CEAT INTERNATIONAL S.A. VS COMMISSIONER OF INCOME-TAX, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 3442 (1998)

Income-tax---

----Income deemed to accrue or arise in India---Royalty or fees for technical services---Foreign non-resident company entering into agreement with Indian company under which Indian company to pay to foreign company export commission for tyres and tubes exported by Indian company---Under agreement foreign company forgoing in favour of Indian company exports in various markets and in certain cases export orders to be transferred to Indian company---By doing so foreign company did not impart any information concerning technical, industrial, commercial or scientific knowledge, experience or skill nor render any managerial, technical or consultancy service---Payment of export commission made by Indian company to foreign company for such services did not amount to "royalty" or "fees for technical services" and was not assessable to tax--Indian Income Tax Act, 1961, S.9(1)(vi), (vii).

The assessee-company, a non-resident foreign company, entered into an agreement with an Indian company under which the Indian company was to pay to the assessee-company export commission at the rate of five percent. of the FOB value of the automotive tyres and tubes exported by the Indian company provided the company fulfilled its obligation to export 15 percent. of its production subject to a minimum value of Rs.4.70 crores in consideration of the following services to be rendered by the assessee: (a) The assessee would forgo in favour of the Indian company exports in various markets and in certain cases export orders were to be transferred to the Indian company; (b) The assessee was to allow the use of channels of distribution in overseas markets to the Indian company and after-sales services in those markets; (c) Detailed market information was to be furnished to the Indian company through their representatives in major international markets at the expense of the assessee; (d) The benefit of advertising expenditure of the assessee to establish CEAT brands overseas was to be permitted. During the previous year relevant to the assessment year 1978-79, in terms of the agreement, the assesee-company was to receive from the Indian company a sum of Rs.23,75,366 for the services rendered under the agreement. This agreement was made in accordance with the. proposal approved by the Government of India vide their letter, dated June, 1977. Though this agreement was executed in Switzerland, it was subject to laws prevailing in the Union of India. In its return filed for the assessment year 1978-79, the assessee claimed that the export commission received by it from the Indian company was not assessable to tax on the ground that the amount could not be treated as royalty/technical services fee as defined in Explanation 2 to section 9(1)(vi) and the Explanation to section 9(1)(vii) of the Income Tax Act, 1961. The Inspecting Assistant Commissioner of Income-tax (assessing authority) rejected the contention of the assessee held that the sum of Rs.23,75,366 received by the assessee was paid on account of royalty and technical service fees within the meaning of sections 9(1)(vi) and 9(1)(vii) of the Act. On appeal, the Commissioner-(Appeals) held that the commission received by the assessee for services referred to in clauses (b) and (d) 'of the agreement rendered to the Indian company was covered by the term "royalty" as defined in Explanation 2 to section 9(1)(vi): He also held that the commission received for the services falling under clauses (a) and (c), rendered by the assessee to the Indian company, did not fall within the definition of royalty or technical fees. As there was no bifurcation of the amount payable for different types of services, The Commissioner (Appeals) held that on pro rata basis, 50 per cent, of the commission received would be taxable as royalty or technical service fees under section 9 of the Act. He, accordingly, held that the assessee was not liable to tax in respect of the other 50 percent. of the amount received by it from the Indian company. On further appeal, both the assessee and the Revenue, the Tribunal held that the payment on account of services referred to in clauses (b), (c) and (d) of the agreement amounted to royalty or fees for technical services within the meaning of sections 9(1)(vi) and 9(1)(vii) of the Act. The Tribunal, therefore, held that 75 percent. of the amount of Rs.23,75,366 was assessable to tax under sections 9(1)(vi) and 9(1)(vii) of the Act. In regard to the remaining 25 percent. of the said amount which was attributable to the services falling under clause (a) of the agreement, it did not amount, to royalty or fees for technical services and hence was not assessable to tax under the Act. On a reference both at the instance of the assessee and the Revenue:

Held, (i) that the payment of the three service referred to in clauses (b), (c) and (d) of the agreement had been treated by the Tribunal as royalty or fees for technical services and the same had been held to be taxable under section 9 of the Act. The assessee did not want to challenge this finding of the Tribunal.

(ii) That the Tribunal was correct in holding that 25 percent. of the export commission attributable to services falling under clause (a) of the agreement could not be treated as "royalty" or "fees for technical services" under clauses (vi) and (vii) of section 9(1). The payment was made for. merely forgoing by the assessee in favour of the Indian company exports in various markets or transferring certain export orders to the Indian company. By doing so, the assessee did not impart any information concerning technical, industrial, commercial or scientific knowledge, experience or skill nor render any managerial, technical or consultancy service.

F.B. Andhyarujina for the Assessee.

R.V. Desai with B.M. Chatterjee for the Commissioner:-

JUDGMENT

DR. B.P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following two questions of law to this Court for opinion, one each at the instance of the assessee and the Revenue.

