Vildirect: IncomeTax-caselaws-1992-VIL-158-ITAT-

1992-VIL-158-ITAT-

Equivalent Citation: ITD 042, 187,

Income Tax Appellate Tribunal MADRAS

Date: 18.05.1992

NODIT LIMITED.

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Member(s) : S. ANANDA REDDY., S. KANNAN.

JUDGMENT

Per Shri S. Kannan, Accountant Member.---These five appeals by the assessee were heard together and are disposed of by a common order for the sake of convenience.

2. The assessee before us, M/s Nodit Limited (formerly M/s. Don International Ltd.), is a non-resident company assessed to Indian income-tax. It is wholly owned by Cape Industries. The said group specialises, inter alia in the manufacture and supply of fraction materials and components to the Automotive Industry in the United Kingdom and outside.

M/s. Rane Brake Linings Ltd. (RBL for short) is an Indian company which makes and markets brake limimgs. For the purposes of the said manufacturing activity, RBL entered into a collaboration agreement with the non-resident company as far back as in July 1965. The details of the said agreement need not detain us here. Suffice it to note that the said agreement was initially in force for a period of ten years from 1-7-1965. The period of its currency was extended for another five years, that is to say, up to 30-6-1980.

3. Subsequently, on 12-11-1980, RBL and the non-resident company entered into what was styled " Technical Aid Agreement ". The said agreement was to be in force for a period of five years from 1-1-1981. The operative portions of this rather short agreement are reproduced below :

" 1. For a period of five years from 1st January 1981 DIL shall provide a comprehensive research and development support service, including but not confined to engineering service, production service, quality control and equipment selection, for Rane and all future developments in the manufacture and use of friction materials originated by the DIL research and development division shall be available to Rane at their request. Further, Rane shall have the option to extend the Technical Aid Agreement for a further period of five years on the same terms subject to the approval of Government of India.

2. During the continuance of this agreement DIL undertakes not to enter Into a technical aid agreement or act as technical advisor or consultant for any person, firm or company in India other than Rane.

3. In consideration for such assistance in research and development, Rane will pay to DIL a lump sum fee of pound 25,000 per annum before deduction of withholding tax, such fee being paid in two equal instalments, the first on 30th June in each year and the second on 31st December in each year. Such payments will be subject to review at the end of a two year period. Similar payments for subsequent periods will be sanctioned on the basis of the monitoring done by the Department of Science and Technology and only after the Department of Science and Technology is satisfied that satisfactory progress is being achieved.

4. For any visits to India or other countries made by DIL personnel at the request of Rane, Rane will pay or reimburse DIL for the costs of such visits as follows :---

(a) Salary at a daily rate to be agreed before such visits are undertaken but only payable for any days in excess of ten working days for any one visit,

(b) Return fares for the journey from Manchester to the agreed destination or destinations,

Payments as set out in (a), (b) and (c) above will be subject to prior approval of the Reserve Bank of India."

4. We may now notice the vicissitudes of the assessment to Indian Income-tax of the non-resident company. The assessee has two sources of income, namely :

(i) dividend income from the equity shares of RBL, and

(ii) the consideration received under the said Technical Aid Agreement. Here we are concerned only with the latter item of income.

5. In the assessment for the assessment year 1982-83, which was completed on 26-11-1982, the assessing officer brought to charge the consideration in question at 20%. Since the assessee did not have any grievance in this regard, the assessee did not file any appeal before the first appellate authority. Subsequently, invoking the powers vested in him by and under section 263 of the Income-tax Act, 1961, the Commissioner of Income-tax called for and examined the assessment records of the assessee.

On such an examination, he considered that the assessment order in question was erroneous in that it was prejudicial to the interests of the revenue. According to the Commissioner, the consideration received by the assessee under the Technical Aid Agreement was in the nature of fees for technical services as defined in section 9(1)(vii) of the Act. Consequently, under section 115A of the Act, the consideration received by the assessee ought to have been brought to charge at 400/6 and not at 20%. He, therefore, put the assessee on notice of his intention to pass suitable order in revision under section 263 of the Act.

The assessee responded by contending that the consideration received by it under the agreement in question was only by way of royalty and that consequently, under section 115A(1)(b)(iii) the lump sum consideration in question was chargeable to tax at 200/6 and not at 40%.

The said contention did not find favour with the CIT. He took the line first that the consideration received by the assessee under the agreement in question was fees for technical services and that consequently tax was exigible thereon at 40%. Secondly, even if it was assumed that the receipt in question was royalty, the assessee could not get the benefit of the lower rate of taxation of 20%, because the said lower rate was applicable only to royalty consisting of a lump sum consideration. In the case before him, the consideration was not a lump sum consideration. It was recurring payment of pound 25,000 per annum spread over a period of five years. Thirdly there was no transfer or imparting of information outside India in respect of any pattern, invention etc. under the agreement in which event alone the assessee could be said to be entitled to the lower rate of 20% Accordingly, on 6-6-1984, he passed an order in revision directing the assessing officer to bring to charge the consideration received by the assessee under the Technical Aid Agreement at 40%.

