TMI Blog1980 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... pany could manufacture under the permission granted under the said agreement This amount calculated at one per cent. of the net sale proceeds was to be paid as " research contribution" under cl. 17 of the agreement. The payment agreed to be made to the foreign company was tax-free, that is, the tax chargeable on these payments was to be borne by the assessee and the foreign company was to receive only the net amount. The ITO worked out the gross contribution at Rs. 1,62,330 and determined tax at 70 per cent. thereof at Rs. 1,13,632. According to the assessee, the rate at which tax was deductible on the remittances made in accordance with the provisions of s. 1 of the Act read with the Finance (No. 2) Act of 1971 was 50 per cent. The claim of the assessee was that the impugned payments made were " royalties " and as such, the tax to be deducted at source was 50 per cent. while the ITO was of the view that the impugned payment was research contribution and as such was covered by the residuary clause in para. 2(ii) Part II of Schedule I of the Finance (No. 2) Act, 1971. This decision of the ITO was upheld in appeal by the AAC. The assessee carried the matter in further appeal to the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable thereon. As pointed out above, the U.K. company was entitled to receive Rs. 48,698 being one per cent. of the net sale proceeds of the products, which were manufactured and sold in India and other territories, covered by the agreement in accordance with the terms of the agreement dated August 28, 1961. The relevant provisions of law are as follows: Under s. 195 of the I.T. Act, provision is made for tax deduction at source in respect of some of the sums mentioned in that section. Sub-s. (1) of s. 195 provides : " Any person responsible for paying to a non-resident, not being company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being 'interest on securities', or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force." The proviso to sub-s. (1) is not material for the purposes of this judgment. Under sub-s. (2) of s. 195: "Where the person responsible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 50 per cent. in the case of payment of income by way of royalties, or under cl. (v) which provides for income-tax at the rate of 70 per cent. on any other income. Mr. Desai, appearing for the Revenue, has urged that, in fact, the appeals to the AAC and thereafter to the Tribunal were both incompetent as the AAC had no jurisdiction under the I.T. Act to entertain the appeal. In this connection, he relied on the provisions of s. 246 of the I.T. Act, 1961, and contended that since this was not an appealable order as set out in s. 246, no appeal lay to the AAC against the decision of the ITO as set out in the letter dated November 21, 1971, to the assessee. Now we find that this very contention was urged before the Income-tax Appellate Tribunal, and in para. 7 of its order the Tribunal dealt with this contention in these words: " Before we close, we would like to deal with another contention raise on behalf of Revenue in regard to admissibility of this appeal. Since we have taken the view in the earlier years that an appeal on this point was competent, this contention also fails. " Thus the Tribunal rejected the contention urged on behalf of the Revenue that the appeal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), had been relied upon had been marshalled in aid. In these decisions, the Supreme Court had laid down that in a reference under the I.T. Act the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under s. 66(1). If he has failed to file an application under s. 66(l) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or another. Where that principle applies it is not open to the assessee to contend on the question raised that the finding of the Tribunal was not supported by the evidence. These decisions are in the context of pure findings of fact which have to be specifically challenged by raising expressly the question that the finding is perverse or unreasonable and not supported by the evidence on record This line of decisions has no application whatever where the finding of the Tribunal raises either a pure question of law or a mixed question of law. In the two latter categor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at behalf in the application under s. 256(1) and since that was not done, we are not going into the question and we will only deal with the question which is referred to us. Therefore, the first submission made on behalf of the Revenue must fail. As regards the question as to what is meant by the word " royalty the Tribunal is right when it says that the word " royalty " is nowhere defined and it is in the light of the general legal principles relating to royalty that the question has to be decided, looking to the terms of the agreement entered into between the parties, namely, between the assessee company and Vinyl Products Ltd. of the U.K. The agreement, dated August 25, 1961, is annex. E to the statement of the case and it points out in the second part of the preamble that the company, that is M/s. Vinyl Products Ltd., is a manufacturer of certain vinyl polymers and complymers, in the form of emulsion, solutions and solid resins based on the vinyl monomers such as vinyl acetate, styrene and esters and salts of acrylic and methacrylic acids and others and derivatives of these and similar resins and certain monomers produced by a process of ester interchange such as vinyl capra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used by or known to the company for the manufacture of the products and as occasion might arise with all and any improvements, modifications and verifications thereof and any new products based on synthetic resins discovered or developed during the course of the agreement and to instruct Calico in the use of such products, their formulations and method of manufacture. Clause 7 stated that where the company was the proprietor of a trade mark registered in India which was used in relation to the said products, the company was bound to produce, if so desired by Calico, a registration of Calico as exclusive registered user of such trade mark in respect of the said products. Under cl. 12 of the agreement, Calico undertook to maintain and preserve the secrecy of the formulations and methods and processing the products and all improvements, modifications and variations thereof. Calico was to designate a representative to receive such information from the company who would be responsible for its safe custody. Calico was to instruct such nominee not to disclose to outside parties any secret information received from the company and to disclose such information to employees of Calico only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this agreement." Under cl. 19 of the agreement, the term and duration of the agreement was to extend from the date of signing of the agreement for a period of 10 (ten) years and thereafter as mutually agreed or