ORDER
S. Kannan, Accountant Member
1. This departmental appeal and the cross-objection by the assessee are directed against the order dated 27-2-1986 of the CIT(A), Trivandrum relating to the assessment year 1985-86.
2. The assessee-company, a wholly owned Central Government undertaking, makes and markets rubber contraceptives, inter alia, under the popular brand “Nirodh”. It entered into a foreign collaboration agreement with (i) M/s. Mitsui & Co. Ltd., and (ii) M/s. Okamoto Riken Gomu Co. Ltd., both of Tokyo, Japan for the purpose of transfer to it of technical know-how from the aforesaid two Japanese companies. Though the aforesaid two Japanese companies were parties to the agreement, only one collaboration agreement was drawn up, which was subscribed to by both the said Japanese companies. The terms and conditions of the collaboration, it would appear, were incorporated in the first instance in an agreement dated September 3, 1984, thought as the subsequent events show, the said agreement dated September 3, 1984 came to be a draft agreement in effect. Section II of the agreement deals with the price to be paid by the Indian company to the two foreign companies. Clause 2.1 stipulates that the Indian company would pay Japanese Yen 261,954,000. Section III stipulates that the said sum:
…shall be paid by an irrevocable, confirmed and without recourse letter of credit covering the said total amount which shall be established in favour of SUPPLIER through any scheduled bank in India to the specified Japanese bank to be designated by SUPPLIER within THIRTY (30) days from the effective date of the AGREEMENT. The PURCHASER may, however, explore the possibility of getting a guarantee of the Government of India for this amount.
3.1.1. One-third of the fee shall be paid within THIRTY (30) days from effective date of AGREEMENT against presentation of simple receipt of the SUPPLIER in triplicate, provided that the performance bond has been furnished by the SUPPLIER within the prescribed time as mentioned in SECTION XVIII.
3.1.2 One-third of the fee shall be paid against presentation of simple receipt of the SUPPLIER accompanied by SUPPLIER’S invoices in triplicate attached with post receipts or air-way bills or any other documents which certify the dispatch of such technical documents at the time of completion of dispatching all documents specified in SECTION IV.
3.1.3 The remaining one-third of the fee shall be paid in the following manner:
– FIFTY per cent (50%) within THIRTY (30) days from the UNIT acceptance date of first UNIT namely after commencement of commercial production against presentation of the relevant UNIT acceptance certificate.
– The last FIFTY per cent (50%) of remaining amount within THIRTY (30) days from the UNIT acceptance date of second UNIT namely after commencement of commercial production against presentation of the relevant UNIT acceptance certificate. or within (4) years from the EFFECTIVE DATE of the AGREEMENT, whichever is earlier.
Section IV of the AGREEMENT deals with ‘the scope of agreement’, Clause 4.1.1 thereof deals with supply of technical know-how. Clause 4.1.4 reads as follows:
All of the said technical know-how and all documents and other materials relating to the technical know-how shall be disclosed, imparted, delivered and transferred by the SUPPLIER in India to a representative or representatives of PURCHASER designated for that purpose. In the absence of such representative being available, delivery of the said technical know-how or part thereof shall be deemed to have taken place to PURCHASER in India at the time the said technical know-how or part thereof has been mailed by registered Air-Mail or handed over to an air carrier and addressed to PURCHASER, it being understood that if such delivery/transfer is lost in transit, SUPPLIER will supply additional copies to replace the same without additional cost to PURCHASER.
It must here be highlighted that according to the agreement dated September 3, 1984 the delivery of technical know-how “shall be deemed to have taken place to PURCHASER in India.”
The aforesaid “draft” agreement was forwarded to the Government of India for their approval. At that time, it would appear, Clause 4.1.4 was amended to the effect that the delivery of the technical know-how in question shall be deemed to have taken place to purchaser in Japan. It is a matter of record that the Government of India, Ministry of Industry, fixed 7-11-1984 as the effective date of agreement. Consequently, the first instalment of technical fee being one-third of the total fee of Japanese Yen 261,954,000, that is to say Japanese Yen 87,318,000 equivalent to Rs. 44,14,459 was payable by 7-12-1984.