6. Thereupon, the assessee moved the Income-tax Appellate Tribunal. On an examination of the facts and circumstances of the case, by its order dated 17-10-1986 in ITA No. 1888/Mds/84, the Income-tax Appellate Tribunal, B-Bench, Madras, held, first that the consideration received by the assessee under the Technical Aid Agreement was a lump sum consideration. According to the Tribunal, the mere fact that the payment was made in annual instalments would not take it outside the category of a lump sum payment. Under the agreement, various services were to be rendered by the assessee to the Indian company. Instead of determining the charges or fees for each one of the services independently, the parties to the agreement, namely, the assessee and the Indian company, had agreed upon the payment of an overall amount which would definitely fall under the category of a lump sum payment.

The Tribunal then turned its attention to the other two conclusions of the Commissioner, viz., (i) there was no transfer or imparting of information outside India, and (ii) what was received by the assessee-company was ' fees for technical services ', and observed :

" We are also not able to accept the finding of the Commissioner that there is no transfer or imparting of information outside India. Cl. 1 of the agreement details various services to be rendered by the assessee to the Indian company in the form of providing the data. Cl. 5 provides for the visits to India and other countries by the personnel of the assessee at the request of the Indian, company. If the agreement is read as a whole, it may not be possible to accept the contention of the Commissioner that the transfer or imparting of the data contemplated under cl. 1 has not been rendered outside India. It perhaps requires verification of further material to ascertain whether the services contemplated under cl. 1 have been rendered outside India or not. We are also not able to agree with the conclusion of the Commissioner that the entire payment under the agreement would fall to be charged at 40%. Under section 115A(1)(b)(ii) a low rate of tax at 20% is to be charged on the income included in the total income by way of royalty as consists of lump sum consideration for the transfer outside India or the imparting of the information outside India in respect of any data, documentation, drawings or specification relating to any paten, invention, model, design, secret formula or process or trade mark or similar property. Cl. 1 of the agreement in our opinion, enumerates two kinds of services. One is a comprehensive research and development including but not confined to engineering service, production service, quality control and equipment selection for the Indian company. The second is to provide all future developments in the manufacture and use of friction materials originated by the assessee-company's research and development division to be available to the Indian company at their request. Though the first category may not fall within the category enumerated for the purpose of a lower rate of taxation at 20%. the second category, in our opinion, would fall within such category and the payment relating to such provision would be liable to be charged only at the concessional rate of 20%.

No attempt has been made to ascertain the correct position in this regard by the Commissioner. We have earlier also pointed out that the place where the service is to be rendered or the imparting of information is to be made has not been properly determined. In these circumstances, we feel that the matter should be restored to the Commissioner for determining the question afresh in the light of our observations made earlier. We would, therefore, set aside the order passed by the Commissioner under section 263, and restore the matter to him for passing a fresh order under section 263."

7. Accordingly, the CIT examined the matter afresh. After taking into account the submissions made before him on behalf of the assessee, the Commissioner observed as follows :

" The information given by the representative of the non-resident company states that the company would have given very little assistance to Rane Brake Linings Limited on a day-to-day basis as the Indian company had been the manufacturers of brake linings for a decade. They were not in a position to say in what percentage the information was given to the improvement of the product etc. and the percentage to the day-to-day working of the company. The Indian company in their information to the Chartered Accountants have stated that they received from the foreign company certain formulations and necessary data and with the above assistance they made alterations in the composition of their products which improved their performance. Here again they were not in a position to say in what percentage the information was utilised for developing their products and what percentage was for other purposes. The Tribunal also in its order dated 11-10-1986 has indicated that while in respect of (a) comprehensive research and development including but not confined to engineering and production, serviees, quality control and equipment selection for the Indian company, the lower rate will not apply, the lower rate may apply in respect of providing all future developments in the manufacture and use of friction materials originated by the assessee's Research and Development Division, to be available to the Indian company at their request. In this view of the matter and taking into account the fact that no specific percentage can be ascertained having regard to the scanty information given by the assessee, I feel it is better to go by the averages. I would consider it fair to apportion it at the ratio of 2 : 1 respectively for the category I and category II mentioned in the Tribunal's order. The main reason for apportioning 66 2/3% of the technical fees towards the liability under section 115A(1)(b)(ii)(2) is that the assessee has not been able to conclusively prove that majority of the amount came under the categories specified under section 115A(1)(b)(ii)(1). I have made a careful study of the replies given by the assessee as well as Rane Brake Linings Limited. These are general statements without specifically identifying the income to the types of services rendered. The agreement between the assessee and the Indian Company is also vague in this regard. In the circumstances, I have no alternative but to make a reasonable apportionment having regard to the facts and circumstances of this case. Having regard to these aspects, 2/3rd of the amount paid would fall to be assessed at the higher rate of 40% and 1/3rd will fall to be assessed at the concessional rate of 20%."