At the instance of the assessee:

"(1) Whether the consideration received by the applicant under the agreement of September 9, 1979, with Ceat Tyres of India Ltd.--

(a) for allowing Ceat Tyres the use of the applicant's channels of distribution and after sale services in overseas markets,

(b) for furnishing detailed market information to Ceat Tyres through the applicant's representatives in major international markets and at the applicant's expenses,

(c) for permitting the benefit of advertising expenditure of the applicant to establish CEAT brands in overseas markets, is covered by the terms 'royalty' and 'fees for technical services' as defined in sections 9(1)(iv) and 9(1)(vii), respectively of the Income Tax Act, 1961?"

At the instance of the Revenue:

"(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that 25 percent. of the export commission received by the assessee from Ceat Tyres of India Ltd., as per the agreement, dated September 9, 1977, was not taxable under section 9(1)(vi) of the Income Tax Act, 1961, for the assessment year 1978-79?"

The material facts giving rise to this reference, briefly stated, are as follows:

The assessee, Ceat International, a non-resident company entered into an agreement with an Indian company, Ceat Tyres of India Ltd., on September 9, 1977. As per this agreement, Ceat Tyres of India Ltd. ("Indian company"), was to pay to the assessee export commission at the rate of 5 percent. of the FOB value of the automotive tyres and tubes exported by the Indian company, provided the company fulfilled its obligation to export 15 percent. of its production subject to a minimum value of Rs.4.70 crores, in consideration of the following services to be rendered by the assessee:

(a) The assessee would forgo in favour of the Indian company exports in various markets and in certain cases export orders were to be transferred to the Indian company.

(b) The assessee was to allow the use of channels of distribution in overseas markets to the Indian company and after sales services in those markets.

(c) Detailed market information " was to be furnished to the Indian company through their representatives in major international markets at the expense of the assessee.

(d) The benefit of advertising expenditure of the assessee to establish Ceat brands overseas was to be permitted.

During the previous year relevant to the assessment year 1978-79, in terms of the agreement, the assessee-company was to receive from the Indian company a sum of Rs.23,75,366 for the services rendered under the agreement. This agreement was made in accordance with the proposal approved by the Government of India vide their letter, dated June 1, 1977. Though this agreement was executed in Switzerland, it was subject to laws prevailing in the Union of India.

In its return of income under the income-Tax Act, 1961 (the "Act"). submitted by the assessee for the assessment year 1978-79, the above income was shown in Part III of the return as not taxable being export commission from Ceat Tyres of India Ltd. According to the assessee, this amount could not be treated as royalty/technical service fees as defined in Explanation 2 to section 9(1)(vi) and the Explanation to section 9(1)(vii) of the Act. The assessing authority, Inspecting Assistant Commissioner of Income-tax, did not accept this contention of the assessee and held that the amount of Rs.23,75,366 received by the assessee under the above agreement was covered by the provisions of sections 9(1)(vi) and section 9(1)(vii) of the Act as it was paid on account, of royalty and technical service fees. Aggrieved by the above order, the assessee appealed to the Commissioner of Income-tax. (Appeals). The Commissioner (Appeals) held that the Commissioner received by the assessee for services referred to in clauses (b) and (d) of the agreement rendered to the Indian company was covered by the term "royalty" as defined in Explanation 2 to section 9(1)(vi). He also held that the commission received for the services falling under clauses (a) and (c), rendered by the assessee to the Indian company, did not fall within the definition of the royalty or technical fees. As there was no bifurcation of the amount payable for different types of services, the Commissioner (Appeals) held that on pro rata basis, 50 percent. of the commission received would be taxable as royalty or technical services fees under section 9 of the Act. He, accordingly, relieved the assessee from tax in respect of other 50 percent. of the amount received by it from the Indian company. Both the assessee and the Revenue appealed against the above order of the Commissioner (Appeals) to the Income-tax Appellate Tribunal (the "Tribunal"). The Tribunal held that payment on account of service referred to in clauses (b), (c) and (d) amounted to royalty or fees for technical services within the meaning of sections 9(1)(vi) and 9(1)(vii) of the Act. The Tribunal, therefore, held that 75 percent. of the amount of Rs.23,75,366 received by the assessee was taxable under the Act. The Tribunal, however, was of the opinion that the remaining 25 percent.. of the said amount, which was attributable to the services falling under clause (a), did not amount to royalty or fees for technical services and hence was not taxable under the Act.. As a result, the Tribunal held that 75 percent. of the export commission was taxable under sections 9(1)(vi) and 9(1)(vii). This 75 percent. admittedly, would be of the total commission received, by the assessee, which amounted to Rs.23,75,366 and not of Rs.11,87,638 as has been erroneously mentioned in the order of the Tribunal. In other words, according to the Tribunal, 75 percent. of the above amount of Rs.23,75,366 would be taxable under the Act and the remaining 25 percent. i.e., Rs.5,93,840, would not be taxable, as it was attributable to the services referred to in clause (a). Both the Revenue and the assessee are before us by way of this reference. The assessee is disputing the decision of the Tribunal in regard to the assessibility of 75 percent. of the total commission received by the assessee as royalty and fees for technical services. The Revenue is dissatisfied with the decision of the Tribunal that 25 percent. of the total commission which was attributable to the services referred to in clause (a) was not taxable.

