Income-tax---

----Non-resident---Income deemed to accrue or arise in India ---Royalty-- Technical services ---Assessee, a foreign company---Agreement for supply of know-how, complete engineering and services to Indian company by assessee---Out of total fee payable to assessee particular sum stated to be cost of supervision of erection and commissioning of plant---Actual sum paid by assessee to employees for technical assistance and services alone deductible---Balance to be treated as royalty---Indian Income Tax Act, 1961, S.9(1)(vi), (vii).

An agreement, dated May 5, 1975, was entered into between the assessee, a Swiss Company, and an Indian Company, for supplying know how, complete engineering and services for the extension of the existing chlorine and caustic soda plants of the Indian company. The agreement was approved by the Government of India. The assessee undertook to perform all engineering services necessary for the supply of imported items and for procurement of indigenous items by the Indian company and to integrate all such equipment into the existing plant in order to raise the production capacity of the chlorine and caustic soda plants to a certain limit. The fee for supply of engineering and rendering of services was agreed at 4,59,795 Swiss francs. The assessee also undertook to provide technical information, drawings, specifications and operating instructions to enable the Indian company to erect, repair and maintain the plant and, on its part, the Indian company undertook to use such drawings solely for the purpose of erection, repair and maintenance of the plant and equipment to be supplied by the assessee, and not to use them or pass them on to other parties for use in the construction on operation of any other plant. The assessee also undertook to place at the disposal of the Indian company one erection supervisor for nine months and one chemical engineer for two months to supervise erection and starting of the plant. The fee for supervision of erection and commissioning of the plant was agreed to be paid by the Indian company to the assessee in the sum of 2,04,032 Swiss francs. Thus, the total amount of consideration for the agreement was 6,68,827 Swiss francs. The Income-tax Officer held that the payment of 4,59,795 Swiss francs did not accrue in India and so was not taxable. The Income-tax Officer, after deducting the remuneration paid to the two engineers from the sum of 2,04,032 Swiss francs, taxed the balance, which on conversion into Indian rupees worked out of Rs.7,60,100. The Tribunal held that the entire amount of 2,04,032 Swiss francs was not paid for the technical services and there was an element of royalty in the said agreement. The Tribunal, therefore, assessed the royalty at 20 per cent of the total consideration which worked out to 40,806 Swiss francs, equivalent to Indian rupees 1,87,300. On references at the instance of the assessee and the Department:

Held, that "royalty" has been defined in Explanation 2 to clause (vi) of subsection (1) of section 9 of the Income Tax Act, 1961, as consideration, inter alia, for the transfer of all or any rights including the granting of a licence in respect of patent, invention, model, design, secret formula or process or trade mark or similar property, 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. Sub-clause (vi) of Explanation 2 includes within the meaning of royalty, the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v). Clause (vii) of subsection (1) of section 9 which talks about income by way of fees for technical services, lays down in Explanation 2 thereto that fees for technical services include 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 do 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". The proviso to clause (vi) of section 9(1), provides 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. Therefore, the fees which had been paid for technical services by virtue of the agreement in question dated May 5, 1975, were not subject to tax by virtue of this proviso, which was inserted by the amendment by Finance (No.2) Act of 1977 with effect from April 1, 1977. An analysis of the provisions of section 9(1)(vi) and (vii) would show that what had been made not taxable was only the fees paid for technical services and not royalty. Clause (4) of the agreement made it clear that out of 6,63,827 Swiss francs, a sum of 2,04,032 Swiss francs, would be the cost of supervision of erection and commissioning of the plant. The Tribunal while discussing the matter had treated 20 per cent of this sum as royalty. There was no basis for this. The assessee was entitled to get, a rebate on the actual amount paid by it to its employees for their technical assistance and services and the rest of the amount had to be treated to be as royalty.

Abhay Sapre for the Commissioner.

H. S. Shrivastava for the Assessee.

JUDGMENT

Both the references involve common questions and, therefore, they are disposed of by a common order. For convenient disposal of both these references, the facts, given in Miscellaneous Civil Case No.440 of 1990 are taken into consideration.

Both the parties aggrieved by the order of the Income-tax Appellate Tribunal, dated September 29, 1989, moved the Tribunal for making a reference to this Court. According, the Tribunal has made a reference to this Court framing two questions---one at the instance of the assessee and the other at the instance of the Revenue.

The question referred at the instance of the Revenue for our answer reads as under:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only 20 per cent of the fee of 2,04,032 francs was taxable?"

The question referred at the instance of the assessee reads as under:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was an element of royalty included in the fee of 2,04,032 Swiss francs and if so the Tribunal was right in estimating 20 per cent of the gross fee being the value of the royalty?"