Accordingly, he directed the assessing officer to pass necessary orders on the aforesaid lines.

8. Aggrieved by the said order in revision, the assessee is now before us.

9. The assessments for the assessment years 1983-84, 1984-85 and 1985-86 were all completed on 31-10-1985. By that time, the order in revision dated 6-6-1984 passed by the Commissioner for the assessment year 1982-83 was before the assessing officer. He, therefore, brought to charge the consideration in question at 40%.

Thereupon, the assessee moved the CIT (A). By the time the appeals were taken up for hearing, the order dated 17-10-1986 of the Income-tax Appellate Tribunal in ITA No. 1888/Mds/84 relating to the assessment year 1982-83 was available. Keeping in view the said order of the Tribunal, the CIT(A) disposed of the three appeals of the assessee by a common order in the following words :---

" In the orders under appeal, the Inspecting Assistant Commissioner considered the entire fees received by the appellant as taxable at the rate of 40%. In view of the facts that the assessment for the assessment year 1982-83 was set aside by the Tribunal, it is necessary to send back the assessments under appeal to the Inspecting Assistant Commissioner to determine the income to be taxed at the concessional rate of 20% in the light of the observations of the Tribunal in their order dated 17-10-1986."

This was on 21-1-1988.

10. Through a common order dated 17-2-1988, the assessing officer gave effect to the said common order dated 21-1-1988 of the CIT(A). In the said order, the assessing officer brought to charge the consideration in question at 20%. It is ex facie clear from the common order dated 17-2-1988 that the assessing officer treated the consideration received by the assessee-company as royalty. It is also exfacie clear from the said common order that the assessing officer has not given any reasons which impelled him to come to the conclusion that the consideration in question partook the characteristic of royalty ; nor did he give any reasons for coming to the conclusion that the lower rate of 20% must be adopted.

11. The assessment for the assessment year 1986-87 was completed on 12-2-1988. The exigibility issue relating to the consideration received by the assessee-company under the Technical Aid Agreement in question was one of the issues that came up for consideration. Teating the said consideration as lump sum royalty, the assessing officer brought it to tax at 20%. For this year also there was no discussion either as respects the nature of the consideration or as, respects the rate at which the consideration was to be brought to tax.

12. To make the picture complete, it may be mentioned that though the assessee had filed an appeal before the CIT(A) on other issues, there was no appeal on the exigibility issue relating to the consideration received by the assessee-company under the Technical Aid Agreement. This is not surprising, because the assessing officer had brought to charge the said consideration at the lower rate of 20%.

13. Thereupon, invoking the powers vested in him by and under the provisions of section 263 of the Act, the Commissioner called for and examined the assessment records of the assessee relating to the assessment years 1983-84 to 1986-87 (both inclusive). On such an examination, he found (i) the common order dated 17-2-1988 passed by the assessing officer to give effect to the common order dated 21-1-1988 of the CIT(A) relating to the assessment years 1983-84, 1984-85 and 1985-86 and (ii) the assessment order dated 12-2-1988 relating to the assessment year 1986-87 were erroneous in that they were prejudicial to the interests of the revenue. As for the former order, the Commissioner found that " the assessing officer did not at all consider the directions given by the Commissioner of Income-tax (Appeals) in his order dated 21-1-1988 ". Instead, he straightaway proceeded to levy tax at 20% on the footing that the consideration received by the company under the Technical Aid Agreement was lump sum royalty. As for the latter order also, the Commissioner expressed the same opinion. He, therefore, put the assessee on notice of his intention to pass suitable order under section 263 of the Act. After hearing the assessee, and basically for the reasons given by him in the order in revision dated 19-2-1988 relating to the assessment year 1982-83, the Commissioner, by his common order dated 16-2-1990, field that 2/3rd of the consideration would fall to be assessed at the higher rate of 40% and the remaining 1/3rd at the lower rate of 20%.

14. Aggrieved by the said common order in revision, the assessee is now before us.

15. Thus the assessee is in appeal before us objecting to the orders in revision passed for the assessment years 1982-83 to 1986-87 (both inclusive).

16. Shri Dalvi, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the CIT was not justified in passing the impugned orders in revision.

Drawing our attention particularly to the order dated 17-10-1986 of the Income-tax Appellate Tribunal, Madras Bench ' B ' in ITA No. 1888/Mds/ 84 relating to the assessment year 1982-83. Shri Dalvi contended that the question whether the consideration received by the assessee under the Technical Aid Agreement was a lump sum consideration stood finally decided in favour of the assessee by the ITAT which held that the consideration in question was lump sum consideration. Secondly, as regards the rate at which the consideration in question was to be charged, the assessee's case was that the lump sum consideration partook the characteristics of royalty and that by the same token should be brought to tax at 20%. Enough material was produced before the CIT both by the assessee and the Indian company M/s. RBL. A proper evaluation of the material produced would clearly show that the entirety of the consideration was taxable only at the lower rate of 20%. The CIT was, therefore, not justified in holding that while 2/3rd of the consideration was to be taxed at 40%, the balance of 1/3rd only could be taxed at 20%.

