ORDER
R.N. Singhal, Accountant Member
1. In this appeal by the department the ground taken is as follows:
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the technical services fee of Rs. 35,90,934 received by the assessee company falls within the meaning of ‘royalty’ defined in Explanation 2 to Section 9(1)(vi) of the I .T. Act and accordingly be charged at 20% instead of treating the same as fees for technical services charged to Income-tax Act, 1961.
2. Thus the dispute is whether the said sum of Rs. 35,90,934 should be taxed at 20% under Section 1 l5A(1)(b)(ii)(1) as royalty.
3. The assessee is a foreign company. It entered into an agreement dated 12-2-1981 with M/s. Bharat Electronics Ltd. (BEL in short) which provided inter alia for delivery of technical data by the assessee company to BEL outside India. Lump sum consideration for this particular thing was specified at US $ 18,60,000 and first instalment thereof US $ 3,72,000 was paid in the previous year relevant to this appeal. Rupee equivalent thereof came to Rs. 35,90,934. The ITO noted that as per that collaboration agreement dated 12th February, 1981 other services were also to be rendered by the assessee-company to BEL and payments for those other services were specified in the said collaboration agreement. But according to the ITO all the services rendered were to be viewed comprehensively. On that basis he held that the said sum of US $ 18,60,000 for transfer of technical know-how outside India constituted part of “fees for technical services” rather than ‘royalty’. He, therefore, taxed the said sum at 40% and rejected the assessee’s claim of its being taxable at 20%. The CIT(A) accepted the assessee’s contention and held that it was taxable at 20%. Hence, the department is in appeal before us.
4. The learned departmental representative took us through the relevant portions of the assessment order and emphasised that the ITO had rightly treated the whole collaboration agreement as composite one. He in particular emphasised the findings given in para 6 of the assessment order in items marked (i) to (via) thereof and submitted that the delivery of documents etc., outside India was merely procedural while the comprehensive reading of the whole agreement clearly gave an impression that the intention was to secure all services. He, therefore, urged that even when separate amounts were mentioned for separate items/services the agreement should be read as a whole and it should be held that the total payment including lump sum payment for technical know-how delivered outside India was in the nature of “fees for technical services” to be taxed at higher rate. Alternatively, he submitted that in the collaboration agreement a very high sum of US $ 18,60,000 was assigned for transfer of technical know-how outside India as compared to the sums assigned for other services and, therefore, at least a part say 50% of the said sum of US $ 18,60,000 should be regarded as pertaining to fees for technical services taxable at higher rate.
5. On the other hand, the learned advocate for the assessee, submitted that in Article marked 13.1.1 to 13.1.4 amounts were specified for different services and there was no scope for re-writing the agreement. He further emphasised that Article 1.5 of the agreement defined “Know-how” and it was that “Know-how” which had the specified price of lump sum payment of US $ 18,60,000 in instalments. He drew our attention also to the Article 13.1.2 to 13.1.4 for payments of other services and to Article 13.3 which provided for the payment of running Royalty at the rate of four per cent of the Net Selling Prices of all the relevant goods produced by the BEL. He in effect supported the order of the CIT(A).
6. We have considered the rival submissions. At the outset it would be beneficial to have a close look on the statutory provisions. It may be first noted that Section 115A prescribed rates of tax to be charged from different types of income of any foreign company. We are concerned with Sub-clauses (ii) and (Hi) of Section 115 A(1) which laid down the rates of tax for income by way of ‘royalty’ and income by way of ‘fees for technical services’ in the following terms :
(ii) the amount of the income-tax calculated on the income by way of royalty, if any, included in the total income-
(1) on so much of the amount of such income 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, at the rate of twenty per cent;
(2) on the balance of such income, if any, at the rate of forty per cent;
(iii) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of forty per cent.
Thus, the lump sum payment if treated as part of royalty would be taxed at 20%, but if treated as part of fees for technical services would be taxed at forty per cent. This is so because there is no doubt that it is a lump sum payment. Naturally, we have to consider whether it would be part of royalty or not. For that, it is common ground, that we shall have to go to some parts of Section 9(1). Explanation 2 below Section 9(1)(vi) is as follows:
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 (0 to (v).
Then Explanation 2 below Section 9(1)(vii) is as follows :
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 personal) 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 ‘Salaries’.
In the light of these two Explanations we shall have to consider whether the said sum of US $ 18,60,000 should be considered as part of ‘royalty’ in terms of Explanation 2 below Section 9(1)(vi) or as part of ‘fees for technical services’ in terms of Explanation 2 below Section 9(1)(vii).
7. Reverting to the factual position we may note that the collaboration agreement dated 12th February, 1981 provides for separate consideration for specified activities as follows:
(a) Article 13.1.1. provides for lump sum consideration of US $ 18,60,000 for transfer of technical know-how outside India.
(b) Article 13.1.2. provides for payment of fees of US $ 9,50,000 for rendering technical services outside India.
(c) Article 13.1.3. provides for payment of fees of US $ 6,50,000 for imparting training to BEL engineers abroad.
(d) Article 13.1,4. provides for payment of US $ 8,000per man per month for services rendered in India.
