Case: The Commissioner of Income Tax - 6 Vs. M/S.Essel Propack Limited (Formerly Known As Essel Packaging Limited)

ORAL JUDGMENT:1. The appeal by the Revenue against the order of the Income Tax Appellate Tribunal, in relation to assessment year 19992000 raises the following questions of law :1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Ld CIT (A) in directing the Assessing Officer to allow the technical know how fees amounting to Rs.6,82,00,029/ as revenue expenditure u/s 37 of the I.T. Act without appreciating the fact that the same was in the nature of capital expenditure being incurred on the acquisition of intangible asset of enduring nature 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the agreement between the assessee company and KMK Lizence Limited was operational in financial year 19971998, even before obtaining the required approval of Government of India on 5-6-19983. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee did not acquire the ownership rights under the agreement without appreciating the fact that the assessee became the beneficial owner of a bundle of rights under the agreement for a period of 5 years 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Duty Free Advance licence which was credited in the books of the assessee was not in the nature of the real income though the income is squarely covered by the provisions of the section 28(iv) of the I.T. Act 2. The assessee entered into an agreement with a company by the name of KMK Lizence Limited, registered in the Republic of Mauritius, under which the licensor granted to the assessee a nonexclusive licence, restricted to the Territory of India to manufacture and use tube-making machines and the tools and parts thereof with the right to register the licence. The licensor was a registered proprietor and beneficial owner of certain patents for manufacturing tube-making machines. Under the terms of the agreement, the assessee obtained a nonexclusive licence for a term of two years between 1st September 1997 and 31st August 1999. Under the agreement, the sole proprietary right in the patents vests with the licensor. The licensor indemnified the assessee as licensee against all actions, claims, proceedings, costs and damages arising out of any breach of the warranties made by the licensor. Under the licence agreement, the assessee was entitled to initiate proceedings for infringement of the patent in order to defend the proprietary rights of the licensor against reimbursement of expenses by the licensor. The licence agreement which was executed in the year 1997, was modified on 15th June 1998. The modification related to the payment of consideration and the terms of the licence. Under the original agreement, the assessee was to pay to the licensor an amount of CHF 280,000 for every machine manufactured and the term was two years. Under the modified agreement, a technical know how fee of CHF 20,78,500 Swiss Francs net of taxes was payable in four installments while the royalty was fixed at five per cent for each captive use / domestic sale of a machine and eight per cent for exports for five years. The term of the agreement was modified to be between 1st September 1997 and 31st August 2002.3. The Assessing Officer was of the view that the payment of the royalty component was of a revenue nature and was an allowable expense under Section 37(1) but the lumpsum component of Rs.6.82 crores which was payable over a period of five years was of a capital nature because the assessee acquired an intangible asset in the form of technical know how. The Commissioner of Income Tax (Appeals) allowed the claim of the assessee. The Tribunal in appeal has come to the conclusion that the rights acquired by the assessee were for a specific tenure and were not absolute. The assessee was not entitled to transfer the rights which it obtained under the licence and had a limited right to use the technical know how for manufacturing machines over a limited tenure. In the circumstances, the Tribunal held that the Commissioner of Income Tax (Appeals) was justified in allowing the claim of the assessee.4. We have perused the original licence agreement and the modification. Under the terms of the agreement, the assessee as a licensee obtained only a nonexclusive licence which was restricted to the Territory of India to manufacture and use tube-making machines. The proprietary rights in the patents continued to vest in the licensor. The term of the licence was five years. Having regard to these salient aspects of the agreement, the Tribunal was justified in coming to the conclusion that the assessee did not acquire an asset of a capital nature. In Commissioner of Income Tax V/s. CIBA of India Limited, (1968) 69 ITR 692 (S.C.) the Supreme Court dealt with a case where a Swiss company had undertaken to deliver to the assessee processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered in the laboratories of the company. The assessee was granted full and sole rights and a licence under the patents, to make use exercise and vend the inventions referred to in India. In consideration of the right to receive scientific and technical assistance, the assessee had agreed to make stipulated contributions. The assessee was held to be a mere licensee for a limited period. The Supreme Court held that the Swiss company did not part with any assets of its business nor had the assessee acquired any asset of an enduring nature. In that context, the Supreme Court held thus :The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss Co. to the assessee : (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other person; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss Co.; (e) there was no transfer of the fruits of research once for all : the Swiss Co. which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement. We agree with the High Court that the first question was rightly answered in favour of the assessee.5. We have adverted to the aforesaid judgment for the purpose of illuminating the basic finding which has been arrived at in the present case which is to the effect that the assessee cannot be regarded as having acquired either wholly or any part, proprietary rights by or under the licence agreement dated 1st September 1997 as modified on 15th June 1998.6. On behalf of the Revenue, it was sought to be submitted that the acquisition of know how under a licence would fall within the ambit of Section 32 of the Income Tax Act, 1961 as amended. On the finding of fact which has been arrived at by the Commissioner of Income Tax (Appeals) and by the Tribunal it has emerged from the record in the present case that the assessee had as a matter of fact not acquired a proprietary interest or ownership in respect of the subject matter of the licence either wholly or in part so as to attract the provisions of Section 32. Having regard to the factual position which has emerged before the Court which is to the effect that the assessee had obtained the benefit, purely on a