The brief facts giving rise to the present reference are that the assessees, Krebs and Company, Claridenistrasse, Zurich (for short "Krebs") is a foreign company and National Newsprint and Paper Mills Limited (for short "Nepa Mills")'is its agent within the meaning of section 163 of the Income Tax Act, 1961 (for short the "Act"). An agreement dated May 5, 1975, was entered into between the assessee, Krebs, on the ore hand, and Nepa Mills, on the other, for supplying know-how, complete engineering and services for the extension of the existing chlorine and caustic soda plants. The agreement was approved by the Government of India for the purpose of expansion of the existing chlorine and caustic soda plants and the assessee undertook supply of plant, equipment and engineering services. A major part of the plant equipment was agreed to be supplied from India by the Nepa Mills and the remainder of the equipment was to be supplied by the assessee from Western Europe under a separate agreement. The assessee undertook to perform all engineering services necessary for the supply of imported items and for procurement of the indigenous items by the Nepa Mills and to integrate all such equipment into the existing plant in order to raise the production capacity of the chlorine and caustic soda plants to a certain limit. The fee for supply of engineering and rendering of services was agreed at Swiss francs 4,59,795. The assessee also undertook to provide technical information, drawings, specifications and operating instructions to enable the Nepa Mills to erect, repair and maintain the plant and on its part the Nepa Mills undertook to use such drawings solely for the purpose of erection, repair and maintenance of the plant and equipment to be supplied by the assessee, and not to use them or pass them on to other parties for use in the construction or operation of any other plant. It will 'also agreed that Nepa Mills will not extend the plant by using the assessee's design and processes without having reached a written agreement with the assessee. The assessee also undertook to place at the disposal of the Nepa Mills one erection, supervisor for nine months and one chemical engineer for two months to supervise erection and starting of the plant. The fee for were vision of erection and commissioning of the plant Was agreed to be paid by Nepa Mills to the assessee in the sum of Swiss francs 2,04,032. Thus, the total amount of consideration for the agreement was 6,68,827 Swiss francs. The personnel posted at the site by the assessee for the purpose of erection and commissioning of the plant were agreed to be paid daily allowance boarding and lodging facilities and travelling expenses by the Nepa Mills.

The Income-tax Officer held that the payment of a sum of 2,04,032 Swiss Francs became due in the accounting period as the commissioning of the plant was completed during that period. He also mentioned that the other amount paid earlier by the Nepa Mills to the assessee did not accrue in India as all the activities relating thereto were carried on outside India. He, therefore, did not take 4,59,795 Swiss francs as taxable and took 2,04,032 Swiss francs as taxable. He did not accept the stand of the assessee that the assessee had no business connection in India. He also negatived the stand of the assessee that the whole process of erection took about three years and, therefore, only one-third of the erection and commissioning fee should be taxed in the instant assessment year. He recorded the finding that the two engineers were in India during the instant accounting period and the erection and commissioning of the plant was done during this period. He, thus, after deducting the remuneration paid to the two engineering from Swiss francs 2,04,032 taxed the balance which on conversion into Indian rupees worked out to Rs.7,60,100.

Aggrieved by the assessment order, the assessee approached the Commissioner of Income-tax (Appeals) who endorsed the finding of the Income-tax Officer. However, it was observed that the said fee should be taxed at 50 per cent. in view of clause II(i)(b) of Paragraph E of Part I of the First Schedule to the Finance Act, 1980 (No.2 of 1980). Aggrieved by this order, the assessee as well as the Department both approached the Tribunal. The stand taken by the assessee was that the entire amount of Swiss francs 2,04,032 was towards fee received by the company and that could not be taken into account as income deemed to accrue or arise in India to the assessee. It was also contended by the assessee-company that by virtue of clause (vii) of subsection (1) of section 9, the entire amount should be taken to be fee for technical services paid by a resident company and the said income is exempted under the proviso to clause (vii) of subsection (1) of section 9. It was contended that no part of it was assessable as royalty. The stand of the Department, on the other hand, was that there was a business connection within the meaning of clause (i) of subsection (1) of section 9 and the income was chargeable under clause (i) and the assessee was not entitled to exemption by virtue of the proviso to clause (vii) of subsection (1) of section 9.