17. From a specific query in this regard from the Bench, Shri Dalvi contended that the question whether the relevant information was imparted by the assessee-company to the Indian company outside India was not in issue. He went to the extent of contending that the case had proceeded on the footing that the transfer of information etc. had taken place outside India.

18. As regards the assessment years 1983-84 to 1986-87 (both inclusive), Shri Dalvi made an additional point based on the doctrine of merger. The assessment orders passed initially by the assessing officer for these years were the subject-matter of appeal before the CIT(A). For a fact, for the assessment years 1983-84 to 1985-86, the order in revision is directed against the common order dated 17-2-1988 passed by the assessing officer to give effect to the common order dated 21-1-1988 of the CIT(A). He, therefore, contended that the CIT could not have validly taken recourse to the provisions of section 263 of the Act. In this regard he referred to and relied upon the Bombay High Court case of Brihan Maharashtra Sugar Syndicate Ltd. v. P.R. Joglekar, Dy. Commissioner of Agricultural Income-tax [1987] 165 ITR 279.

19. In view of the foregoing, therefore, contended Shri Dalvi, the assessee is entitled to succeed.

20. On his part, Shri Jain, the learned Departmental Representative, strongly supported the impugned orders in revision.

As regards the jurisdictional issue, Shri Jain contended that the common order dated 17-2-1988 passed by the assessing officer was clearly erroneous in that it was prejudicial to the interests of the revenue, because it was passed without giving effect to the clear directions of the CIT(A) to the effect that the assessing officer would examine the matter afresh in the light of the observations contained in the ITAT order dated 17-10-1986 relating to the assessment year 1982-83. There is nothing in the common order dated 17-2-1988 passed by the assessing officer to suggest that the said officer had at all examined the matter on the lines suggested by the Tribunal. On the contrary, he straightaway applied the lower rate of 20 %.

Further, by his common order dated 21-1-1988, the CIT(A) had remitted the entire matter to the assessing officer for fresh consideration and decision. It is well settled that when a matter is thus remitted the CIT(A) does not decide the matter one way or the other. It should, therefore, follow that by remitting the matter to the assessing officer, the CIT(A) had not given any relief to the assessee. Consequently, the doctrine of merger cannot avail the assessee.

As regards the assessment year 1986-87 the position was that in the assessment order dated 12-2-1988, the assessing officer had without discussion applied the lower rate of 20%. The assessee was naturally not aggrieved by the application of the said lower rate and consequently, there is no question of the assessee's taking the issue in appeal before the CIT(A). What was agitated before the CIT(A) was the issue relating to the capital gains which was entirely a different subject-matter. Hence the doctrine of merger cannot avail the assessee for this year also.

21. In view of the foregoing, therefore urged Shri Jain the impugned orders in revision do not invite any interference.

22. We have looked into the facts of the case. We have considered the rival submissions.

23. We may clear the decks as it were by considering at the outset (i) the jurisdictional issue relating to the assessment years 1983-84 to 1985-86 (both inclusive), and (ii) the precise finding and directions given by the Tribunal in its order dated 17-10-1986.

The jurisdictional issue may be considered into two parts, namely, one relating to the assessment years 1983-84 to 1985-86, and other relating to the assessment year 1986-87. The issue relating to the assessment year 1986-87 does not present any difficulty. As pointed out earlier, in the assessment order for this assessment year, which was passed on 12-2-1988, the assessing officer had brought to tax the consideration in question at 20%. Naturally, the assessee was not dissatisfied with the said decision of the assessing officer. Therefore, there was no question of the assessee making this issue a subject-matter of appeal before the CIT(A). True, the assessee had filed an appeal against the said assessment order, but the issue canvassed therein concerned the exigibility issue relating to capital gains. Since the issue relating to the rate at which the consideration received by the assessee under the Technical Aid Agreement was not the subject-matter of appeal filed by the assessee, the question of invoking the doctrine of merger does not arise.

As for the assessment years 1983-84 to 1985-86 it is a matter of record that all that the CIT(A) did by his common order dated 21-1-1988 was to rement the matter to the assessing officer for fresh consideration and decision in the light of the observations made by the ITAT in its order dated 17-10-1986. It is also a matter of record that without examining the issue as directed by the CIT(A), the assessing officer straightaway applied the lower rate of 20%. Two points here are noteworthy. First, the appellate order remitting the matter to the lower authority for fresh consideration and decision is not tantamount to giving a decision one way or the other on the controversy before the appellate authority. When the Act talks of an issue being the subject-matter of appeal, it means an issue that is subject-matter of effective appeal, that is to say, the appellate authority should have decided the issue on merits one way or the other. Where, however, the matter is rented to the lower authority for fresh consideration and decision, no final finding is given. Therefore, the doctrine of merger cannot be invoked.

Secondly, it is ex facie clear from the common order passed by the assessing officer on 17-2-1988, purporting to give effect to the directions of the CIT(A) that the assessing officer did not at all apply his mind. Stated differently, he did not make the inquiries warranted by the facts and circumstances of the case. Here, the Delhi case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 is authority for the proposition that the Commissioner can justiflably invoke the revisionary powers vested in him by and under section 263 and hold that such an order is prejudicial to the interests of the revenue and on that basis pass suitable orders in revision.

24. As we see it, the Bombay case of Brihan Maharashtra Sugar Syndicate Ltd. referred to and relied upon by the learned counsel for the assessee, cannot avail the assessee for more reasons than one. First, after ruling that an order passed by the Agricultural Income-tax officer implementing the order of the Tribunal cannot be revised because the Tribunal is not subordinate to the Commisssioner or the Deputy Commissioner, the Court went on to point out that if the Agricultural Income-tax officer made any mistake in carrying out the directions given by the Tribunal, to that extent his order would be liable to be revised by the Dy. Commissioner or the Commissioner. This ruling goes clearly against the contentions of the learned counsel for the assessee in this regard.

Secondly, the mere fact that an appeal had been filed not on the issue which was the subject-matter of an order in revision by the Commissioner but on other issues, cannot enable the assessee to invoke the doctrine of merger. In the case of Investment Trust of India Ltd. v. ITO [1991] 37 ITD 100 the ITAT Madras Bench ' C ' on an exhaustive review of the decisions of the jurisdictional High Court on this issue, held inter alia, that the jurisdictional High Court had consistently taken the line that the doctrine of merger could be invoked only in cases in which the subject-matter of revisionary jurisdiction was already considered and decided by the appellate authorities. The said doctrine cannot be invoked in cases where an appeal had been filed not on the issue which was the subject-matter of revisionary jurisdiction but on other issues. This position in law, if we may say so with respect, has been lucidly put by the Madras High Court in the case of CIT v. Eimco K.C.P. Ltd [1984] 147 ITR 603. The Court observed :

" In this statutory milieu, we do not see any implied curb on the revisional powers of the Commissioner under section 263, which might be thought to exist merely on the accident of the quite different aspects of the officer's order having been carried in appeal before the AAC. . . The theory that the whole order of assessment is before the AAC must be read subject to the provisions of the Act." [Emphasis supplied.]

25. In this connection, we may state that the 1988 and 1989 amendments to section 263 is nothing more than the legislative exposition of the legal position obtaining in the areas subject to the jurisdiction of the Madras High Court.

26. In view of the foregoing, therefore we reject Shri Dalvi's arguments based on the doctrine of merger.

27. We turn next to the order dated 17-10-1986 of the ITAT Madras Bench ' B ' in ITA No. 1888/Mds/84 relating to the assessment year 1982-83. As pointed out supra, the Tribunal gave a definite finding that the consideration received by the assessee-company under the technical Aid Agreement was a lump sum consideration. On the question whether the lower rate of 20% would apply to the entirety of the consideration received by the assessee under the said agreement the Tribunal, as we see it, did not give any specific finding, certain general observations of the Tribunal notwithstanding Particularly, the question whether the technical information. data etc. were transferred inside India or outside India was left to be decided afresh by the Commissioner. We are not, therefore, prepared to accept Mr. Dalvi's contention that the situs of transfer or imparting of information etc. was not in issue. That matter is very much in issue and will have to be decided.

28. We may here point out that the observations made by the Tribunal towards the end of paragraph 6 are at best general observations based on first impressions. The question whether the consideration received by the assessee under the agreement in question partook the characteristic of ' royalty ' or ' fees for technical services ' will have to be decided only with reference to the provisions of section 9(1)(vi) and 9(1)(vi) of the Act. It is only thereafter that the related question of the rate to be applied can be considered.

29. It is, therefore, necessary first to ascertain the nature of the consideration received by the assessee under the agreement in question. For this purpose, it is necessary to examine the relevant provisions of the Income-tax Act, 1961.

30. Under the scheme of the Act, the ambit of taxation varies with the factor of residence in the relevant previous year. As respects non-residents, the following categories of Income are charged to tax :

(a) (i) Income received by the non-resident in India.

(ii) Income deemed to be received by the non-resident in India.

In either case, the date or place of accrual of the income is immaterial.

(b) (i) Income which accrues or arises in India.

(ii) Income which is deemed to accrue or arise in India.

In either case, the date or place of receipt of the income is immaterial.

If in a particular case the income received by a non-resident satisfies the receipt or the accrual test, then tax will be eidgible thereon on that score alone. If, however, both the above tests fail, then section 9 will get activated to see whether the income could be deemed to accrue or arise in India.

31. Prior to its amendment by the Finance Act, 1976 with effect from 1-6-1976, section 9 did not contain any definition of the terms ' royalty ' and ' fees for technical services '. At that time, section 9(1) dealt with five categories of income which were deemed to accrue or arise in India. Of these, the category of income first mentioned in the clause (viz. income accruing or arising through or from any business connection in India) was relevant for that purpose. For the egibility issue relating to the royalty/technical fees received abroad by a non-resident from a resident for services rendered or information imparted outside India used to be and, in fact, had to be decided only with reference to section 9(1)(i), there being no other section covering the issue. And such royalty/technical fees could be deemed to accrue or arise in India, only if it could be shown that, as laid down by section 9(1)(i), such royalty/technical fees accrued or arose from a business connection in India.

