COMMISSIONER OF INCOME TAX Vs. POLYFORMALIN PRIVATE LIMITED

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Cochin Bench, has referred the following questions to this court under Section 256(1) of the Income-tax Act:

(2.) THE assessee is a company incorporated on May 18, 1974, with the object of manufacturing and selling organic and synthetic chemicals. THE company had its buildings constructed and machineries installed and it started producing formalin from February 24, 1975 onwards. THE assessee entered into a collaboration agreement on May 23, 1975, with a neighbouring concern by name M/s. Arborites (P.) Ltd. for the production of urea formaldehyde resin. THE term of the agreement was initially for a period of five years, but it was provided that the term can be extended subject to further agreement between the parties. As per the agreement, M/s. Arborites (P.) Ltd. transferred its technical know-how and the right to use the trade mark to the assessee. THE assessee was required to keep the technical know-how in confidence. Information about further improvements in the technical know-how was also agreed to be transferred to the assessee. In consideration of the transfer of the technical know-how, the assessee company was to pay to Arborites (P.) Ltd. a royalty calculated at the rate of Rs. 100 per ton of the contract product manufactured. THEre was a further agreement on May 28, 1975, as per which M/s. Arborites (P.) Ltd. transferred its plant and machinery to the assessee for a price fixed at Rs. 1,00,000 and vacated the rental premises occupied by it. THEre was yet another agreement on March 22, 1978, by way of clarification of the agreement dated May 23, 1975, that there was no absolute transfer of the technical know-how, the ownership in respect of which continued with M/s. Arborites (P.) Ltd, and the assessee was only entitled to the use of it for a period of five years on payment of royalty as agreed to between the parties.

(3.) IN M. K. Brothers P. Ltd. v. CIT [1972] 86 ITR 38 (SC), the assessee company had by agreement with a partnership firm by name Sharma & Co. obtained the sole selling agency right of the products of the Kanpur Cotton Mills owned by the British INdia Corporation. As per the agreement between the assessee and Sharma & Co., all the outstandings due from the latter to the British INdia Corporation were to be discharged by the assessee by way of deduction at a particular rate each year from the commission earned on the sale of the products of the Kanpur Cotton Mills. The assessee's claim that such payment effected by way of deduction during the relevant accounting period concerned was a revenue expenditure was not accepted by the Supreme Court. The Supreme Court observed at page 43: