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Issues involved: Interpretation of whether a lump sum payment made by a resident company to a non-resident company for supply of designs and drawings constitutes 'income' by way of royalty under section 9(1)(vi) of the Income-tax Act.
Summary: The High Court of Andhra Pradesh considered a reference under section 256(2) of the Income-tax Act regarding a payment made by an Indian company to a non-resident company for technical drawings towards engineering for a kiln. The Income-tax Officer treated the payment as royalty and assessed it at 20%. The Appellate Tribunal, however, concluded that the payment was for a capital asset supplied from abroad and not royalty. The main contention was whether the payment constituted royalty under section 9(1)(vi) of the Act. The Revenue argued that the payment was royalty under section 9(1)(vi) of the Act, while the assessee contended that it was for a capital asset. Section 9(1)(vi)(b) of the Act deems income to accrue or arise in India if paid as royalty, unless used for business outside India. The definition of "royalty" in Explanation 2 includes consideration for imparting information on patents, designs, or technical knowledge, excluding capital gains. The Tribunal found that the payment was for construction/installation of a kiln, not for imparting technical information, thus not falling under the definition of royalty. The Court, after examining the terms of the agreement and nature of the transaction, held that the payment was for a capital asset and not for imparting technical information or designs. Therefore, the Court ruled in favor of the assessee, stating that the payment did not constitute income by way of royalty under section 9(1)(vi) of the Income-tax Act.
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