Catalysts and Chemicals India (West Asia) P. Ltd. vs Commissioner of Income Tax

K.A. Nayar, J.—The Income Tax referred case arises out of the appellate order of the Income Tax Appellate Tribunal for the assessment year 1971-72. The assessee-company came into existence under a collaboration agreement between A. Laljee Sons and Company, a firm in India, and Catalysts and Chemicals Inc. (CCI), a company in the U.S.A. On June 29, 1977, three books of manuals containing the information regarding the technical details in production of catalysts were received by the Indian firm. The manuals were for the exclusive use of the Indian company and no portion thereof may be disclosed to any of the persons and in the assessment year 1971-72, the assessee-company claimed development rebate and depreciation at the rate of 15% on Rs. 18.75 lakhs being the amount paid by the assessee to the CCI. The Tribunal determined the cost of the manuals at Rs. 25,000 and allowed depreciation and development rebate thereon. But, by judgment dated April 2, 1982, in ITR Nos. 103 and 104 of 1979 (See Catalysts and Chemicals India (West Asia) Ltd. Vs. Commissioner of Income Tax, this court found, on a reference at the instance of the assessee, that the determination made by the Tribunal was arbitrary and hence directed the Tribunal to hear the appeal afresh. The finding of the Tribunal that the sum of Rs. 18.75 lakhs was not only for the three manuals but was also for certain rights was not challenged in those proceedings. Therefore, the Tribunal, after remand, rejected the working submitted by the assessee. The Tribunal held that a rational basis for ascertaining the cost of the manuals would be to deduct from the total consideration of Rs. 18.75 lakhs the cost attributable to the various components and to take the difference as the cost of the manuals. The Tribunal evaluated the cost of the other items at Rs. 16,50,000 and determined the balance amount of Rs. 2,25,000 as the cost of the manuals. The Income Tax Officer was directed to allow depreciation, development rebate, etc., on that basis. The assessee-company filed a reference application u/s 256(1) of the Income Tax Act. But the same was dismissed on the ground that no question of law arose out of the order of the Tribunal dated February 16, 1983. The assessee-company filed a miscellaneous petition before the Tribunal requesting for rectification of the said order of dismissal. That was also dismissed by the Tribunal by its order dated October 30, 1984. Thereafter, the assessee-company filed an original petition u/s 256(2) of the Income Tax Act and this court, by its order dated May 26, 1987, has directed the Tribunal to refer the following question of law for our opinion which was referred, viz.;

" Whether, on the facts and circumstances of the case, the Tribunal was justified in excluding the know-how as detailed below from the know-how as contained and conveyed in the manuals.

(Rs.)

Scheme for components of the catalysts 50,000

Quality control test 25,000

Drawing of process scheme engineering 75,000

Personnel organisation, management, manufacture, sales and service 50,000

Estimate of direct / indirect maintenance labour 30,000

Maintenance schedule 20,000

Process design information for customer utilisation 50,000

3,00,000

By a supplementary statement of case, another question was also referred, viz. :

" Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in fixing the cost of the manuals at Rs. 2,25,000?"

We heard counsel Sri K.C. John for the assessee and Sri P.K.R. Menon for the Revenue.

The assessee is, admittedly, entitled to depreciation and development rebate on plant and machinery installed for the purpose of the business and plant, u/s 43(3), will include the books as well used for the purpose of the business. The assessee obtained three books of manuals containing information about the necessary technical details in production of catalysts and a payment of Rs. 18.75 lakhs was made by the assessee. The technical know-how contained in the manuals is an important ingredient of what has been received by the assessee in return of consideration of Rs. 18.75 lakhs. But the submission to identify, to a large extent, the technical know-how with the impugned books has been rejected by the Tribunal. The Tribunal has given a finding that the sum of Rs. 18.75 lakhs was not only for three manuals but also was in return for certain rights from the collaborators, one of which was the right to receive the present as well as the future know-how. Therefore, the technical know-how cannot be identified with the books. The contents of the manuals has been divided into nine parts by the Tribunal as :

Description of composition of all catalysts

Raw materials and their specifications

Quality control tests

Detailed engineering drawing of processes

Layout of all equipment and building

Personnel organisation schemes

Estimate of direct maintenance labour

Process design information for customer

Design of plants to assist customers

Before the Tribunal, two workings were given by the assessee allocating the total payment of Rs. 18.75 lakhs amongst the various components of what has been obtained by the assessee. These two workings admit the fact that part of the cost should be attributed to the composition of the catalysts, patents and trade manuals. Each of various components does have some value evfen in the assumption of the assessee. A rational basis for ascertaining the cost of the manuals had to be ascertained by the Tribunal by deducting from the total consideration of Rs. 18.75 lakhs, the cost attributable to the various components, thus arriving at the difference as the cost of the manuals. Admittedly, an important component, viz., the composition of patent rights, will have to be deducted. It would appear that the cost attributable to patent rights has been agreed upon by both sides. The cost of other items also had to be evaluated and this was done by the Tribunal keeping in mind the manner of the working by the assessee itself. But, in so doing, under the head know-how, eight items have been excluded. The eighth item which is future know-how is evaluated at Rs. 25,000. The assessee has no complaint regarding the exclusion of future know-how. But the assessee contends that there is no justification for excluding other seven items. According to the assessee, the approach of the Tribunal was arbitrary. It did not apply judicial or objective norms for determining the values of the excluded items. It also did not indicate as to how those items rank for exclusion even though styled as know-how. There may be justification for excluding those items. But a reasoned order has to be passed by the Tribunal. The valuation made of the excluded items is also not seen to have been made on any scientific basis. If it was made accepting the valuation given by the assessee as in the case of patent rights, then there cannot be any objection. But, in the order, it is seen that except for the patent rights, there was no admitted valuation for other components.

Therefore, we feel that a fresh consideration is required by the Tribunal regarding the exclusion and valuation of the seven items mentioned in question No. 1 referred to us. The answer to the second question referred will depend upon reconsideration of the appeal. In the circumstances, we refuse to answer the question referred to us and direct the Appellate Tribunal to take the appeal for the assessment year 1971-72, viz., I.T.A. No. 303/Coch. of 1974-75, on file and dispose of the same afresh considering the question of exclusion of the know-how mentioned in question No. 1 and valuation thereof.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.