COMMISSIONER OF INCOME TAX Vs. POLYFORMALIN PRIVATE LIMITED

JUDGEMENT

(1.) IN these referred cases, two questions were referred for the decision of this court. They are as follows :

(2.) THE assessee is a private limited company having the main objects to manufacture, otherwise deal in formaldehyde, polyester/urea/phenol resin, pentaorythritol, hexemine and their derivatives including other organic and synthetic chemicals. THE assessee entered into an agreement with Arborites Pvt. Ltd. company, which was functioning adjacent to the premises which carried on business of manufacture of urea formaldehyde resin. THE agreement was entered into with the said company for the supply of technical know-how. THE assessee entered into a collaboration agreement on May 23, 1975, with Arborites Private Limited 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, Arborites Private Limited 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, It was also provided that 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 Private Limited a royalty calculated at the rate of Rs. 100 per ton of the contract product manufactured. THE assessee entered into a further agreement on May 28, 1975, with Arborites Pvt. Ltd. as per which the latter has 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. A third agreement was entered into on March 22, 1978, purporting to be by way of clarification of the agreement dated May 23, 1975, which provided that there was no absolute transfer of the technical know-how, the ownership in respect of which continued with Arborites Pvt. 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.) AFTER setting out the facts of the case, this court posed the question thus (at page 39 of 161 ITR) :