V.S. Deshpande, C.J.
(1) In Chapter Vl-A of the Income-fax Act, 1961 entitled 'Deductions to be made in Computing Total la- come', section 80-MM deals with deductions from income claimed by an Indian company in respect of royalties, etc., received by it from any person in India. Where an assessed receives a royalty commission fees or any other payment from a person carrying on business in India in consideration for
(I)'the provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials, or in the installation or erection of the machinery or plant for such manufacture or processing.' or in consideration for
(II)'rendering services in connection with the provision of such technical know-how.'
under an agreement approved by the Central Government the assessed shall be allowed a deduction from such income of an amount equal to forty per cent thereof in computing his total income
(2) The expression ''provision of technical know-how', inter alias means the imparting of any information concerning the working of or the use of a design or information concerning commercial or scientific knowledge, experience or skill.
(3) The question before us is whether the agreement at annexure I of the writ petition between the petitioner company and the Hindustan Steel Limited qualifies for such approval by the Government and whether the refusal by the Government by the impugned order of 27th August, 1975 at annexure Viii should be quashed
(4) Let us first analyze the relevant parts of the agreement with a view to consider if they show that technical know-how was passed on by the petitioner thereby. The petitioner was to design, construct and instal a plant for the manufacture of sulphuric acid as per specifications and deliver the contract drawings for a total consideration of Rs. 74,19.670. The contract price included a know-how and design fee of Rs. 4,65,000. Under clause 5 (a) (iv) the petitioner was to supply all contract drawings and documents in accordance with clause 25 of the agreement. Clause 25 entitled 'Contract Drawings' opens thus :
'INASMUCHas the Contractor is required to supply drawings he shall furnish them free of charge to the Purchaser. The drawings shall be in English language. All drawings and information furnished by the Contractor shall become the property of the Purchaser.'.
Then follows a list of the contract drawings. These exclude shop drawings and drawings of patented apparatus. At the end is the confidential clause saying 'all drawings and information supplied by the Contractor shall be treated by the Purchaser and his agents and servants as confidential and shall not be lent, copied or otherwise used by any of them without the previous written consent of the Contractor except in connection with the operation and maintenance of the plant.'
(5) The application for approval had to be made in the prescribed form which asked pointed questions to the petitioner with a view to elicit from it how it could be considered an agreement for the supply of technical know-how. Clause 9 of the application pertinently asks whether the technical know-how provided is inter alias (i) a design, or (ii) information concerning, inter alias commercial or scientific knowledge, experience or skill.
(6) The answer of the petitioner to clause 9(i) was that the petitioner had supplied design, process and similar property involving specialised design, method and process for production of sulphuric acid. It is clear, however, that this did not involve the turn over of technical know-how by the petitioner. What is 'technical know-how'? Its plain meaning is the knowledge of how to do a thing. In this agreement the petitioner did not convey such a knowledge to Hindustan Steel Limited in respect of the design, construction and the installation of the plant because the petitioner itself did this work. Had the petitioner, merely conveyed the knowledge of how this work should be done to the Hindus- tan Steel Limited with a view to assist the latter in the erection and installation of the plant, then only the agreement would have amounted to the one for supply of know-how. On the contrary, the agreement is expressly stated to be a turnkey contract which means that the contractor has to do the work from the stage of design till the stags of completion of the plant fit for operation. The essence of the turnkey contract is that the know-how of the contractor is used by the contractor for the execution of the contract, but the know-how remains with the contractor because the contract is executed by the contractor itself. Unless the contractor parts with the know-how alone so that the said know-how is used by the other party for erection, installation of a plant or manufacture of goods or materials no question arises of the contractor supplying the know-how to the other party.
(7) The emphasis of the contractor on clause 4 of the contract stating that the contract price includes a know-how and design fee of Rs. 4,65,000 is completely misplaced. For, the know-how and the design fee is paid to the contractor not for the supply of the know-how but because the know-how has been used by the contractor itself for making the design. It is only if the know-how of how the plant should be erected and installed had been transferred by the petitioner to the Hindustan Steel Limited leaving the latter to use the know-how for the erection and installation of the plant then only the contract would have been one for the supply of know-how in respect of the installation and erection of the machinery and plant.
