TMI Blog1982 (8) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... Now it would be relevant to refer to the relevant provisions of the said Act. The First Schedule to the said Act provides rules for computing the chargeable profits under the provisions of that Act. Rule stipulates that income, profits and gains and other slims falling within the clauses mentioned thereafter should be excluded from the total income of cls. (ix) and (x). Clause (ix) of r. 1 of the First Schedule to the said Act reads as follows : "income by way of royalties received from Government or a local authority or any Indian concern." Clause (x) reads as follows: "In the case of a non-resident company which has not made the prescribed arrangements for the declaration and payment of dividends within India, its income by way of any interest or fees for rendering technical services received from Government or a local authority or any Indian concern." The question before us is whether the amounts mentioned in the orders which are under appeal before the Tribunal would come within the expression " income by way of royalties received from local government or local authority or any Indian concern " and similarly " in the case of a non-resident company ", which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is an exhaustive agreement. It has several clauses containing definitions about drawings and various other things. This agreement was entered into by and between the assessee, STANTON IRONWORKS COMPANY LTD., which was incorporated in Great Britain and whose registered office is situated at Stanton by Dale in the County of Derby which is called in the agreement as " Stanton " which was said to include its subsidiary and controlled companies of the one part and the Indian Iron Steel Company Ltd., as we have mentioned, which is called IISCO of the other part. On behalf of the as it was claimed that this agreement could properly be described as technical know-how collaboration agreement and the amounts paid in respect of different items should be considered to be royalties or fees and would not merit consideration as commission. In order to decide the controversy it is material to refer to certain relevant clauses. The agreement recites that the Stanton had authorised IISCO to establish and work a plant at Kulti for the manufacture of centrifugally cast iron pipes and joints for use therewith. The agreement was called "Export Agreement" supplemental to the Manufacturing Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the erection of the Kulti extension and in particular the installation and starting up of the Specialist Plant; (iii) During the continuance of this agreement to permit IISCO to send to Stanton's plant at Stanton by Dale on reasonable notice such employees (not exceeding ten in all) of IISCO as IISCO shall, deem suitable to be trained to operate the Specialist Plant to be incorporated in the Kulti extension which training Stanton hereby agrees to use its best endeavours to impart and which shall include instruction in what is in the opinion of Stanton the best method of operating the Specialist Plant; (iv) Generally during the continuance of this agreement to act as consultants to IISCO on the manufacture of Stanton Products and as such consultants to advise IISCO on, problems of a technical nature including the imparting to IISCO of particulars of all improvements in the manufacturing technique of Stanton products made by Stanton as a result of research, work carried, out by Stanton during the continuance of this agreement and which in the opinion of Stanton would be of assistance to IISCO in reducing the cost of production and/or increasing the quality of Stanton products man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides as follows: "(a) A commission at the specified rate (as hereinafter defined) on the nett selling price (as hereinafter defined) of all Stanton products manufactured and sold by IISCO during the continuance of this agreement, such commission to become due and payable in the manner specified in cl. 6 hereof. The specified rate in respect of all Stanton products manufactured prior to the reduced commission date shall be three per centum and thereafter one and a half percentum. The nett selling price above referred to shall mean the nett price, at the plant of manufacture realised by IISCO: (b) Except always in so far as: may otherwise be agreed in writing from time to time an amount equivalent to the cost to Stanton of all salary and travelling expenses (including board while in IISCO territory) of the engineer whose services shall be lent to IISCO pursuant to clause 2 of this agreement and all other engineers or other employees of Stanton whose services Stanton may hereafter agree shall be lent to IISCO in connection with the operation Of any plant of IISCO for manufacture of Stanton products or the construction of any plant by IISCO for such purpose or advice in regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the trade mark or trade name STANTON ". The Tribunal referred to the several clauses which we have mentioned hereinbefore and it also noted the contentions urged on behalf of the respective parties. The Tribunal was of the view that the agreement could be actually termed as, a collaboration agreement by virtue of which the non-resident assessee-company had allowed the Indian company to use its patents, privileges, technical information, etc., for a limited period