So far as the payment of the services referred to in clause (b) of the agreement, viz., allowing use of channels of distribution in overseas markets to the Indian company and after sales services in those markets is concerned, it appears that even before the Inspecting Assistant Commissioner of Income-tax, it was the case of the assessee itself that such payment could constitute royalty or fees for technical services and that 25 percent. of the total commission which is attributable to such services could be regarded as royalty or fees for technical services.

We have heard Mr. Andhyarujina,, learned counsel for the petitioner, who fairly stated before us that in view of the fact that the assessee is a non-resident company and the dispute pertains to the assessment year 1978-79 and the taxes due as per the order of the Tribunal have already been paid by the assessee, he has instructions not to pursue the question referred at the instance of the assessee. We appreciate the fair stance of learned counsel. There is no dispute between the parties about the allocation of the expenditure for the four types of services referred to in clauses (a) to (d). The only dispute that survives, for our consideration is whether the Tribunal was justified in holding that 25 percent. of the export commission received by the assessee from the Indian company, Ceat Tyres India Ltd., as per the agreement, dated September 9, 1977, in the previous year relevant to the assessment year 1978-79 is taxable under section 9(1)(vi) or 9(1)(vii) of the Act.

We have also heard Mr. RN. Desai, learned counsel for the Revenue, and perused the order of the Tribunal. As earlier stated, the payment for three services referred to in clauses (b); (c) and (d) of the agreement has been treated by the Tribunal as royalty or fees for technical service and the same has been held to be taxable under section 9 of the Act. The assessee does not want to challenge this finding now. Hence, the only dispute before us is in regard to the taxability of 25 per cent of the commission which is attributable to the services referred to in clause (a) of the agreement. Clause (a) reads:

"(a) The -assessee would forgo in favour of Ceat, Tyres of India Ltd., export sales in various markets and in certain cases export orders would be transferred to Ceat Tyres."

The controversy is, whether payment for these services can be regarded as royalty or technical service fees, or to put in differently, whether these services would fall under section 9(1)(vi) or 9(1)(vii) of the Act. If they fall under any of these clauses, the amount so received on account thereof would be taxable---otherwise not.

Under section 9 of the Act, certain categories of income are deemed to accrue in India. This section, so far as relevant, as it stood at the material time, reads as follows:

"9. Income deemed to accrue or arise in India.---(1) The following incomes shall be deemed to accrue or arise in India--...

(vi) income byway 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 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 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 I.-...

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 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) 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 purpose of making or earning any income from any source in India;

Explanation.---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'."

From a plain reading of the above clauses, it is clear that in order to fall within the deeming provision of section 9, the income should be by way of royalty or fees for technical services. "Royalty" is defined in Explanation 2 to clause (vi) and "fees for technical services" in Explanation to clause (vii).

We asked Mr. R.V. Desai, learned counsel for the Revenue, as to under which of the items of the definition of "royalty" or "fees for technical services", according to him, the income for the services falling under clause (a) would fall. In reply, Mr. R.V. Desai submitted that the only clauses under which it could fall is clause (iv) of Explanation 2 which talks of imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience of skill. He submitted that in the alternative, it can be regarded as fees for technical service, viz., for managerial, technical of consultancy services. We have carefully considered the above submission. The Tribunal has held that 25 percent. of the commission attributable to services falling under clause (a) of the agreement cannot be treated as "royalty" or "fees for technical services". The Tribunal appears to be correct in its above conclusion. Obviously, the payment is for forgoing in favour of the Indian company export in various markets or transferring certain export orders to the Indian company. By doing so, the assessee did not impart any information concerning technical, industrial, commercial or scientific knowledge; experience or skill nor render any managerial, technical or consultancy service. In fact, the assessee had merely agreed to forgo in favour- of the Indian company certain exports in various markets and to transfer certain export orders to the Indian company. We asked Mr. Desai as how these acts can be regarded or construed as imparting information concerning technical, industrial, commercial or scientific knowledge experience or skill or tendering managerial, technical or consultancy services. There was no satisfactory answer. We have also carefully perused the language of the definition of "royalty" as contained in Explanation 2 to clause (vi) and "fees for technical services" in the Explanation to clause (vii) of subsection (1) of section 9 of the Act. We, however, fail to understand how services referred to in clause (a) of the agreement can be regarded as 'royalty' or "fees for technical services". Commission attributable to services referred to in clause (a) of the agreement, therefore, cannot be treated as "royalty" or "fees for technical services" falling under clauses (vi) and (vii) of section 9(1) of the Act. The Tribunal, in our opinion, was right in holding so.

In view of the above, we answer question No.2, which is referred to us at the instance of the Revenue in the affirmative, i.e., in favour of the assessee and against the Revenue.

Question No.1, which is referred at the instance of the assessee, is returned unanswered as desired by learned counsel for the assessee.

Reference is disposed of accordingly with no order as to costs.

M.B.A./62/FC Order accordingly