3. For the purpose of remitting the said sum, the assessee-company, it is common ground, approached the ITO C-Ward, Trivandrum requesting him to issue a No Objection Certificate to enable it to remit the sum in question. It would appear that ITO asked the asessee to deduct at source a tax of Rs. 29,42,972 from the said sum of Rs. 44,14,459. While issuing the said direction, it is common ground, the ITO had proceeded on the basis that tax was to be deducted at source at 40% and that too on “tax on tax basis”. The ITO issued the direction to the said effect obviously relying on the circumstances : (i) that under Clause 2.2 of the agreement the total technical fee of Japanese Yen 261,954,000 was payable to the foreign collaborators net of tax and (ii) that under the agreement dated 3-9-1984 the delivery of technical know-how “shall be deemed to have taken place to purchaser in India”.
It is common ground that the assessee did deduct and display to the credit of the Income-tax Department a sum of Rs. 29,42,922.
4. Subsequently, the assessee-company came to realise that by virtue of the amendment dated 5-11-1984 the delivery of technical know-how shall be deemed to have taken place in Japan and that, consequently the tax was to be deducted at source only at 20% of the amount to be remitted.
According to the assessee, the tax deductible at source from the remittance of Rs. 44,14,459 at 20% being Rs. 8,82,892 it was entitled to a refund of Rs. 20,60,080.
Accordingly, on January 2,1985 it wrote a letter to the ITO requesting him to refund the excess tax that was deducted at source. The said letter was followed by another letter of January 3, 1985 requesting the ITO to adjust the said excess against the advance-tax payable by the assessee for the assessment year 1985-86. In this regard, it was explained to the ITO that it had deducted tax of Rs. 29,42,972 at source and paid it to the credit of the Government.
5. To cut a long story short, the assessee’s request was rejected on the ground that the tax of Rs. 29,42,972 having been deducted at source for and on behalf of the assessee’s foreign collaborators, the assessee was not entitled either to the refund or to adjustment of the excess tax deducted at source. It is a matter of record that the CIT, Trivandrum declined to interfere in the matter.
6. Predictably, the assessee took up the matter in appeal before the CIT(A). On an examination of the facts and circumstances of the case, the CIT(A) held that an appeal had been validly filed under Section 246(1)(c) of the Act. Secondly, holding that, in the facts and circumstances of the case, non-refund of the excess money by the Department was not correct, he allowed the assessee’s appeal and directed that the excess amount should be repaid to the assessee.
7. It is in these circumstances that the Department is now before us raising a two fold objection to the impugned order of the CIT(A). First is that the CIT(A) erred in holding that the appeal filed by the assessee before him was maintainable under Section 246(1)(c) of the Act. The second objection is that, in any event, the CIT(A) erred in holding that the excess amount of tax deducted at source was refundable to the assessee.
8. In the cross-objection filed by it, the assessee-company has supported the impugned order of the CIT(A).
9. We have looked into the facts of the case. We have considered the rival submissions.
10. At the outset we may say that insistence on rigid adherence to the letter of law in preference to the spirit thereof lies at the bottom of this departmental appeal. Be that as it may, we now proceed to examine the two fold objections raised by the Department against the impugned order of the CIT(A).
11. The key to the problem that arise for resolution in this case lies in the answer to the question : “Did the assessee deduct at source a larger amount of tax than it was statutorily obligated to under the relevant provisions of the Act”. The answer to the said question depends on the answer to the further question whether the sums paid by the assessee-company under the foreign collaboration agreement was royalty or technical fees within the meaning of the Act. It is, therefore, necessary to notice first the relevant provisions of the Act.
12. 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.