unless determined by one year's notice but such notice could not be served before the end of the ninth year of the agreement. This agreement was subject to the approval of the Govt. of India, and it is on record that, in fact, the agreement was approved by the Govt. of India. The question, in the light of the provisions which we have set out hereinabove, is whether the payment of what is referred in cl. 17 as a research contribution, amounted to Cc royalty " as known to law. In Corpus Juris Secundum, Vol. 77, at p. 542, it has been mentioned: " Defined generally, the word 'royalty' means a share of the product or profit reserved by the owner for permitting another to use the property ; the share of the production or profit paid to the owner; a share of the product or proceeds therefrom reserved to the owner for permitting another to use the property; the share of the produce reserved to the owner for permitting another to exploit and use the property; a share of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to moneys that are received by a patentee in respect of the use of the patent by a licensee of the patent or by an author from a publisher for the right to publish a literary work. The word 'royalty' is also commonly applied to moneys which the lessee of a mine pays to the lessor for the right to work it ; the amount of the royalty may be fixed by reference to quantities of material won from the mine. Hence in its business or commercial sense the words may be used to refer to moneys which are part of the proceeds of the sale of a capital asset." It has also been pointed out in the context of Australian decisions: ".. ......... in its primary and natural sense 'royalties' is merely the English translation or equivalent of regalitates, jura realia, jura regia. To say that the uses of the word are now figurative and represent analogies to the revenues which some jura realia were seen to yield to the Crown does not help much to ascertain the scope of present usage. It may be noted, however, that the modern applications of the term seem to fall under two heads, namely, the payments which the grantees of monopolies such as patents and copyrights receive under licences and, payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssor by way of rent for the right or privilege of taking oil or gas out of a designated tract of land, and such interest is not subject to deductions for operation, maintenance, and management charges, by the lessee, and it is for that reason that such an interest is usually referred to as a gross royalty The remaining interest in production which are sold to the public in order to obtain capital, only participate in production after operating; and management expenses and other charges, are deducted and hence are usually referred to as net royalties." In Encyclopaedia Britannica, 1972, Edn., Vol. 19, at p. 676, the word " royalty " is accepted to be: " the payment made to the owners of Certain types of rights by those who are permitted by the owners to exercise the rights. The rights concerned are literary, musical and artistic copyright, rights in inventions and designs, and rights in mineral deposits, including oil and natural gas. The term originated from the fact that in Great Britain for centuries gold and silver mines were the property of the Crown; such 'royal' metals could be mined only if a payment ('royalty') were made to the Crown . ...... An individual inventor wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to use the invention but also undertakes to supply the licensee with technical 'know-how', that is to say, information from his own experience on the most efficient and economical way of working the patent. It is estimated that more than 50% of licence contracts include 'know-how' provisions. When applied to industrial designs, the meaning of the word "royalty" is roughly the same as in the case of patented inventions. Designs, depending on their nature or the various national laws, may be protected by patents, copyright or registration. The form of legal protection, however, does little to change the system of royalty payment as described in regard to patents." It is thus clear that in the case of secret processes, patents, special inventions, when right of exploitation is given by the owner of the inventions, patents, etc., to a third party, instead of outright sale, then, for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be co-related to the extent of exploitation. It is in this sense, as pointed out by Encyclopaedia Britannica that licence agreements for the exploitation of patents, inventions, etc., are be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to avoid double taxation, between India and the foreign country. Between India and Sweden an agreement was entered into in January, 1959, and in article VII of that agreement between India and Sweden it was provided: " Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory." " In this article, the term 'royalty' means any royalty or other like amount received as consideration for the right to use copyright, artistic or scientific works, patents, models, designs, plants, secret processes or formulae, trade-marks and other like property or rights, but does not include any royalty or other like amount in respect of the operation of mines, quarries or other natural resources, or in respect of cinematographic films." Similar agreements regarding exemption from double taxation were entered into between India and Denmark, India and Norway, India and Finland, India and Austria, India and Greece, India and the United Arab Republic, India and France and India and Belgium. In each of these agreements, the word " royalty " has been defined to mean any royalty or the like amount received as considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The Supreme Court accepted the principle laid down in Ormond Investment Co. Ltd. v. Belts [1928] AC 143 at page 156. Similarly, in ITO v. Mani Ram [1969] 72 ITR 203 (SC), the Supreme Court pointed out at pp. 210, 211 of the report: "Generally speaking, a subsequent Act of Parliament affords no useful guide to the meaning of another Act which came into existence before the later one was ever framed. Under special circumstances, the law does, however, admit of a subsequent Act to be resorted to for this purpose but the conditions under which the later Act may be resorted to for the interpretation of the earlier Act are strict; both must be laws on the same subject and the part of the earlier Act which it is sought to construe must be ambiguous and capable of different meanings." And a passage from the decision of the House of Lords in Kirkness (Inspector of Taxes) v. John Hudson and Co. Ltd. [1955] AC 696 was cited (at p. 211): " I have looked at the later Acts to which the Attorney-General referred to in order to satisfy myself that they do not contain a retrospective declaration as to the meaning of the earlier Act, they clearly do not, and I do not think that it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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