The Tribunal also held that the income did accrue or arise to the assessee in India, and clause (vii) prevailed over clause (i) and, therefore, the amount of technical fee was not chargeable to tax. The Tribunal further held that the entire amount of 2,04,032 Swiss francs was not paid for the technical services and there was an element of royalty in the said agreement. According to the said agreement, the assessee undertook to provide technical information; drawings, specifications and operating instructions to enable the Nepa Mills to erect, repair and maintain the plant and the Nepa Mills on its part undertook to use such drawings, solely for the purpose of erection, repair and maintenance of the plant and equipment to be supplied by the assessee and not to use them or pass them on to other parties for use in the construction or operation of any other plant. It was also agreed that Nepa Mills would not explained the plant by using the assessee's design and processes without having reached a written agreement with the assessee. The Tribunal, therefore, held that there was transfer of certain rights for exclusive use of those rights in respect of model, design and the process for expansion of the plant. The Tribunal held that the transfer was not an out and out transfer. It was restricted by certain conditions. Therefore, the Tribunal held that a part of the amount would be charged towards technical services and the rest would be charged as royalty within the meaning of Explanation 2 to clause (vi) of subsection (1) of section 9 and, thus, the Tribunal held that the assessee had income by way of royalty. The Tribunal, therefore, assessed the liability at 20 per cent of the total consideration which worked out to 40,806 Swiss francs equivalent to Indian rupees 1,87,300 as the amount of value of the royalty. Both the parties approached the Tribunal for making reference and accordingly the Tribunal has referred the aforesaid questions for answer by this Court.

In short, the question is whether it was an agreement which was entered into between Krebs and Company and Nepa Mills for expansion of their plant by using the assessee's design and processes and for that they have paid a total sum of 6,63,827 Swiss francs and out of the said sum, 2,04,032 Swiss francs was given by the Nepa Mills to the assessee towards cost of supervision of erection and commissioning of the plant and whether the whole amount should be directed to be treated as paid towards technical services and there was an elephant of royalty. In order to appreciate the rival contentions, it would be relevant to refer to clause (4) of the agreement, which is significant for our purpose. Clause (4) of the agreement reads as under:

"4. The contract price payable by the purchaser to the contractor for the supply of know-how complete engineering and service for the plant as outlined in Tender No.5040 and inclusive of delegation of supervising personnel as specified in clause (3) above will be a total of 6,63,827 Swiss francs (Swiss francs six lakhs sixty-three thousand eight hundred twenty-seven only), out of which 2,04,032 Swiss francs (Swiss francs two lakhs four thousand thirty-two only), will be the cost of supervision of erection and commissioning of the plant. The total fee of 6,63,827 Swiss francs payable to the contractor will be inclusive of all Indian taxes, duties and statutory levies on the part of the contract."

The whole controversy centres round this agreement. Section 9 of the Income-tax Act deals with income deemed to accrue or arise in India. Clauses (vi) and (vii) of subsection (1) of section 9 of the Income-tax Act are relevant. The relevant portion thereof for our purpose is quoted below:

"Section 9. Income deemed to accrue or arise in India.---(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 a non-resident, where the royalty is payable respect of any right, property or information used or services utilised; for the purposes of 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 2:---For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the incomeof the recipient chargeable under the head 'Capital gains') for---

(i) the transfer of all or any rights (including the granting of a 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) tile 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 'Salaries'

"Royalty" has been defined in Explanation 2 to clause (vi) of subsection (1) of section 9 as 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 the transfer of all or any rights including the granting of a licence in respect of patent, invention, model, design, secret formula or process or trade mark or similar property; 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. Sub-clause (vi) of Explanation 2 lays down for rendering of any services in connection with the activities referred to in sub clauses (i) to (v). Clause (vii) of subsection (1) of section 9 which talks about the income by way of service, lays down in Explanation '2 that any income which has been paid for technical services in 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 "salaries". The proviso further provides 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. Therefore, the fees which have been paid for technical services were not subject to tax by virtue of this proviso, which was inserted by the amendment by Finance (No.2) Act of 1977 with effect from April 1, 1977.

An analysis of the provisions of section 9(1)(vi) and (vii) clearly shows that what is not made taxable is only the fees paid for technical services and not the royalty part. Clause (4) of the agreement makes it clear that out of 6,63,827 Swiss francs, 2,04,032 Swiss francs will be the cost of supervision of erection and commissioning of the plant. So far as the purchasing of other material from abroad is concerned, that has been excluded. Therefore, our attention centers around this amount, whether this amount relates to a fee levied by technical personnel and whether it has an element of royalty or not. The Tribunal while discussing the matter has taken 20 per cent: as a royalty and the rest of the amount has been left as fee from technical services. We have not been able to understand as to on what basis the Tribunal has come to the conclusion and has taken the amount of Rs.1,87,300 as the value of the royalty. Hence, we hold that the assessee is entitled to get a rebate on the actual amount paid by them to their employees for their technical assistance and services and the rest of the amount will be treated to be a royalty.

In the result, we answer the first question in favour of the Revenue and against the assessee and the second question is answered against the assessee and in favour of the Revenue.

M.B.A./3063/FC Reference answered.