TMI Blog1987 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... tamin D. (ii) Data regarding working methods and manufacturing processes (including indications, instructions, specifications, standards and formulae), methods of analysis and quality control and other particulars to enable the Indian company to start and carry on the manufacture of vitamin D. (iii) Medical and other information relating to the pharmacological and pharmaceutical properties of vitamin D. (iv) The training of one or more technicians of the Indian company in the factory of the assessee in the Netherlands for setting up the plant as aforesaid and/or the placing at the disposal of the Indian company of a technical expert for the erection and initial working of the plant as also the training of an agreed number of qualified staff of the Indian company in the factory of the assessee in the Netherlands. (v) Assistance to the Indian company in the initial costing of production and advice on problems in respect of establishment, installation, running and administration of the said plant. (vi) Analysing in the laboratory of the assessee in the Netherlands samples produced by the Indian company free of charge of each batch of vitamin D manufactured by the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 263 of the Income-tax Act, 1961 (" the Act "), as he was of the opinion that the payments received by the assessee from the Indian company were more in the nature of royalty than technical assistance fees. The assessee preferred an appeal before the Tribunal against the order of the Commissioner under section 263. The appeal was unsuccessful. The Income-tax Officer, in the reassessment after construing the agreement in the background of Explanation II to clause (vi) of sub-section (1) of section 9, held that it was obvious that technical assistance, know-how and information furnished by the assessee to the Indian company were nothing else but royalty. He made a distinction between technical assistance fee and technical service fee. He held that technical assistance fee was paid for passing on technical information and services rendered in connection therewith whereas technical service fee was paid for rendering actual technical services. He held that the assessee had received the payments from the Indian company in consideration of passing on of certain technical know-how and information and even if certain services have been rendered in connection therewith, the entire receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for manufacture of products of the assessee in India on a fixed percentage of the net selling price of the manufactured products. He held that this payment had an element of royalty as also an element of fees. He came to the conclusion that 50 per cent. of the payments received by the assessee from Dupher Interfran Ltd. was in the nature of fees for technical assistance and information and should be taxed as such and the balance 50 per cent. should be treated as royalty and taxed in the hands of the assessee accordingly. Being aggrieved, both the Revenue and the assessee preferred appeals from the order of the Commissioner (Appeals) before the Tribunal. Before the Tribunal, it was contended on behalf of the assessee that at the material time, the word " royalty " had not been defined in the Act, and, therefore, the general meaning of the said word had to be obtained from dictionaries. The assessee cited the Random House Dictionary and the Webster's New World Dictionary, where the word " royalty " was defined, inter alia, as (a) payment by lessee to the owner of the land for privilege of working mine; (b) the amount paid to a patentee for the use of his patent; (c) payment m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legally necessary for the inventor to obtain a patent. The inventor could exploit the invention being information or knowledge of the secret process without getting it patented by sharing it with others against payment who would keep such information or knowledge secret and such payments would be payments for royalty. The Tribunal held that in the instant case, it was open to the assessee to obtain patents in respect of the manufacturing processes of its products. The assessee agreed to impart to the Indian company the knowledge and information of the process of manufacturing itself for which the Indian company was required to make payment of a fixed percentage of the turnover and to keep the information received as secret. The Tribunal held that the payment made by the Indian company to the assessee on account of the aforesaid would be royalty. The Tribunal held further that some of the information to be imparted by the assessee under the agreement, viz., providing data, assistance and information with regard to drawings and detailed instructions and directions of a plant to be set up in India by the Indian company as also general information with regard to the properties o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in inventions and designs, and rights in mineral deposits including oil and natural gas. As to inventions, royalty may be said to be compensation paid under a licence granted by the owner of a patent (the licensor) to another person (the licensee) who wishes to make use of the invention, the subject of the patent. The patent remains the property of the licensor. A licence may be exclusive, in which case the patent owner precludes himself from granting licences to third parties, or non-exclusive, in which case the patent owner may grant licences to as many persons as he wishes." (c) Wharton's Law Lexicon : In this book, " royalty " has been defined as a payment to a patentee by agreement on every article made according to the patent ; or to an author by a publisher on every copy of the book sold ; or to the owner of minerals for the right of working the same on every tonne or other weight raised. (d) Law Lexicon by Ramanatha Aiyer: In this book, " royalty has been defined to mean-(a) percentages or dues payable to landowners for mining rights; (b) sums paid for the use of a patent (c) percentages paid to an author by a publisher on the sales of a book." The learned advocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make any difference to the quality and character of payment. The measure or method of payment cannot determine the nature of the transaction involved. Learned advocate for the Revenue contended, on the other hand, that on a proper construction of the agreement between the assessee and the Indian company, it would appear clear that the assessee had at its disposal information regarding working methods and manufacturing processes of its various products which was being made available by the assessee to the Indian company. It would appear from clause 4 of the agreement that the information disclosed by the assessee to the Indian company under the agreement was meant solely for the use of the Indian company. The said clause further recorded that such information was being disclosed by the assessee in confidence to the Indian company and would not become the property of the Indian company till such information would become public. The Indian company was obliged to obtain similar undertakings of secrecy in respect of the information imparted by the assessee from its employees to the extent the latter would come to know of the same. Learned advocate for the Revenue contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... large stocks of grenades were still in existence after manufacture and that the amount of the award attributable to future use was negligible were accepted and it was held that the taxpayer had been correctly charged to income-tax. This decision was cited for the following observations made in Handley Page v. Butterworth [1935] 19 TC 328 at p. 359 by Romer L.J. in the Court of Appeal which were relied