TMI Blog1992 (5) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... ot detain us here. Suffice it to note that the said agreement was initially in force for a period of ten years from 1-7-1965. The period of its currency was extended for another five years, that is to say, up to 30-6-1980. 3. Subsequently, on 12-11-1980, RBL and the non-resident company entered into what was styled " Technical Aid Agreement ". The said agreement was to be in force for a period of five years from 1-1-1981. The operative portions of this rather short agreement are reproduced below : " 1. For a period of five years from 1st January 1981 DIL shall provide a comprehensive research and development support service, including but not confined to engineering service, production service, quality control and equipment selection, for Rane and all future developments in the manufacture and use of friction materials originated by the DIL research and development division shall be available to Rane at their request. Further, Rane shall have the option to extend the Technical Aid Agreement for a further period of five years on the same terms subject to the approval of Government of India. 2. During the continuance of this agreement DIL undertakes not to enter Into a technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee under the Technical Aid Agreement was in the nature of fees for technical services as defined in section 9(1)(vii) of the Act. Consequently, under section 115A of the Act, the consideration received by the assessee ought to have been brought to charge at 400/6 and not at 20%. He, therefore, put the assessee on notice of his intention to pass suitable order in revision under section 263 of the Act. The assessee responded by contending that the consideration received by it under the agreement in question was only by way of royalty and that consequently, under section 115A(1)(b)(iii) the lump sum consideration in question was chargeable to tax at 200/6 and not at 40%. The said contention did not find favour with the CIT. He took the line first that the consideration received by the assessee under the agreement in question was fees for technical services and that consequently tax was exigible thereon at 40%. Secondly, even if it was assumed that the receipt in question was royalty, the assessee could not get the benefit of the lower rate of taxation of 20%, because the said lower rate was applicable only to royalty consisting of a lump sum consideration. In the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain whether the services contemplated under cl. 1 have been rendered outside India or not. We are also not able to agree with the conclusion of the Commissioner that the entire payment under the agreement would fall to be charged at 40%. Under section 115A(1)(b)(ii) a low rate of tax at 20% is to be charged on the income included in the total income by way of royalty as consists of lump sum consideration for the transfer outside India or the imparting of the information outside India in respect of any data, documentation, drawings or specification relating to any paten, invention, model, design, secret formula or process or trade mark or similar property. Cl. 1 of the agreement in our opinion, enumerates two kinds of services. One is a comprehensive research and development including but not confined to engineering service, production service, quality control and equipment selection for the Indian company. The second is to provide all future developments in the manufacture and use of friction materials originated by the assessee-company's research and development division to be available to the Indian company at their request. Though the first category may not fall within the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division, to be available to the Indian company at their request. In this view of the matter and taking into account the fact that no specific percentage can be ascertained having regard to the scanty information given by the assessee, I feel it is better to go by the averages. I would consider it fair to apportion it at the ratio of 2 : 1 respectively for the category I and category II mentioned in the Tribunal's order. The main reason for apportioning 66 2/3% of the technical fees towards the liability under section 115A(1)(b)(ii)(2) is that the assessee has not been able to conclusively prove that majority of the amount came under the categories specified under section 115A(1)(b)(ii)(1). I have made a careful study of the replies given by the assessee as well as Rane Brake Linings Limited. These are general statements without specifically identifying the income to the types of services rendered. The agreement between the assessee and the Indian Company is also vague in this regard. In the circumstances, I have no alternative but to make a reasonable apportionment having regard to the facts and circumstances of this case. Having regard to these aspects, 2/3rd of the amount paid w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee-company under the Technical Aid Agreement in question was one of the issues that came up for consideration. Teating the said consideration as lump sum royalty, the assessing officer brought it to tax at 20%. For this year also there was no discussion either as respects the nature of the consideration or as, respects the rate at which the consideration was to be brought to tax. 12. To make the picture complete, it may be mentioned that though the assessee had filed an appeal before the CIT(A) on other issues, there was no appeal on the exigibility issue relating to the consideration received by the assessee-company under the Technical Aid Agreement. This is not surprising, because the assessing officer had brought to charge the said consideration at the lower rate of 20%. 