1991 (6) TMI 92 - AT - Income Tax

Issues Involved:
1. Taxability of technical services fee as 'royalty' or 'fees for technical services'.
2. Applicability of tax rates under section 115A(1)(b)(ii)(1) and section 9(1)(vi) of the I.T. Act.
3. Interpretation of the collaboration agreement between the assessee-company and BEL.

Detailed Analysis:

1. Taxability of Technical Services Fee as 'Royalty' or 'Fees for Technical Services':
The primary dispute revolves around whether the technical services fee of Rs. 35,90,934 received by the assessee-company should be taxed as 'royalty' or 'fees for technical services'. The Income Tax Officer (ITO) treated the sum as 'fees for technical services' and taxed it at 40%, while the Commissioner of Income Tax (Appeals) [CIT(A)] held it as 'royalty' taxable at 20%.

The assessee, a foreign company, had an agreement with Bharat Electronics Ltd. (BEL) for the delivery of technical data outside India, with a lump sum consideration of US $ 18,60,000. The ITO viewed the collaboration agreement comprehensively and treated the payment as 'fees for technical services'. However, the CIT(A) accepted the assessee's contention that it should be taxed as 'royalty'.

2. Applicability of Tax Rates under Section 115A(1)(b)(ii)(1) and Section 9(1)(vi) of the I.T. Act:
Section 115A prescribes different tax rates for 'royalty' and 'fees for technical services'. According to sub-clauses (ii) and (iii) of section 115A(1), income by way of 'royalty' is taxed at 20%, while 'fees for technical services' is taxed at 40%. The key issue is whether the lump sum payment of US $ 18,60,000 falls under 'royalty' as per Explanation 2 to section 9(1)(vi) or 'fees for technical services' as per Explanation 2 to section 9(1)(vii).

The collaboration agreement specified different payments for various services:
- Article 13.1.1: Lump sum consideration of US $ 18,60,000 for transfer of technical know-how outside India.
- Article 13.1.2: Fees of US $ 9,50,000 for rendering technical services outside India.
- Article 13.1.3: Fees of US $ 6,50,000 for imparting training to BEL engineers abroad.
- Article 13.1.4: Payment of US $ 8,000 per man per month for services rendered in India.
- Article 13.3: Recurring royalty of 4%.

The Tribunal noted that the lump sum payment of US $ 18,60,000 specified in Article 13.1.1 was for the transfer of technical know-how, which falls under the definition of 'royalty' as per Explanation 2 to section 9(1)(vi).

3. Interpretation of the Collaboration Agreement:
The ITO argued that the entire agreement should be viewed comprehensively, treating all payments as 'fees for technical services'. However, the Tribunal disagreed, emphasizing that the agreement clearly specified separate considerations for different services. Article 21 of the agreement, which dealt with the transfer of know-how, was not merely procedural but indicated a distinct activity for which the lump sum payment was made.

The Tribunal found no substance in the ITO's contention that the transfer of technical know-how was intimately connected with other activities and should be treated as part of 'fees for technical services'. The Tribunal agreed with the assessee that the payment for transfer of technical know-how was 'royalty' and not 'fees for technical services'.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the lump sum payment of US $ 18,60,000 for the transfer of technical know-how outside India qualifies as 'royalty' under Explanation 2 to section 9(1)(vi) and should be taxed at 20%. The department's appeal was dismissed. The Tribunal also noted that for subsequent instalments of the same agreement, the department had accepted the assessee's stand, further justifying the dismissal of the appeal.

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