on by the Revenue. " A patentee has, of course, a monopoly, and that monopoly, which is a right of preventing other people utilising his invention, is a capital asset in his hands. He may exploit that capital asset in either or both of the following ways : he can himself exercise his invention for profit, or he can grant licences to others to do so on payment of royalty. The profit he derives by exercising the invention himself or the profit he derives from the royalty are profits and gains within the meaning of Schedule D, notwithstanding the fact that every year his capital asset is diminishing in value ...... The owner of a secret process, such as was possessed by Mr. Handley Page, stands in a very analogous position; he has not a monopoly at law, but he has a monopoly in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , what is received can be, but will not necessarily be, receipt on capital account. But imparting 'know-how' for reward is not like this any more than a teacher sells his knowledge or skill to his pupil ...... The other point is that 'know-how', though very naturally looked upon as part of the capital equipment of a trade, is a fixed asset only by analogy and, as it were, by metaphor. The nature of receipts from it depends essentially, I think, upon the transaction out of which they arise and the context in which they are received." (c) P. H. Divecha v. CIT [1963] 48 ITR 222 (SC) : This decision of the Supreme Court was cited for the proposition laid down as follows (p. 232): "It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as 'pay', 'remuneration', etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets that the assessee would acquire. They cannot, strictly speaking, be said to be the purchase price of these assets. It is true that the assessee's foreign principals would be imparting their 'know-how' to the assessee for reward; but that is nothing more than a teacher selling his knowledge or skill to his pupil. The assessee's foreign principals were merely supplying technical information to enable the assessee to carry on business in terms of the agreement." (f) CIT v. Gilbert Barker Mfg. Co. [1978] 111 ITR 529 (Bom): In this case, it was held by a Division Bench of the Bombay High Court on facts that it was possible to make available know-how by one person to another on the basis of a licence and the same would be a method of carrying on a business by the person who has the know-how. The court quoted with approval the observation of Romer L.J. in the case of Handley Page [1935] 19 TC 328 (CA) which has been noted earlier. (g) CIT v. Ahmedabad Mfg. Calico Printing Co. [1983] 139 ITR 806 (Guj): In this case, the assessee, an Indian company, entered into an agreement with an English company under which the foreign company granted to the assessee sole and exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee maintained technical research establishments in the United Kingdom from which latest information, processes and invention relating to goods manufactured by the assessee were communicated to its subsidiaries and associate companies. Under an agreement entered into by and between the assessee and its Indian subsidiary, the latter agreed to pay to the assessee a proportionate part of the cost and expenses including salaries and research and development expenditure incurred by the assessee for acquisition, discovery and development of information, processes and invention. The Government of India permitted the Indian subsidiary to pay to the assessee research contribution to be paid on the volume of sales by the Indian company subject to a ceiling. The question arose whether the amounts paid by the Indian subsidiary to the assessee were payments of or in the nature of royalty or the same were merely reimbursement of expenses. It was held by a Division Bench of this court on the facts as found that payment was made by the Indian subsidiary to the assessee for sharing of expenses of research. It was noted that the agreement did not provide as to ultimately what would happen to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dictionary meaning of the terms " royalty " and " fee ". It was observed that the " nomenclature " used by the parties which were not defined in the statute were required to be construed on the basis of commercial principles and concepts as understood generally by people in trade or commerce. The nomenclature given by the parties would not be conclusive or decisive of the matter. (j) Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar): This judgment is that of a learned judge of the Karnataka High Court delivered in a writ petition. In this case, the assessee, a non-resident company, incorporated in Japan, entered into a collaboration agreement with the Government of India under which the assessee agreed to supply technical know-how to the Government for establishment of a modern watch factory in India. The Government set up a company known as Hindustan Machine Tools Ltd. wholly owned by the Government and transferred its rights, obligations and responsibilities under the agreement with the assessee to the Indian company. The agreement provided for payment of various amounts to the assessee for services and the technical know-how to be provided by the assessee to the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dictionary meaning of the term " royalty ", it appears that the said term connotes payments periodic or at a time for user by one person of certain exclusive rights belonging to another person. The examples of such exclusive rights are rights in the nature of a patent, mineral rights or rights in respect of publications. It appears to us that the person who grants the user of the exclusive right might have the sanction of law which guarantees the exclusiveness. Such sanction may be obtained by taking out a patent in respect of an invention. In other cases, such exclusive right would arise from the ownership of mineral rights and protected by the laws relating to property. In respect of books and publications, the exclusive right of the author is protected and sanctioned by the laws of copyright. It is possible that a person who invents may not take out a patent for his invention but unless some other inventor independently and by his own efforts comes to duplicate the invention, the original invention remains exclusive to the inventor and it is conceivable that such an inventor might exploit his invention permitting some other person to have the user thereof 'against payment' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew, goes beyond the concept of assistance and falls into the category of a right of user of an exclusive property right. For the reasons as aforesaid, we accept the conclusion of the Tribunal and hold that the information agreed to be supplied by the assessee in respect of working methods and manufacturing processes of the product under clause 2(ii)/(iii) are exclusive information and knowledge available to the assessee and not generally disseminated and payment in respect thereof would bear the character of royalty. For the reasons as aforesaid, we answer the question referred in the affirmative and in favour of the Revenue. The reference is disposed of accordingly without any order as to costs. SHYAMAL KUMAR SEN J.-While agreeing with my learned brother, I wish to add the following: The facts that the company would keep all information received from the assessee solely for the purpose of its use in its factory and would treat the same as having been disclosed in confidence and that it shall not become the property of the company until such time as and to the extent that such information or any part thereof becomes public. As a result, the user or disclosure really sho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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