32. The Finance Act, 1976 effected substantial and indeed basic changes as respects the assessment on non-residents. It added, inter alia, clauses (vi) & (vii) to section 9(1) -- the former dealing with royalty and the latter with fees for technical services, thereby putting the exgibility issue in a new and unambiguous perspective.

33. The significant features of the new provisions may be highlighted.

A. Royalty -- Section 9(1)(vi)

(i) Section 9(1)(vi) defines, for the first time the term " royalty " and defines it in wide terms. The definition is contained in Explanation 2 to clause (vi). The Explanation details as many as six circumstances in which the payment made will be regarded as royalty. It takes within its sweep, not only royalty properly so called (i.e., a fee or compensation for the right or licence to use a patent, copyright etc.) but also fee or compensation for the imparting of any information concerning a patent, invention, model, design, secret formula etc. The fact that the definition is so detailed and so specific as to make clause (vi) a special provision was noticed by the Gujarat High Court in the case of Meteor Satellite Ltd v. ITO [1980] 121 ITR 311.

(ii) Under the new provisions royalty income of the following types are deemed to accrue or arise in India :

(a) Royalty payable by the Central Government or any State government ;

(b) Royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India, or to any other source of his income outside India ; and

(c) Royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India.

(iii) The proviso to clause (vi) lays down that the deeming provisions will not apply to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or imparting of information outside India in respect of any date, documentation etc., if such lump sum consideration is payable in pursuance of an agreement made, actually or constructively, before 1-4-1976 and the agreement is approved by the Central Government.

B. Fees for Technical Services--Section 9(1)(vi)

(i) As in the case of royalty, so in the case of fees for technical services, the Legislature has, for the first time, introduced a definition of the term.

(ii) The following types of fees are deemed to accrue in India :

(a) Fees payable by the Central Government or any State Government :

(b) Fees payable by a resident except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India ; and

(c) Fees payable by a non-resident, if the payment is relatable to a business or profession carried on by him in India or to any othe source of his income in India.

(iii) By virtue of the proviso introduced by the Finance (No. 2) Act. 1977 w.e.f. 1-4-1977, the deeming provisions contained in section 9(1)(vii) win not apply to income by way of fees for technical services if the fees are payable by or under an agreement made, actually or constructively, before 1-4-1976 and approved by the Central Government.

34. Some of the significant legal implications of the new provisions may now be examined. First, the terms " royalty " and " fees for technical services " have been defined. Therefore, the nature of the payment received by a non-resident under a collaboration agreement with a resident will have to be determined strictly in accordance with the definitions.

Further, the term " royalty " has been defined in wide terms. The definition, as adumbrated, encompasses not only royalty properly so called but also the consideration payable for imparting of information. Such a wide definition has significant legal implications. For example, a collaboration agreement may conceivably provide only for the imparting of certain technical information, without granting the right or licence to use a patent, process etc. The consideration payable under such an agreement will be caught within the mischief of the wide definition of the term " royalty ". One cannot, therefore, be heard to say that, because the right or licence to use the patent, process etc. has not been granted under the agreement, the consideration payable under it is not royalty.

35. Secondly, clauses (vi) and (vii) of section 9(1) are provisions which deal specifically with royalty and fees for technical services respectively. Therefore, on the principle that the particular excludes the general, clause (i) of section 9(1) cannot be called to help in cases where clauses (vi) and (vii) are applicable. This would mean that, after the 1976 amendment, the exigibility issue relating to royalty or fees for technical services must be decided without importing the concept of business connection incorporated in section 9(1)(i) which is a general provision. If any authority is needed for this proposition, it is to be found in the case of Meteor Satellite Ltd. This is what the Court observed at p. 3.21 of the report :

" One of the contentions urged by Mr. Desai was on the question of interpretation of section 9(1), clause (vi) and he contended that even if the proviso to clause (vi) of section 9(1) applied, the only thing that the provision would help the petitioner in doing would be to take this particular income by way of royalty out of the provisions of clause (vi) but that would still leave the matter open to be brought under clause (i) or clause (vii) of section 9(1). In our opinion, this contention must fail. Clause (vi) of section 9(1) deals with a specific type of income, namely, income by way of royalty, whereas clause (i) of section 9(1) is a more general provision, which deals with all incomes accruing or arising whether directly or indirectly, through or from, any business connection in India. Income by way of royalty is a species or one of the categories of a larger class mentioned in clause (i) of section 9(1) and, hence, the specific instance having been provided by clause (vi), once we come across the question of royalty, we have only to look at that clause (vi) and not to the more general provision of clause (i) of section 9(1). Similarly, income by way of fees for technical assistance, which is covered by clause (vii), is a more general category as compared to the royalty which is referred to in clause (vi), particularly in the light of the definition of ' royalty ' in Explanation 2 to clause (vi) of section 9(1). Again, the same principle of particular excluding the general has to be applied in this case and if the case falls under clause (vi) and is exempted from the operation of clause (vi) by virtue of the proviso then we cannot refer to clause (vii) which is a general clause."