nonexclusive basis, of a licence confined to the territory of India, for a limited term and that the proprietary rights in the patents which formed the subject matter of the licence continued to vest in the licensor, the provisions of Section 32 were not attracted in this case. Moreover, the finding which has been arrived at in the present case is that the agreement was entered into on 1st September 1997 which was prior to 1st April 1998 on which date the amended provisions of Section 32 were brought into force. Though the contention of the Revenue was that the approval of the Government was obtained after 1st April 1998, more specifically on 5th June 1998, the Tribunal has observed that once approval was granted, it would relate back to the original date of the agreement, 1st September 1997, and that as a matter of fact the assessee had used the technical know how for the production of machines in financial year 19971998. Thus, as a matter of fact the Tribunal found that the agreement was operative during the course of financial year 19971998 prior to the enforcement of the amended provisions of Section 32. Hence, looked at from either perspective, the finding which has been arrived at by the Tribunal does not suffer from any error and no substantial question of law would arise insofar as first the three questions are concerned.7. In so far as the fourth question is concerned, there is a finding of fact which has been arrived at by the Tribunal which is to the effect that no real income had accrued to the assessee during the course of the assessment year in question. The record before the Court would show that it was the contention of the assessee even before the Assessing Officer that an application had to be made to the Licensing Authority for obtaining an advance licence against exports and as a matter of fact no application was made during the assessment year by the assessee. No application was made by the assessee during the assessment year 19992000 and consequently no real income had accrued to the assessee during that period. On this finding of fact, no substantial question of law would arise. There is no merit in the appeal.

Decision:
0[ds]4. We have perused the original licence agreement and the modification. Under the terms of the agreement, the assessee as a licensee obtained only a nonexclusive licence which was restricted to the Territory of India to manufacture and usemachines. The proprietary rights in the patents continued to vest in the licensor. The term of the licence was five years. Having regard to these salient aspects of the agreement, the Tribunal was justified in coming to the conclusion that the assessee did not acquire an asset of a capital nature. In Commissioner of Income Tax V/s. CIBA of India Limited, (1968) 69 ITR 692 (S.C.) the Supreme Court dealt with a case where a Swiss company had undertaken to deliver to the assessee processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered in the laboratories of the company. The assessee was granted full and sole rights and a licence under the patents, to make use exercise and vend the inventions referred to in India. In consideration of the right to receive scientific and technical assistance, the assessee had agreed to make stipulated contributions. The assessee was held to be a mere licensee for a limited period. The Supreme Court held that the Swiss company did not part with any assets of its business nor had the assessee acquired any asset of an enduring nature. In that context, the Supreme Court held thus :The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss Co. to the assessee : (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other person; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss Co.; (e) there was no transfer of the fruits of research once for all : the Swiss Co. which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement. We agree with the High Court that the first question was rightly answered in favour of the assessee.5. We have adverted to the aforesaid judgment for the purpose of illuminating the basic finding which has been arrived at in the present case which is to the effect that the assessee cannot be regarded as having acquired either wholly or any part, proprietary rights by or under the licence agreement dated 1st September 1997 as modified on 15th Junethe finding of fact which has been arrived at by the Commissioner of Income Tax (Appeals) and by the Tribunal it has emerged from the record in the present case that the assessee had as a matter of fact not acquired a proprietary interest or ownership in respect of the subject matter of the licence either wholly or in part so as to attract the provisions of Section 32. Having regard to the factual position which has emerged before the Court which is to the effect that the assessee had obtained the benefit, purely on a nonexclusive basis, of a licence confined to the territory of India, for a limited term and that the proprietary rights in the patents which formed the subject matter of the licence continued to vest in the licensor, the provisions of Section 32 were not attracted in this case. Moreover, the finding which has been arrived at in the present case is that the agreement was entered into on 1st September 1997 which was prior to 1st April 1998 on which date the amended provisions of Section 32 were brought into force. Though the contention of the Revenue was that the approval of the Government was obtained after 1st April 1998, more specifically on 5th June 1998, the Tribunal has observed that once approval was granted, it would relate back to the original date of the agreement, 1st September 1997, and that as a matter of fact the assessee had used the technical know how for the production of machines in financial year 19971998. Thus, as a matter of fact the Tribunal found that the agreement was operative during the course of financial year 19971998 prior to the enforcement of the amended provisions of Section 32. Hence, looked at from either perspective, the finding which has been arrived at by the Tribunal does not suffer from any error and no substantial question of law would arise insofar as first the three questions are concerned.7. In so far as the fourth question is concerned, there is a finding of fact which has been arrived at by the Tribunal which is to the effect that no real income had accrued to the assessee during the course of the assessment year in question. The record before the Court would show that it was the contention of the assessee even before the Assessing Officer that an application had to be made to the Licensing Authority for obtaining an advance licence against exports and as a matter of fact no application was made during the assessment year by the assessee. No application was made by the assessee during the assessment year 19992000 and consequently no real income had accrued to the assessee during that period. On this finding of fact, no substantial question of law would arise. There is no merit in the appeal