13. The determination of the question whether a particular receipt is chargeable to tax in the hands of a non-resident entails the examination of the issue in five stages or steps. The first stage is to see whether the receipt is on capital account or on revenue account. If the receipt is on capital account, it is not exigible to tax, for the question of taxability will arise only if the receipt is on revenue account. If the receipt is on revenue account, it has to be determined – and this is the second step – whether the income was received, actually or constructively, in India. If it was so received it would be exigible to tax on that count alone. If the income was not received, actually or constructively, in India, it had to be determined -and this is the third step – whether the income could be deemed to have been received by the non-resident in India. If the income could be so deemed, then it is taxable on that score alone. When the deemed-receipt test fails it has to be determined – and this is the fourth step – whether the income had actually accrued or arisen in India. If it had so accrued or arisen it would be taxable on that score alone. If it did not actually accrue or arise in India, it had to be examined – and this is the fifth step – whether the income could be deemed to have accrued or arisen in India. It is here that the provisions of Section 9 comes into play. It needs to be emphasised that if the income of a non-resident becomes exigible to tax either by reason of its having been received actually or constructively, in India, or by reason of its being deemed to have been received in India, or by reason of its actually accruing or arising in India, then Section 9 has no application. It is only when the receipt and the actual accrual test fails that Section 9 gets activated, its aim and objective being to see whether the income could be deemed to accrue or arise in India. Section 9 is, thus, so to speak, a residuary legatee.
14. Prior to its amendment by the Finance Act, 1976 with effect from 1-6-1976, Section 9, insofar as it is relevant to the purpose on hand, stood as follows :
9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind, or through the transfer of capital asset situate in India.
Explanation : For the purpose of this clause
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;
It will be evident that the said clause dealt with five categories of income which are deemed to accrue 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) is relevant for our purposes. For the exigibility 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.
15. 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 exigibility issue in a new and unambiguous perspective. Referring to these amendments, the Kamataka High Court, in the case of VDO Tachometer Werke, West Cermany v. CIT [1979] 117 ITR 804 observed :
At this stage it may be appropriate to refer to certain subsequent amendments made to Section 9(1) of the Act by adding Clauses (vi) and (vii) by Finance Act, 1976, and Finance (No. 2) Act, 1977, with effect from 1st April, 1977. Clauses (vi)(b) and (vii)(b) are relevant for the present case. They read as follows:
** ** **
It is significant that a proviso has been added to Clause (vi) and a similar proviso has been added to Clause (vi). Both the provisos expressly declare that nothing contained in Clauses (vi) and (vii) shall apply in relation to any income by way of royalty or fees for technical services payable in pursuance of an agreement made prior to 1st day of April, 1976, and approved by the Central Government. The said provisos to Clauses (vi) and (vii) read with Explanation (1) given below each of them, would show that Parliament intended to alter the law in relation to the liability of such payments to tax….
All these new provisions came into force with effect from 1-6-1976 and are applicable to the assessment year 1977-78 and onwards. It is to these new provisions that we must now turn.
16. The relevant portions of the amended Section 9 read as follows :
Income deemed to accrue or arise in India-
9(1) The following incomes shall be deemed to accrue or arise in India ** ** ** (vi) income by way of royalty payable by (a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government.
Explanation 1: For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Income-tax Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.
Explanation 2: For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘capital gains’ for
(i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v);
(vii) income by way of fees for technical services payable by
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1: For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2: For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaires’.
17. 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 royality 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)(vii):
(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 other 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), will 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.
18. 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 adumberated supra, 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.
19. 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 (iii) 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.’s case (supra). This is what the Court observed at pp. 321-2 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 provisions 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 consequence of this ruling is that, in a given case, a payment may properly fall 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 (it) of Explanat on 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 the 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 marked 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.
20. 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).
21. 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.
22. Prior to the 1976 amendment, in cases where it was held that the whole or part of royalty/fees for technical series was eligible 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 is that for purposes 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 sec ion 44D is that no deduction in respect of any expenditure or allowance is admissible.
23. Section 115A specifies the income ax 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 year 1985-86, which is now before us, is that income-tax is payable at the rates indicated below:
(1) Royalty
(a) Where royalty consists of lump 20% Section 115A(1)-
sum consideration for the trans- (b)(iii)(1)
fer 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% Section 115A(1)(b)(iii).
