COMMISSIONER OF INCOME-TAX VS KLAYMAN PORCELAINS LTD
1999 P T D 3197
[229 I T R 735]
[Andhra Pradesh High Court (India)]
Before Syed Shah Mohammed Quadri and V. Rajagopala Reddy, JJ
COMMISSIONER OF INCOME-TAX
Versus
KLAYMAN PORCELAINS LTD
Case Referred No. 100 of 1988, decided on 09/07/1997.
(a) Income-tax---
----Non-resident---Income deemed to accrue or arise in India---Royalty Meaning of "royalty "---Assessee engaged in manufacture of porcelain articles---Lump sum payment to non-resident for construction/installation of kiln---Not income by way of royalty within the meaning of S.9(1)(vi)-- Indian Income Tax Act, 1961, S.9.
(b) Words and phrases---
------Royalty"---Meaning.
A plain reading of section 9(1)(vi)(b) of the Income Tax Act, 1961, shows that any amount paid by a person who is a resident by way of royalty will fall within the phrase "income deemed to accrue or arise in India". The 'expression "royalty" is defined in Explanation 2 of the clause. The Explanation defines "royalty" to mean consideration including any lump sum consideration paid for imparting 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 and also the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. A lump sum consideration paid which is in the nature of income chargeable under the head "Capital gains", is excluded from the meaning of royalty.
The assessee entered into agreements with a German company which provided for three types of works. Under one of the agreements titled "Kerabedarf s _ Order No.32911 " which was the second type of works, consideration was paid for construction/installation of a kiln. The amount paid under that memorandum by the Indian company to the non-resident company as payment for technical drawings towards engineering for the kiln was treated by the Income-tax Officer as royalty within the meaning of Explanation (ii) to section 9(1)(vi) of the Income-tax Act, treating it as taxable remuneration in the hands of the non-resident company. The Tribunal, 'however, held that the payment did not constitute royalty. On a reference:
Held, that the Tribunal on construing the relevant, portion of the agreement recorded the finding that this was a case of a foreign company undertaking to supply, erect and commission a kiln in India, the only service rendered in India being that of supervision by an expert deputed by the foreign company. The amount was not paid for imparting 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 falling under clause (ii) of Explanation 2 to section 9(1)(vi) or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of clause (iv) of Explanation 2. A close reading of the second type of work as well as the other items of the memorandum showed that the consideration was paid for construction/installation of the kiln. Therefore, the payment of DM 1,62;450 made by the assessee to the non-resident company did not constitute "income" by way of royalty of the non-resident company, within the meaning of the provisions of section 9(1)(vi) of the Act.
S.R. Ashok for the Commissioner.
Y. Ratnakar for the Assessee.
JUDGMENT
SYED SHAH MOHAMMED QUADRI, J.---In this reference under section 256(2) of the Income-tax Act, at the instance of the Revenue, the following question is referred to this Court for opinion:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the lump sum payment of DM 1,62,450 made by the resident company to the non resident company for supply of designs and drawings (engineering for the kiln) did not constitute 'income' by way of royalty of the non-resident company, within the meaning of the provisions of section 9(1)(vi)?"
In the assessment year 1980-81, Klayman Porcelains Ltd., Hyderabad, hereinafter referred to as the Indian company, which has been treated as statutory agents for Keramische Industries of Berlin, West Germany, hereinafter referred to as the non-resident company (NRC), entered into a memorandum of understanding on December 20, 1979, which, inter alia, provided for three types of works. We are concerned only with the second type of works, which is numbered as "Kerabedarf's Order No.32911." The amount paid under that memorandum by the Indian company to the non-resident company as payment for technical drawings towards engineering for the kiln was treated by the Income-tax Officer as royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Income-tax Act. Treating it as taxable remuneration in the hands of the non resident company, he assessed the entire amount paid, i.e., Rs.8,56,920 at the rate of 20 per cent. The assessee filed an appeal against the order of assessment. But the appellate authority dismissed the appeal on July 6, 1983. That order was questioned before the Income-tax Appellate Tribunal. The Tribunal came to the conclusion that the amount paid by the Indian company to the non-resident company for supply of engineering data was a capital asset supplied from abroad for a price and that part of it accrues or arises in India or could be deemed to arise or accrue in India; it also recorded the finding that the said amount could not be regarded as royalty within the meaning of Explanation 2 to clause (vi) of subsection (1) of section 9 of the Income-tax Act, and allowed the appeal of the assessee by its order, dated January 19, 1984. On these facts, the above question arise for our opinion.
Sri S.R. Ashok, learned standing counsel for the Revenue, contends that payment made by the resident company to the non-resident company under the memorandum is nothing but royalty and, therefore, the same is taxable under section 9(1)(vi) of the Act. The submission of Sri Y. Ratnakar, learned counsel appearing for the assessee, is that the amount paid by the Indian company to the non-resident company amounts to a capital asset.
To appreciate the contentions of learned counsel it may be useful to read here the relevant provisions of section 9(1)(vi)(b) of the Act which deals with "income deemed to accrue or arise in India" and it runs thus:
"Section 9(1): The following incomes shall be deemed to accrue or arise in India--
(vi) income by way of royalty payable by--- ....
(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 .... "
A plain reading of the provision extracted above shows that any amount paid by a person who is a resident by way of royalty will fall within the phrase "income deemed to accrue or arise in India". It may be noted that 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 (non-resident) outside India or for the purposes of making or earning any income from any source outside India, will be outside the purview of deemed income. The expression "royalty" is defined in Explanation 2 of the above said provision. Reliance is placed on clauses (ii) and (iv) to the said Explanation which run thus:
"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-
(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,.
(iv) the imparting of any information concerning technical industrial, commercial or scientific knowledge, experience or skill;"
The Explanation defines "royalty" to mean consideration including any lump sum consideration paid for imparting 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 and also the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. It requires to be noted here that lump sum consideration paid which is in the nature of income chargeable under the head "Capital gains", is excluded from the meaning of royalty. In this case, if -the amount in question has been paid by the Indian company to the non resident for 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 or if it is paid for the imparting of any information concerning technical, industrial; commercial or scientific knowledge, experience or skill, the amount would fall within the meaning of "royalty". This is a question of fact to be determined on the facts and circumstances of each case and the terms of agreement under which there has been a transfer. The memorandum of understanding, dated December 29, 1979, records the nature of the transaction. As already noted above, the amount was paid for the second type of works. In this case, the Tribunal on construing the relevant portion of the agreement recorded the finding thus:
"Here was a case of a foreign company undertaking to supply, erect and commission a kiln in India, the only services rendered in India being that of supervision by an expert deputed by the assessee foreign company. The remuneration for such supervision is separately paid for and the tax liability in respect of such services is not the matter before us. There has been supply of materials and know-how which have both been despatched from abroad. There has been no hire of any patent rights or technical know-how on the part of the taxpayer in India. Obviously, the entire payment has been considered as the cost of the kiln by the Indian taxpayer and rightly so, that there is a capital cost to the Indian taxpayer can no doubt be a revenue receipt in the hands of the recipient."
A close reading of the second type of works as well as the other terms of the memorandum, leaves no doubt in our mind that the consideration was paid for construction/installation of kiln. Hence, we are unable to say that the amount was paid for imparting 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 falling under clause (ii) of Explanation 2 or. for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of clause (iv) of Explanation 2.
In the result, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. The reference is accordingly answered.
M.B.A./3070/FCReference answered.