(8) The answer to paragraph 9(ii) of the application has, thereforee, more importance for the purposes of judging whether a part of the agreement was for the transfer of technical know-how. As stated above, section 80-MM applies only to that technical know-how 'which is likely to assist in the manufacture or processing of goods or materials or in the installation or erection of machinery or plant for such manufacture or processing'. We have already seen above that no technical know-how was transferred to assist the installation or erection of machinery or plant. For that work was done by the petitioner itself who retained the technical know-how for doing the work with itself. The confidential clause of the contract referred to above prohibits the Hindustan Steel Limited from using the same for itself, copying the plant or making such a similar plant without the consent of the petitioner. That is the final answer to the plea that any technical know-how for the erection or installation of the plant or machinery was supplied by the petitioner to the Hindustan Steel Limited.
(9) It is not necessary, however, that technical know-how must concern itself with the installation or erection of machinery and plant. Twe stages of operation are contemplated in the opening words of section 80-MM(1). The first stage is the installation or erection of machinery and plant for the manufacture of or processing of goods or materials. This stage of the operation was completed by the petitioner itself. Technical know-how for doing this stage of the operation thus remains with the petitioner and was not ransferred to the Hindustan Steel Limited. The second stage of the operation is the manufacture or processing of goods or materials. This is independent of the first stage of installation or erection of plant or machinery. The words 'installation or erection of machinery or plant for such manufacture or processing' are important. They say that the installation or erection of machinery or plant has to be for such manufacture or processing of goods as is referred to in the preceding words, namely, the provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials.' Even if, thereforee, no technical know-how was transferred for the erection or installation of plant or machinery we have still to inquire whether any technical know-how was transferred which was likely to assist in the manufacture or processing of material for which manufacture or processing the plant or machinery was installed or erected.
(10) In considering this question the point to be remembered is that the know-how must assist the manufacure or processing of goods directly. It would appear that the reason why the erection or installation of plant or machinery for such manufacture or processing is mentioned expressly in section 80-MM is to show that even the erection of plant or machinery would be covered by section 80-MM and would not be regarded as too remote in its connection with the manufacture or processing of goods or materials.
(11) In answering clause 9(ii) the petitioner has stated in annexure 1 to the application that the technical know-how is imparted by the petitioner by closely associating the Hindustan Steel Limited and by communication with it in various stages of project implementation like design, planning, erection, commissioning and maintenance of the plant and also by training of personnel in these fields. Further information concerning industrial, commercial or scientific knowledge was provided by the delivery of drawings, date sheets, technical specifications, order specifications, test procedures, erection manuals and drawings, start-up instructions, operating instructions and maintenance instructions.
(12) The fundamental question thereforee is whether the transfer of the contract drawings amounts to provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials. Unfortunately, this basic question has not been considered by the Central Board of Direct Taxes in passing the impugned order declining the approval to the agreement. The impugned order is right as far as it goes. It says that the agreement is for designing, supplying and commissioning of a complete plant on turnkey basis and product 55 tonnes per day of sulphuric acid at the Bhilai Steel Plant. Such a turnkey project does not constitute provision of a technical know-how relating to a design engineering within the meaning of section 80-MM. For, the erection and installation of the plant and equipment by the contractor itself does not involve imparting of the technical know-how relating to the erection and installation of the plant.
(13) So far so good.
(14) But what about the manufacture or processing of goods or materials, namely sulphuric acid for the purposs of which the plant and machinery are installed and erected? This question had to be considered by the Board as it arises plainly from the language of section 80-MM. It is true that the petitioner did not pointedly state in its application that the supply of the contract drawings amount to the provision of technical know-how because they are likely to assist in the manufacture or processing of goods or materials. Nor did the petitioner say that section 80-MM(2)(ii) referring to the imparting of any information concerning the working of, or the use of a design is also attracted to cover the provision of the transfer of the contract drawings. Nevertheless, the primary facts for the consideration of the Board were stated in the application and it was for the Board to apply the law by carefully considering the language of section 80-MM. The Board did not keep in mind either the opening words of section 80-MM indicating that the provision of technical know-how may relate to such technical know-how which is likely to, assist in the manufacture or processing of goods or to the language of section 80-MM(2)(ii) which includes in the meaning of technical know-how the imparting of information concerning the working or the use of a design.