24. One more legal aspect needs to be noticed and that is the one relating to deduction of tax at source from royalty/technical fees paid to foreign companies. In the case before us, the first instalment of the money payable to the foreign company under the agreement was paid on 7-12-1984. Therefore, the provisions of the Finance Act, 1984, relating to the rates at which tax has to be deducted at source, will govern this case. Part II of the First Schedule to the Finance Act, 1984, which prescribes the rates for deduction of tax at sources in certain cases, contains the following provisions, which are relevant to the case before us:
(1) Royalty
(a) Where royalty consists of lump
sum consideration 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. 20% Item I(2)(b)(iv)-
(B)(1)
(b) In other cases 40% Item I(2)(b)(iv)-
(B)(2)
(2) Technical fees 40% Item I(2)(b)(i;)(B).
25. We may now examine the facts of the case before us in the light of the foregoing legal provisions.
As pointed out supra, the key to the problem that arises for resolution in this case lies in the answer to the question: “Did the assessee deduct at source a larger amount of tax than it was statutory obligated to under the relevant provisions of the Act? The answer to the said question depends upon the answer to the further question whether the sum paid by the assessee-company under the foreign collaboration agreement was royalty or technical fees within the meaning of the Act. To answer the last question, it is necessary first to glean from the collaboration agreement the exact details of the contractual obligations of the foreign companies and thereafter ascertain with reference to the definition of the terms “Royalty” and “fees for technical services” contained in Explanation 2 to Section 9(1)(vii)and 9(1)(ii) respectively, whether the amount paid by the assessee-company to the foreign companies is royalty or fees for technical services. The details subtracted 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 assessee-company to the foreign-companies:
Paragraph Activity/task to be preformed Item of Explanation 2
No. of the to Section 9(1)fvi)
Agreement in which the activity
falls
1 2 3
4.1.2 Transfer of technical know-how
comprising the total design,
know-how and engineering required
for the establishment and operation
of the plant including process and
basic engineering designs and
know-how unforeseen at the date of
signing the agreement but which may
later on become necessary for the
fulfilment of the performance
guarantees of the plant (ii) & (iv)
4.1.3 Purchasers (assessee-company)
authorised representatives from time
to time to participate in the
design and know-how, engineering and
discussions held by the supplier
(foreign companies) (ii) & (iv)
4.1.4 Disclosing, imparting, delivering and
transferring by suppliers in Japan of
technical know-how of documents and
other materials relating to technical
know-how to a representative or
representatives of the purchaser (ii) & (iv)
4.1.5 Imparting of technical information to
purchaser from time to time in writing
of all new developments which the
supplier has or which the purchaser
would propose to supply to keep the
plant upto-date according to the
supplier's latest standards of
technology and engineering (ii) & (iv)
4.2.5 Willingness of the supplier during a
period of ten years commencing on the
start-up date to receive visits in
Japan at approximately twelve monthly
intervals of a reasonable number of
representatives of the purchaser for
the purpose of imparting to them
technical information on any
improvements or new developments in the
plant, the process or the products
evolved by supplier and which may be
of use to purchaser in the plant. (ii) & (iv)
4.2 Supply of engineering documents (ii) & (iv)
4.3 Training of the staff of purchaser
in Japan (ii) & (iv)
9 Rendering necessary technical help by
the supplier to the purchaser during
erection period in installation and
erection of the plant (ii), (iv) & (vi)
10 Start up and guarantee test run (ii), (iv) & (vi)
13 Training of the staff of purchaser by
the supplier in Japan (ii), (iv) & (vi)
26. 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. (supra) 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.
27. In view of the foregoing, therefore, we hold that the case before us is one of royalty. Indeed, the CIT(A) has also come to the same conclusion though he has not given us the benefit of his reasoning process.
28. Since the amount in question is royalty payable under a post 31-3-1976 agreement, under Section 44D of the Act no deduction in respect of any expenditure or allowance is admissible. This would mean that the gross amount paid is itself the taxable income.
29. Secondly, the royalty in question is a lump sum consideration of the type referred to in Section 115A(1)(b)(ii)(1) and hence, income-tax is exigible at 20%.