13. Thereupon, invoking the powers vested in him by and under the provisions of section 263 of the Act, the Commissioner called for and examined the assessment records of the assessee relating to the assessment years 1983-84 to 1986-87 (both inclusive). On such an examination, he found (i) the common order dated 17-2-1988 passed by the assessing officer to give effect to the common order dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. RBL. A proper evaluation of the material produced would clearly show that the entirety of the consideration was taxable only at the lower rate of 20%. The CIT was, therefore, not justified in holding that while 2/3rd of the consideration was to be taxed at 40%, the balance of 1/3rd only could be taxed at 20%. 17. From a specific query in this regard from the Bench, Shri Dalvi contended that the question whether the relevant information was imparted by the assessee-company to the Indian company outside India was not in issue. He went to the extent of contending that the case had proceeded on the footing that the transfer of information etc. had taken place outside India. 18. As regards the assessment years 1983-84 to 1986-87 (both inclusive), Shri Dalvi made an additional point based on the doctrine of merger. The assessment orders passed initially by the assessing officer for these years were the subject-matter of appeal before the CIT(A). For a fact, for the assessment years 1983-84 to 1985-86, the order in revision is directed against the common order dated 17-2-1988 passed by the assessing officer to give effect to the common order dated 21-1-1988 of the CIT(A). He, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n do not invite any interference. 22. We have looked into the facts of the case. We have considered the rival submissions. 23. We may clear the decks as it were by considering at the outset (i) the jurisdictional issue relating to the assessment years 1983-84 to 1985-86 (both inclusive), and (ii) the precise finding and directions given by the Tribunal in its order dated 17-10-1986. The jurisdictional issue may be considered into two parts, namely, one relating to the assessment years 1983-84 to 1985-86, and other relating to the assessment year 1986-87. The issue relating to the assessment year 1986-87 does not present any difficulty. As pointed out earlier, in the assessment order for this assessment year, which was passed on 12-2-1988, the assessing officer had brought to tax the consideration in question at 20%. Naturally, the assessee was not dissatisfied with the said decision of the assessing officer. Therefore, there was no question of the assessee making this issue a subject-matter of appeal before the CIT(A). True, the assessee had filed an appeal against the said assessment order, but the issue canvassed therein concerned the exigibility issue relating to capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not subordinate to the Commisssioner or the Deputy Commissioner, the Court went on to point out that if the Agricultural Income-tax officer made any mistake in carrying out the directions given by the Tribunal, to that extent his order would be liable to be revised by the Dy. Commissioner or the Commissioner. This ruling goes clearly against the contentions of the learned counsel for the assessee in this regard. Secondly, the mere fact that an appeal had been filed not on the issue which was the subject-matter of an order in revision by the Commissioner but on other issues, cannot enable the assessee to invoke the doctrine of merger. In the case of Investment Trust of India Ltd. v. ITO [1991] 37 ITD 100 the ITAT Madras Bench ' C ' on an exhaustive review of the decisions of the jurisdictional High Court on this issue, held inter alia, that the jurisdictional High Court had consistently taken the line that the doctrine of merger could be invoked only in cases in which the subject-matter of revisionary jurisdiction was already considered and decided by the appellate authorities. The said doctrine cannot be invoked in cases where an appeal had been filed not on the issue which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(1)(vi) of the Act. It is only thereafter that the related question of the rate to be applied can be considered. 29. It is, therefore, necessary first to ascertain the nature of the consideration received by the assessee under the agreement in question. For this purpose, it is necessary to examine the relevant provisions of the Income-tax Act, 1961. 30. Under the scheme of the Act, the ambit of taxation varies with the factor of residence in the relevant previous year. As respects non-residents, the following categories of Income are charged to tax : (a) (i) Income received by the non-resident in India. (ii) Income deemed to be received by the non-resident in India. In either case, the date or place of accrual of the income is immaterial. (b) (i) Income which accrues or arises in India. (ii) Income which is deemed to accrue or arise in India. In either case, the date or place of receipt of the income is immaterial. If in a particular case the income received by a non-resident satisfies the receipt or the accrual test, then tax will be eidgible thereon on that score alone. If, however, both the above tests fail, then section 9 will get activated to see whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Government or any State government ; (b) Royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India, or to any other source of his income outside India ; and (c) Royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. (iii) The proviso to clause (vi) lays down that the deeming provisions will not apply to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or imparting of information outside India in respect of any date, documentation etc., if such lump sum consideration is payable in pursuance of an agreement made, actually or constructively, before 1-4-1976 and the agreement is approved by the Central Government. B. Fees for Technical Services--Section 9(1)(vi) (i) As in the case of royalty, so in the case of fees for technical services, the Legislature has, for the first time, introduced a definition of the term. (ii) The following types of fees are deemed to accrue in India : (a) Fees payable by the Central Government or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in section 9(1)(i) which is a general provision. If any authority is needed for this proposition, it is to be found in the case of Meteor Satellite Ltd. This is what the Court observed at p. 3.21 of the report : " One of the contentions urged by Mr. Desai was on the question of interpretation of section 9(1), clause (vi) and he contended that even if the proviso to clause (vi) of section 9(1) applied, the only thing that the provision would help the petitioner in doing would be to take this particular income by way of royalty out of the provisions of clause (vi) but that would still leave the matter open to be brought under clause (i) or clause (vii) of section 9(1). In our opinion, this contention must fail. Clause (vi) of section 9(1) deals with a specific type of income, namely, income by way of royalty, whereas clause (i) of section 9(1) is a more general provision, which deals with all incomes accruing or arising whether directly or indirectly, through or from, any business connection in India. Income by way of royalty is a species or one of the categories of a larger class mentioned in clause (i) of section 9(1) and, hence, the specific instance having been provided by cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (vi) contains special provisions and will, by the same token, prevail over clause (vii). A related argument merits attention here. It could perhaps be argued that, since the activity of deputing technical personnel could well be brought within the pale of Explanation 2 to clause (vii), the consideration payable under the collaboration agreement must be regarded as a composite consideration and should, therefore, be allocated or apportioned between the two heads, viz. royalty and technical fees. This argument too must be rejected for two reasons. Neither clause (vi) nor (vii) authorises such an allocation or apportionment. [Notice that this is in market contrast to the provisions of Explanation (a) to clause (i) of section 9(1)]. Further, when the activity of deputing technical personnel (which, in the illustration, is incidental to the imparting of information concerning the secret formula) gets properly subsumed under item (vi) of Explanation 2 to clause (vi), recourse to clause (vii) is totally shut out for that reason alone. 36. In the case before us, we are concerned with a post 31-3-1976 agreement, and hence it is unnecessary to notice the proviso and Explanation 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amine the facts of the case before us in the light of the foregoing legal position. 41. We may first glean from the Technical Aid Agreement in question the exact details and the contractual obligations of the assessee-company and ascertain with reference to the definition of the terms ' royalty ' and ' fees for technical services ' contained in the Explanation 2 to section 9(1)(ii) and 9(1)(vii) respectively. whether the consideration received by the assesseecompany is ' royalty ' or ' fees for technical services '. The details abstracted in the concordance table below will clearly indicate that it was 'royalty' within the meaning of section 9(1)(vi) that was paid by the Indian company to the assessee-company : ----------------------------------------------------------------------------------------------------------------------------------------------- Paragraph Activity/task to be performed Item of No. of the Expln. to section Agreement 9(1)(vi) in which the activity falls ----------------------------------------------------------------------------------------------------------------------------------------------- 1 2 3 ------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 9(1)(vi), the latter would prevail over the former. 43. In view of the foregoing, therefore, we hold that the case before us is one of royalty. We may here highlight the fact that, as pointed out in paragraph 34 supra, there is no question of apportioning the consideration in question between the two heads, namely, ' royalty ' and fees for technical services '. 44. The question that then arises for consideration is what is the rate of taxation to be adopted? (20% under section 115A(1)(b)(ii) or 40% under section 115A(1)(b)(ii)(2). To be entitled to be taxed at the lower rate of 20 per cent, it should be shown not only that the royalty consists of lump sum consideration but also that such consideration was for the transfer outside India of or the imparting of information outside India in respect of any data, documentation, drawing or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property. In the case before us, as has been held by the Tribunal in its order dated 17-10-1986, the royalty consists of a lump sum consideration. Still, it is necessary to find whether such consideration was for the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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