A couple of points are noteworthy. First, the court has held that, dealing as it does with a larger class of income, clause (i) is general in nature. Secondly, and more significantly, the court has also held that clause (vii) itself is more general than clause (vi). One of the significant legal consequences of the ruling is that, in a given case a payment may properly fail to be considered under clause (vi) rather than under clause (vii). This aspect of the matter may be illustrated in the following manner. Let us take a case where a non-resident enters into an agreement with a resident for the imparting of information concerning the working of a secret formula. Clearly, this activity is covered by item (ii) of Explanation 2 to clause (vi) and, therefore, the payment received under the agreement must be regarded as royalty. Let us also assume that, with a view to facilitating full and faultless imparting of the information concerning the working of the secret formula, the non-resident undertakes to depute and in fact deputes a couple of technical experts. In that event, the deputing of technical experts will clearly be incidental to the imparting of information concerning the secret formula, and will, for that reason alone, fall to be considered under item (vi) of Explanation 2 to clause (vi). With the result, the payment in question must be regarded as royalty.

One could be tempted to argue that the activity of deputing technical experts means nothing more than the rendering of technical services within the meaning of Explanation 2 to clause (vii). But such an argument must be rejected, because, as pointed out by he Gujarat High Court, clause (vi) contains special provisions and will, by the same token, prevail over clause (vii). A related argument merits attention here. It could perhaps be argued that, since the activity of deputing technical personnel could well be brought within the pale of Explanation 2 to clause (vii), the consideration payable under the collaboration agreement must be regarded as a composite consideration and should, therefore, be allocated or apportioned between the two heads, viz. royalty and technical fees. This argument too must be rejected for two reasons. Neither clause (vi) nor (vii) authorises such an allocation or apportionment. [Notice that this is in market contrast to the provisions of Explanation (a) to clause (i) of section 9(1)]. Further, when the activity of deputing technical personnel (which, in the illustration, is incidental to the imparting of information concerning the secret formula) gets properly subsumed under item (vi) of Explanation 2 to clause (vi), recourse to clause (vii) is totally shut out for that reason alone.

36. In the case before us, we are concerned with a post 31-3-1976 agreement, and hence it is unnecessary to notice the proviso and Explanation 1 to section 9(1)(vi) and 9(1)(vii).

37. As an integral part of the scheme of systematising or rationalising assessment of foreign companies. the Finance Act, 1976 introduced two more sections. namely, sections 44D and 115A The former contains special provision for computing income by way of royalty etc. in the case of foreign companies, while the latter deals with income-tax payable on dividends, royalty and technical fees in the case of foreign companies. It is, therefore, necessary to notice these sections.

38. Prior to the 1976 amendment, in cases where it was held that the whole or part of royalty/fees for technical services was exigible to tax in India for whatever reason, the net income by way of royalty or fees for technical services had still to be computed. But the Act did not contain any specific provision governing such computation, with the result the mode and mechanics of quantifying the net income varied from case to case, leading, not unnaturally, to litigation. With the introduction of section 44D, however, a uniform method of computing the net income has been prescribed. Two points are noteworthy here. First, for purpose of this section, the terms " royalty " and " fees for technical services " have the same meaning as in section 9(1)(vi) and 9(1)(vii) respectively. Secondly, as respects royalty/technical fees received by a foreign company under a post 31-3-1976 agreement, the effect of section 44D is that no deduction in respect of any expenditure or allowance is admissible.

39. Section 115A specifies the income-tax payable, inter alia, on royalty and technical service fees in the case of foreign companies. As respects royalty/technical fees received by a foreign company under a post 31-3-1976 agreement, the effect of section 115A, in its application to the assessment years under consideration, is that income-tax is payable at the rates indicated below :

(1) Royalty

(a) Where royalty consists of lump 20% section 115A

sum consideration for the (1)(b)(ii)

transfer outside India of, or

the imparting of information

outside India in respect of.

any data, documentation.

drawing or specifications

relating to any patent,

invention, model, design,

secret formula or process or

trade mark or similar property.

(b) In other cases. 40% section 115A

(1)(b)(ii)(2).

(2) Technical fees 40% 115A(1)(b)(iii).