30. Thirdly under Item No. I(2)(b)(iv)(B)(1) of Part-II of the First Schedule to the Finance Act, 1984, tax deductible at sources is also fixed at 20%.
31. From the foregoing it is clear that one of the significant results of the systematisation or rationalisation of assessment of foreign companies introduced by the Finance Act, particularly as respects post 31.3.1976 agreement, is first that no deduction is admissible from the royalty/ technical fees paid, and secondly that tax is to be deducted at source at the same rate at which income-tax itself is payable.
32. In the case before us tax was, however, deducted at source at 40%. The question whether the Assessing Officer was responsible for this state of affairs, or whether there was contributory negligence on the part of the assessee-company also, need not detain us here. The basic fact is that excess tax was deducted at source.
33. The question that then arises for consideration is whether the excess tax could be refunded directly to the assessee. Here, the Department’s case is that since the tax was deducted at source from the royalty paid to the foreign companies, they should go through the motions of filing return of income & claiming refund. As we see it, the Department is not justified in taking this line for more than one reason. First, under the agreement in question which was approved by the Central Government, the foreign company was to receive royalty without having to bear any tax burden. That burden was to be borne by the assessee-company. Therefore, it would not be unreasonable to visualise a situation whether the foreign companies might well refuse to take any initiative in the matter, leaving the matter to be handled entirely by the assessee-company.
34. Secondly, even if the foreign companies were to co-operate in the matter with the assessee-company and to file a return for the purpose of getting refund, they would be going through a series of totally unnecessary motions, because, as pointed out earlier, at the end of the exercise, they would be entitled to a refund of Rs. 20,60,080, Added to this the further trouble which they have to take in approaching the Central Board of Direct Taxes for waiving the period of limitation etc. This is clearly driving them from pillar to post which, in the present context of the urgent need for foreign investments in India, is totally uncalled for. Secondly, the granting of refund to the foreign companies would entail outflow of foreign exchange.
35. The Department has nowhere suggested that the assessee-company could suo motu file a return and get a refund nor has the Department taken any action under Section 163 to declare assessee-company as agents of the foreign companies. Be that as it may, as we see it, there is nothing in Section 163, which prevents the assessee from filing a return in the capacity of a representative assessee. On the contrary under Section 163(1)(c), the assessee is clearly an agent of the foreign companies and, as such, is entitled to file a return in that capacity, and on its own. We may here mention that the provisions of Section 163(2) are based on the principle of audi alter am pattern, which is an essential ingredient of natural justice. Those provisions are designed in the interest of justice and they will come to play only when the Assessing Officer chooses to treat a person as an agent of the non-resident. This, however, cannot lead to the conclusion that the assessee is prevented from filing a return in the status of a representative assessee for the purpose of claiming the refund.
36. But the matter does not rest there. As in the case of the foreign companies, so in the case of the assessee-company, it is unnecessary to go through such motions. The position would, of course, have been different, if the making of the assessment on the basis of such a return had entailed any inquiry for purposes of making any allowance or disallowance. But, as pointed out earlier, the rationalised scheme of assessment of foreign companies does not have any room for any such investigation. This would mean that the assessee-company would be driven from pillar to post and that too pointlessly.
37. In view of the foregoing, therefore, we hold that the assessee is entitled to the refund of Rs. 20,60,080. Since its claim was rejected out of hand by the Department, we hold that it is a fit case for not only admitting the appeal filed by the assessee but also for directing the granting of the refund of the said sum of Rs. 20,60,080. This is exactly what the CIT(A) has done. We, therefore, decline to interfere in the matter.
38. Before taking leave of the case we may highlight one of the basic principles of modern appellate procedure. As has been pointed out by the Punjab High Court in the case of Bipan Lal Kuthialav. CIT[ 1957] 32 ITR 361, an appellate court should be slow to interfere with an order of the trial court when the error complained of has not resulted in a miscarriage of justice. Minor and technical errors of procedure should be disregarded particularly when a judgment is right on the law and facts and the error does not affect the substantial rights of the parties.
39. In the result, the appeal and this cross-objections are dismissed.