and at a price. The non-resident company had placed at the disposal of the Indian company its services through its employees and had also agreed to train up the personnel or employees of the IISCO. The agreement related to the manufacture of Stanton products which briefly meant cast iron pipes and joints for use therein. Then the Tribunal referred to the several clauses relevant for the purpose of the contentions urged before the Tribunal and set them out in its order. The Tribunal observed that on a careful reading and on a conspectus of the above clauses, it would be evident that the amounts in dispute represented fees for rendering certain technical services envisaged in subcls. (ii), (iii) and (iv) of cl. 2 and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t constitute income but were capital receipts representing the price of the minerals removed. It was held by the Privy Council affirming the decision of the High Court at Patna, (i) that the salami was paid for the acquisition of the right, of the lessees to enjoy the benefits granted to them by the lease and that right being a capital asset, the money paid to purchase it was a payment on capital account, (ii) that the minimum royalty being a species of annual guarantee was income flowing from the covenants in the lease and was in no sense a payment on capital account, (iii) that it was fallacious to envisage the royalty payable every year under the terms of the lease as merely the price of the actual, tons of coal; it was compensation which the lessees paid the lessor for that species of occupation which the contract between them allowed and it was, therefore, income from other sources within the meaning of s. 12 of the Indian I.T. Act, 1922. If the receipts were income, it was not material for tax purposes that that for which they are paid came from a waste property. It may be mentioned, as it would be apparent from the facts given before, that the concept of royalty was discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to th employees of the IISCO. The Tribunal then referred to the circulars issued by the CBDT, from time to time on foreign collaboration agreements, technical fees of the know-how an as to how they were to be understood. Our attention was drawn to Circular No. 21 of 1969, dated 9th July, 1969, which would be found in the Statute portion at p. 19 of 73 ITR. The circular was issued on the subject of foreign technical collaboration, payments for technical know-how, etc. This circular was issued in clarification of certain facts. Paragraph 8 of the said circular refers to the participant's tax liability in a foreign collaboration agreement in the context Of capital and revenue receipts. Paragraphs 8, 9 and 10 of the said circular stated as follows: "8. As regards the foreign participant's tax liability also, the first question would be whether the amount received for the supply on technical know-how, is a receipt on capital account or on revenue account. The answer would again depend on the facts of the case. It has to be observed that the nature of the outgoing in the hands of the Indian participant will not always be determinative of the nature of the receipt in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the various services rendered under the agreement. Ordinarily, a payment expressed as a percentage of the sales in India is to be treated as payment of royalty and taxed in India. When the payment is stated to be for technical know-how or services rendered abroad but is related to the sales, the Income-tax Officer will have to go into the facts of the case and determine the extent to which the payment attributed to technical services abroad represents in fact payment for, (i) services abroad, (ii) services in India and (iii) royalty or extra royalty for exploiting the know-how in India. It is therefore necessary that the utmost care should be exercised by the assessing officers in determining the true nature of the payment when it is a consolidated figure or is expressed as a percentage of sales, by whatever term the contracting parties may decide to call it. Allocation of the payment among the various services in India and abroad and towards the royalty element, if any, included in the arrangement, has to be made objectively and after a careful appraisal of the precise terms of the collaboration agreement and the actual manner in which the terms have been implemented in pract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice, as a recompense for their labour and trouble, ascertained either by Acts of Parliament, by rule or order of court, or by ancient usage, in modern it times frequently commuted for a salary, e.g., by the Justices Clerks Act, 1877, ss. 2-4 (repealed). Although, however, the officers of a court may be paid by salary instead of by fees, the obligation of suitors to pay fees usually remains. See the Supreme Court Order, 1970 ; County Court Fees Order, 1981. The mode of collecting fees in a public office is, under the Public Offices Fees Act, 1879 (repealing and replacing the Public Offices Fees Act, 1866), by stamps or money, as the Treasury may direct. The fees of the steward of a manor were regulated entirely by custom, and a customal or list of fees to be taken, under every circumstance, was generally handed down from steward to steward. When the steward made excessive charges, the copyholder could bring an action on the case to recover the excess, and an indictment would lie for