40. We may now examine the facts of the case before us in the light of the foregoing legal position.

41. We may first glean from the Technical Aid Agreement in question the exact details and the contractual obligations of the assessee-company and ascertain with reference to the definition of the terms ' royalty ' and ' fees for technical services ' contained in the Explanation 2 to section 9(1)(ii) and 9(1)(vii) respectively. whether the consideration received by the assesseecompany is ' royalty ' or ' fees for technical services '. The details abstracted in the concordance table below will clearly indicate that it was 'royalty' within the meaning of section 9(1)(vi) that was paid by the Indian company to the assessee-company :

-----------------------------------------------------------------------------------------------------------------------------------------------

Paragraph Activity/task to be performed Item of No.

of the Expln. to section Agreement 9(1)(vi) in

which the activity

falls

-----------------------------------------------------------------------------------------------------------------------------------------------

1 2 3

-----------------------------------------------------------------------------------------------------------------------------------------------

1 (a) Providing of comprehensive

research and development

support service comprising engineer

-ing service, production service.

quality control and equipment

selection. (ii) & (iv)

(b) Making available all future

developments in the manufacture

and use of friction materials

originated by the assessee (ii) & (iv)

company's R & D Division.

The foregoing entail supply of new technology, designing of dynometers, transfer of technology regarding absestos free materials, the provision of know-how with regard to improvements to productivity and improvements to the environment within RBLs factory.

In particular, the following formulations with necessary data were supplied :

(a) Latest high friction materials for commercial vehicles with the specific aim of meeting international regulations.

-----------------------------------------------------------------------------------------------------------------------------------------------

1 2 3

-----------------------------------------------------------------------------------------------------------------------------------------------

(b) Disc pads for both passenger car and light commercial vehicles application including the fourth generation materials using composite elastomer crumbs.

(c) Asbestos free products for commercial vehicles and passenger cars drum brake applications using different routes of manufacturing.

(d) Non-asbestos based disc and materials for passenger cars.

(e) Assistance in matters relating to the carrying out of tests of products and materials.

(ii) Providing guidelines in relation to Thermogravimetric Analyser installed by RBL and assistance in the interpretation of its results.

(g) Selection of components for a dynamometer fabricated and installed in India by RBL.

Cl.4. Deputing assessee-company's technical (vi) read

personnel to India and other with item

countries. Nos. (ii) &

(iv).

42. It would be ex facie clear from the foregoing table of concordance that we have before us a case of royalty within the meaning of section 9(1)(vi). It needs to be reiterated here that, as pointed out by the Gujarat High Court in the case of Meteor Satellite Ltd., the provisions of section 9(1)(vii) being more general in nature as compared to the provisions of section 9(1)(vi), the latter would prevail over the former.

43. In view of the foregoing, therefore, we hold that the case before us is one of royalty. We may here highlight the fact that, as pointed out in paragraph 34 supra, there is no question of apportioning the consideration in question between the two heads, namely, ' royalty ' and fees for technical services '.

44. The question that then arises for consideration is what is the rate of taxation to be adopted? (20% under section 115A(1)(b)(ii) or 40% under section 115A(1)(b)(ii)(2). To be entitled to be taxed at the lower rate of 20 per cent, it should be shown not only that the royalty consists of lump sum consideration but also that such consideration was for the transfer outside India of or the imparting of information outside India in respect of any data, documentation, drawing or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property. In the case before us, as has been held by the Tribunal in its order dated 17-10-1986, the royalty consists of a lump sum consideration. Still, it is necessary to find whether such consideration was for the transfer/imparting of information etc., outside India For a fact, on the earlier occasion also, the Tribunal addressed itself to this question but was unable to answer it because of lack of data. It was, therefore, that it remitted the matter to the Commissioner of Income-tax for fresh consideration and decision. The matter has not improved in the second round of the proceedings. This is because, in the impugned orders in revision, the CIT has not at all adverted to this aspect of the matter. Nor was any data produced before us in this regard to enable us to come to a conclusion on this issue. In the circumstances, therefore, we have no go but to remit this aspect of the matter to the CIT for fresh consideration and decision.

45. Our findings are summarised as follows :

(i) The consideration received by the assessee-company under the Technical Aid Agreement is ' royalty ' within the meaning of Explanation 2 to section 9(1)(vi) of the Act. (Needless to add, it is also a lump sum consideration as found by the Tribunal in its order dated 17-10-1986).

(ii) Under the scheme of section 9 there is no case for apportioning the consideration received by the assessee-company between ' royalty ' on the one hand, and ' fees for technical services ', on the other.

(iii) On the question of the situs of the transfer of information etc. no finding has been recorded by the CIT in the impugned orders in revision. Nor was any data forthcoming before us to enable us to record a finding in this regard. Therefore, this aspect of the matter is being remitted back to the CIT for fresh consideration and decision. Should he find that the transfer took place outside India, he will no doubt hold that the consideration in question will be taxed at the lower rate of 20 per cent.

46. Before taking leave of this case, we may add that had the Technical Aid Agreement in question (which had obviously, been approved by the Government of India), included a provision regarding the situs of the transfer of information etc., the matter could have been sorted out easily. Unfortunately, however, the agreement in question is silent on this crucial aspect of the matter. Be that as it may, now that the matter goes back to the CIT for fresh consideration and decision, he will no doubt collect the necessary data and take a decision in accordance with law.

47. In the result, all the five appeals are treated as allowed for statistical purposes

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