(15) A design may mean two things according to the context. It may firstly mean a design drawn on paper as a drawing. It may secondly mean the design which is acutally prepared by constructing the thing itself which has been designed on paper. If the mere paper design is transferred the only object of such transfer would be to convey informition as to how the thing which is designed on paper could be made. That would be technical know-how. Such a transfer has not been effected by the agreement of the petitioner with the Hindustan Steel Limited inasmuch as the petitioner used its own paper design to make the thing designed. The other meaning of design is, however, relevant. The petitioner has installed and erected the plant and machinery which is to manufacture or process goods or materials. Do the contract drawings directly assist in the manufacture or processing of sulphuric acid? The petitioner has filed an affidavit sworn by its officer, one Mr. Banerjee to support this claim. Such a claim was not explicitly made even in the original application for approval much less in the writ petition filed before us. The additional affidavit by Mr. Banerjee making a claim that the contract drawings are of direct assistance in the manufacture of sulphuric acid cannot be appreciated by us except on technical advice. It is not necessary for us to call for such technical advice because the primary jurisdiction to consider this question is with the Central Board of Direct Taxes. The Board may also consider whether installation of the machinery and plant amounted to the creation of a design by the petitioner and if so whether the contract drawings contained information concerning the working of or the use of the said design within the meaning of section 80-MM(2)(ii). It is arguable that the words 'use of a design' may mean the use of a design which has been bought or which has been transferred to the user. But the words 'working of a design' would mean the actual operation of the thing or the design. It has to be considered whether the contract drawings are information which concern the use or the working of the design, namely, the sulphuric acid plant. Since such consideration has not been bestowed or the agreement by the Central Board of Direct Taxes, there is no decision before us by the said Board on this essential question directly arising under section 80-MM in this respect.
(16) Shri Kirpal for the Revenue contended that even if technical know-how regarding the use or working of the design which directly assists the manufacture or processing of sulphuric acid has been tranasferrced by the petitioner to the Hindustan Steel Limited by this agreement such a transfer was without consideration. For, clause 25 of the agreement says that the transfer of drawings was free of charge. Firstly, whether the technical know-how as to the working or use of the design was transferred and whether the contract drawings directly assist in the manufacture or processing of sulphuric acid has itself not been considered by the Board. It is only when an affirmative finding on this question is given by the Board that the consequent question will arise whether the provision of such technical know-how was free of charge. The second question whether the transfer was for consideration may also be considered by the Board in the light of the following observations :
(1)Clause 3 defining the scope of the contract includes in the consideration of payment not only the design and execution of the work but also the supply of the necessary drawings.
(2)The turnkey nature of the contract comes to an end when the plant becomes ready for operation and is delivered to the Hindustan Steel. The subsequent operation of the plant has to be by the Hindustan Steel Limited and not by the petitioner. If, for such operation the contract drawings are necessary, then the supply of the contract drawings is turn being used by the Hindustan Steel and is thus outside the scope of the turnkey part of the contract.
(3)Clause 3 also says that it is in consideration of the contractor fulfillling his obligation which includes the supply of contract drawings that the purchaser has to pay to the contractor the contract price.
(4)Clause 4 says that the total net price for the work specified in clause 3 (a) is Rs. 74,19,670. The supply of necessary drawings is included in clause 3 (a) and is, thereforee, included in the work for which the total contract price is payable under clause 4(a). It is in this context that clause 25 has to be read. It says that inasmuch as the contractor is required to supply drawings he shall furnish them free of charge to the purchaser. Then it goes on to say that the listed drawings three prints each shall be sent to the purchaser for approval. It also goes on to say that the number of drawings submitted at a time under each of the activities shall be limited to five. It further says that the contractor shall supply one set of reproducible prints on plastic if available, otherwise the original pencil-on-paper drawings, and five sets of ordinary prints, etc.
