch work was done the royalty prescribed under the agreement is not quantifiable with reference to actual output. A technical information furnished was also to be preserved as confidential and secret and all the drawings, blue prints, specifications and written materials shall be treated as confidential.

Thus there is no merit in the contention of the learned counsel for the assessee that this know-how has been utilised only for patch work and no manufacturing or processing is involved. If the same technique could also be utilised in ship building industry, then it would be regarded as manufacturing or processing of goods. The decision of the Tribunal cited also supports the claim that the information obtained by the assessee has been used for the purposes of business. Insofar as machinery parts are manufactured and fitted in the ships in the process of repairing the test would be satisfied. Keeping in view the totality of the circumstances stated above, the conclusion that arises is that the assessee has obtained know-how for purposes of its business by paying lumpsum consideration and, therefore, the claim of the assessee falls within the mischief of Section 35AB applicable to assessment year 1986-87. The decisions of the Tribunal relied upon by the learned counsel for the assessee are not applicable. Accordingly, we uphold the order of the CIT (Appeals) and reject the grounds taken by the assessee.