(e) Article 13.3. provides for recurring royalty of 4%.
Presently we are concerned with the nature of item at (a) above. But it is important to note that three other lump sum payments are mentioned at (b), (c) and (d) above for other services and a recurring royalty of 4% is envisaged as per (e) above after the commencement of the sale of the relevant goods by the BEL. In the face of this position there is no substance in ITO’s contention that all the payments envisaged in the agreement should be treated as payments of only one nature, namely, ‘fees for technical services’. It is on this basis mat in paras marked 6(0 to 6(viii) of the assessment order the ITO has rejected the assessee’s reliance on Article 21 of the agreement.
That Article reads as follows :
Article XXI, Transfer of Know-how – 21.1 The Know- how to be furnished under this Agreement shall be deemed to be transferred to BEL on the delivery, in the country of origin, of the necessary documents, data and information to the Post Office for mailing or to a Carrier for shipment to India, in which case the Post Office or the Carrier shall be deemed to be the agent of BEL for receiving such know-how. If any of the documentation is lost in transit, COM agree to deliver the documentation again on request by BEL.
We do not. agree with the ITO that this Article is merely for the convenience of the assessee-company to ensure the smooth payment of the fees in instalments. We agree with the assessee’s contention that this Article envisages transfer of know-how for which the lump sum payment of US $ 18,60,000 is envisaged in Article 13.1.1 of the Agreement.
8. In our opinion there is no substance in para marked 6(iv) of the ITO’s order that the source of activity flows after the delivery of the documents and that way it is intimately connected with other activities envisaged in Article 13.1.2 to 13.1.4 and Article 13.3 mentioned above to an extent that the activity envisaged in Article 13.1.1 should be treated as part and parcel of Articles 13.1.2to 13.1.4 and 13.3 as mentioned above. There is also no substance in ITO’s contention mentioned in 6(v) of assessment order that separate agreement could have been executed for the activity of supply of technical know-how envisaged in Article 13.1.1. There is no substance in the point raised in para marked 6(vi) of the assessment order that activity envisaged in Article 13.1.1 for transfer of technical know-how was not intended to be separate from other activities. Coming to para marked 6(vii) of the ITO’s order we find that he has taken note of Clauses (a) to (g) of Article 13.2.2. They specified the instalments payable for other activities and the ITO has mentioned that in most of them it is envisaged that the documents of technical know-how would have been transferred. In para marked 6(viii) the ITO has again emphasised the aspect of the services envisaged in the collaboration agreement of a composite nature and requiring comprehensive view. We have already mentioned that separate considerations are mentioned for different services. Taking all these circumstances into account we find no substance in the arguments given in the assessment order and we agree with the learned advocate of the assessee that the payments envisaged in Article 13.1.1 for lump sum payments of US $ 18,60,000 is for ‘royalty’ and not ‘fees for technical services’. It is covered by Explanation 2 below Section 9(1)(vi) and in particular Clauses (iv) and (vi) thereof. It is not covered by Explanation 2 below Section 9(1)(vii). On this basis department’s appeal deserves to be dismissed.
9. Before parting we may mention that at the time of hearing we sought further information from the assessee in regard to the position of assessee’s stand and department’s treatment to different items of payments envisaged in the agreement from assessment years 1984-85 to 1990-91 and the information has been furnished by the Chartered Accountants of the assessee-company of M/s. A.F. Ferguson & Co. We have taken that information into account and considered the rival submissions. They have given in para 4 of the note accompanying their letter dated 25th April, 1991 details of different items of payments to the assessee. We need extract below the information furnished by them in regard to the impugned sums of US $ 18,60,000 as envisaged in Article 13.1,1 because that is the only point of dispute in this appeal. That information is as follows:
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A.Y. Consideration Under Article Claimed by I.T. Dept. stand Pending
under agent. of the Agent. CFSA ITO's CIT(A) where.
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1984-85 2nd Inst. US 13.1.1 Royalty taxed
$ 3,72,000 taxable at 20%
@ 20%
1985-86 3rd Inst. US 13.1.1 Royalty Taxed
$ 3,72,000 taxable at 20%
@ 20%
1986-87 4th Inst. US 13.1.1 Royalty Taxed Tax at Dept. not in
$ 2,44,000 taxable at 40% 20% appeal on
@ 20% this issue.
1989-90 5th & last 13.1.1 Royalty Taxed
inst. US @ 30% @ 30%
$ 5,00,000
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Thus, out of a total 5 instalments comprising the said sums of US $ 18,60,000, department has accepted at the assessment stage itself the assessee’s stand for three instalments, namely, second, third and fifth. Then for yet another instalment, (namely, The fourth instalment), assessment was made at higher rate but the CIT(A) allowed the relief and the department is not in appeal on this issue. Thus, out of a total of five instalments comprising the said sum, of US $ 18,60,000 the department is contesting only in respect of the first instalment of US $ 3,72,000. For the subsequent for instalments department has either assessed or accepted the CIT(Appeals)’s decision in favour of the assessee. This is yet another reason warranting dismissal of department’s appeal.
10. Department’s appeal is dismissed.