(17) A contract without consideration would be void. It is nobody's case that the contract between the petitioner and the Hindustan Steel Limited or any part of it was without any consideration and, has thereforee. Void. Dr. Pal for the petitioner argued that while the consideration of the contract includes consideration for the supply of the drawings the expression 'free of charge' refers to the supply of the various copies in the drawings stipulated form or machinery, etc. from time to time. That is to say, in view of the obligation to supply contract drawings which obligation is undertaken for consideration no further charge for it could be made for supplying copies of drawings. We see force in this argument. Firstly, it avoids conflict between the two parties of the agreement, one stating that the total consideration includes supply of drawings and the other saying that the copies of the drawings shall be delivered free of charge. Secondly, this question arises after the Board has determined whether the contract drawings directly assist the manufacture or processing of goods or materials, and is, thereforee, left to be decided by the Board in the first instance. Lastly, if the Board comes to the conclusion that the contract drawings assist in the manufacture of sulphuric acid in the use or working of the designed plant, that it is for the Board to find out if the contract drawings were supplied for consideration and if so what part of the total consideration should be aportioned as relating to the supply of contract drawings.
(18) We find that in Income-tax Circular No. 140 dated 6th July, 1974, reproduced in 95 I.T.R. 144 onwards, paragraph (x) contains the following statement:
'MEREfurnishing of copies of designs and drawings of the plant or machinery supplied under the agreement, as also giving of information concerning the working, maintenance, etc. of such plant or machinery will not be regarded as provisions of technical know-how within the meaning of sub-section (2) of section 80-MM.'
In our view, it is a question of fact or of judgment as to whether particular drawings or design drawn on paper directly assist in the manufacture or processing of goods or material or in the working of use of a designed plant. We have already referred in the penultimate paragraph of our judgment in M/s. J.K. (Bombay) Ltd. v. Central Board of Direct Taxes, C.W. 901 of 1975, delivered on 17-1-1979(1) to the classification of three questions considered by administrative tribunals, namely (i) questions of law, (ii) questions of fact, and (iii) questions of judgment (Administrative Law, Cases and Materials, 4th Edition (1976) last Chapter, by Prof. Louis L. Jaffe and Prof. Nathaniel L. Nathanson). A reasonable view expressed by the Board on a question of fact or of judgment would not ordinarily be reviewable by this court. This question will have to be very carefully considered by the Board. For, on an analogous question even judicial decisions have not been unanimous in the United Kingdom (J.A. Farmer : Tribunals and Government, (1974) Chapter Vi, section 4). The question there was whether designing was a separate activity preparatory to manufacture or whether it was the beginning of the manufacture itself.
(19) A consulting firm which designed machines in a wide range of industry which consulted and engaged them for that purpose was held not to be carrying on manufacturing activity but was held to be performing a scientific and technical service in G.C. Phillips (Conventry Ltd.) V. Ministry of Labour, (1967) 2 I.T.R.(2).
(20) A mere five days later a Scottish Tribunal held that the Raiiant Company which designed machines of a specialised kind and, unlive the Phillips Company, did so only on a contract basis for certain manufacturing companies was engaged in manufacturing process because the specialised machine tools could not be made without being designed. The design was thus regarded as a necessary stage in the manufacture. The Court of Session upheld the decision and in the further appeal the House of Lords refused to upset the Tribunal's finding of fact. Viscount Dilhorne observed : 'While in the majority of cases it may be that the activity of designing is to be regarded as distinct and separate activity from the making of what has been designed, in particular cases a finding that it forms part of the process of manufacturing may be justified. In such case it is, in my view, a question of fact'. (Lord Advocate v. Reliant Tool Company (1968) 3 I.T.R. 70.
(21) The judgment by the Board as to whether the drawings constitute technical know-how would have to be based on expect engineering advice and would have to be reason,able. In paragraph (x) itself it is recognised that a turnkey contract will not qualify for approval unless the supplier is also required under the agreement to provide technical know-how. The Board has to consider, thereforee, whether the contract drawings required to be supplied by the contractor constitute technical know-how.
(22) We, thereforee, allow the writ petition, quash the impugned order and direct the Board to reconsider the application of the petitioner for approval under section 80-MM of the Income-tax Act) 1961 in the light of the above observations. There will be no order as to costs.