extortion colore officio. In transactions where these fees were large or numerous a special agreement was generally made (Allen v. Aldridge [1843] 5 Beav. 401). Reference was also made to Rama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts nature in law but its nature in business or in accountancy whichever way one likes to put it, because from the legal point of view there may be no difference whatsoever as between the parties between a capital and an income sum. It may be totally irrelevant to the legal relationships into which they are proposing to enter. When, however, the tertius gaudens, in the shape of the Revenue, appears on the scene, that matter which as between the parties may have been a matter of not the slightest importance becomes immediately a matter of very great importance, and it is necessary to examine the circumstances of each individual case, including any documents which require to be construed, in order to ascertain what is the character to be attributed to the payment." The same view of the Supreme Court was recorded in the decision of the Bombay High Court in the case of CIT v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545. There it has been held that in taxation matters it is not necessary to construe documents from their purely legal aspect and it is open to the High Court not only to look at the documents themselves, but also to consider the surrounding circumstances so as to arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 (Bom). Reliance was placed on the observations of the court at pp. 352 and 360. This decision was referred to on behalf of the assessee for the purpose of emphasizing that what the section required was not that strictly exemption should be limited to royalties or fees but the section required computation of capital to be limited strictly to those payments which could be strictly considered to be royalties or fees which could be considered to be income by way of dividends. The Bombay High Court at p. 360 of that report referred to s. 85A of the I.T. Act, 1961, and noted that the expression " any income by way of dividends " in the section would not make any difference, because dividends received are always income and the words used were just a convenient mode of description. Reliance was also placed on the decision of the Bombay High Court in In re Tata Iron and Steel Company Ltd. [1921] 1 ITC 125 (Bom). There the Division Bench observed that the amount of money paid by a joint stock company to the underwriters on an issue of new shares increasing the capital of the company cannot be allowed to be deducted as an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. The question was whether payment was " royalty " liable to suffer deduction of tax at lower rate of 50%- Pt. II, 2(b)(ii), of the Finance (No. 2) Act, 1971, and s. 195 of the I.T. Act, 1961. It is not necessary for our purpose to set out the actual controversy referred to therein. There the court reiterated that the expression " royalty " was not defined in the Act. That is true in the instant case also. The court also referred to certain definitions in Corpus Juris Secundum, Vol. 77, at p. 542, on the expression " royalty " and also in Words and Phrases Legally Defined, Vol. 4, at p. 384, and also the meaning of that word in Australian and Canadian decisions. It may, however, be illustrative to refer to the meaning of " royalty " in the Encyclopaedia Britannica, 1972 Edn., Vol. 19, at p. 676, which the court in that case noted : " ' 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 cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aliens. Royalty payments may be in exchange for something in addition to the mere use of the invention. The most common example is that wherein the licensor not only grants the 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. " The court, therefore, was of the opinion that in the case of secret processes, patents, special inventions, when right of exploitation was given by the owner of inventions, patents, etc., to a third party instead of outright sale, then for the right to exploit these inventions, secret processes, some amount might be paid and the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... background of the facts and circumstances of this case. But before we conclude we must mention that, on behalf of the Revenue, it was contended that IISCO is not a company within the meaning of the expression of any Indian concern in r. 1(ix) of the 1st Schedule to the Surtax Act, 1964, or r. 1(x) thereof. Reliance was placed on certain observations of the Madras High Court in the case of CIT v. Craigmore Land and Produce Co. Ltd. [1977] 110 ITR 730 (Mad). There the accounts of the assessee-company showed that depreciation claimed year after year had not been deducted from the value of the buildings or machinery which continued to be shown at the original value. The claim of the assessee for taking into account a sum of Rs. 8,00,000 shown as replanting, buildings and machinery reserve was allowed by the officer, but rejected by the Commissioner in suo motu revision proceedings. The Tribunal, however, after obtaining a remand report from the AAC in which it was stated that no part of the amount allowed as depreciation was contained in this sum of Rs. 8,00,000, held that the amount fell within the scope of reserve as contemplated in r. 1 of the Second Schedule to the Super Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
