TMI Blog1993 (9) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... by U.C.I.L. was assessable in the hands of the assessee as "royalty" within the meaning of Explanation 2 to section 9(1)(vi) of the Act. According to him, the fact that the nomenclature of the agreement was "Technical Service Agreement" did not determine the nature of the receipt. He over-ruled the assessee's contention that the amounts received under the agreement were fees for the technical service and were exempt as such under section 9(1)(vii) of the Act read with Explanation 2 thereto. Certain other contentions regarding the applicability of the provisions of section 9(1)(vi) were also taken before the Income-tax Officer which were overruled by him. These will be discussed at a later stage since they are not very relevant for our purpose at this juncture. The Income-tax Officer, in this view of the matter brought to tax the amount of Rs. 43,57,233 as the business income of the assessee. 3. On appeal, the assessee repeated the contentions it has raised before the Income-tax Officer. The CIT (Appeals) did not accept them. According to him, the case of the assessee was not governed by the proviso to section 9(1)(vi), since the payments made under the technical service agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the two agreements was wholly different and both dealt with different matters. He pointed out that the agreement with which we are concerned has used the expression "royalty" in the year 1973 and therefore the expression should be interpreted without being influenced by Explanation 2 to section 9(1)(vi) of the Act which contained a definition of the word "royalty". He, thereafter took us through the various clauses of the technical service agreement. In sum and substance, the contention of Dr. Pal was that the Agreement provided for a continuous process of supplying information regarding the fruits of research carried out by the assessee in its laboratories abroad for the most efficient use of the information regarding the production of the licensed products, namely, carbamate pesticides. There was, according to him, a "fund of knowledge" available with U.C.C., the assessee herein, because of its experience in the field of manufacture of pesticides for long period of years, and this fund was utilised by the Indian company namely U.C.I.L. to which it was supplied continuously. According to Dr. Pal, any imparting of information regarding the process of manufacture of pesticides fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77 (SC) (the observations at page 390 of the report) (ii) CIT v. Stanton Stavely (Overseas) Ltd. [1984] 146 ITR 405 (Cal.) at page 423. (iii) Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.) at page 787. (iv) CIT v. Ahmedabad Mfg. Calico Printing Co. [1983] 139 ITR 806 (Guj.) at pages 819-820. 6. Dr. Pal criticised the conclusions of the Income-tax Officer as well as the CIT (Appeals). According to him, the CIT (Appeals) has not kept in mind the true import or implication of the various clauses of the Technical Service Agreement, since he had not extracted the relevant clauses in full, but has preferred to rely on the tabulation furnished before him by the Income-tax Officer at the time of hearing. His contention was that the CIT (Appeals) should have himself examined the various clauses of the agreement fully before coming to any conclusion on the assessability of the amounts paid under the agreement. 7. An important contention was thereafter raised by the Ld. Counsel for the assessee. He submitted that the amplitude of clause (iv) of Explanation 2 to section 9(1)(vi) is cut down by the Explanation 2 to section 9(1)(vii) and to interpret both the provisions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention to the judgments of the Calcutta High Court in N.V. Philips v. CIT (No. 1) [1988] 172 ITR 521 and in Stanton Stavely (Overseas) Ltd.'s case in support of his contention that the assessee had certain exclusive rights or specialised knowledge in the field of manufacture of carbamate pesticides and certain intermediate pro ducts useful in the manufacture of such pesticides and such knowledge, expertise or experience was equivalent to having a patent and any payment received by the assessee as consideration for the use or exploitation of the same by U.C.I.L. will have to be considered as royalty. He next referred to the judgment of the Gujarat High Court in Meteor Satellite Ltd.'s case, and relying on the observations at page 31 thereof submitted that if a given case concerns the question of royalty one has to look only to the specific provisions of section 9(1)(vi) of the Act and the provisions of section 9(1)(vi) automatically stand excluded, being a more general provision. 9. Dr. Pal for the assessee in his reply sought to point out that the Gujarat High Court in the decision relied on by the Learned Senior Standing Counsel, was not concerned with section 9(1)(vii) but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know how than to its exclusive acquisition." It can only be held that U.C.I.L. had only the use of the know-how or knowledge of U.C.C., the consideration for which does not amount to royalty under any of the clauses of Explanation 2 to section 9(1)(vi). Referring to the argument of the Senior Standing Counsel that the assessee itself had described the payment as "royalty" in Article 5.1 of the Agreement, Dr. Pal submitted that the nomenclature given to the parties to the payment is not conclusive. In this connection, he referred to the following judgments of the Supreme Court: (i) CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422, (ii) Kettlewell Bullen Co. Ltd. v. CIT [1964] 53 ITR 26 1, and (iii) CIT v. Motors General Stores (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical information and such other information or data as the assessee's present or future experience may indicate as being necessary or useful for the production and use of the pesticides in India. The second type of service to be rendered by the assessee to U.C.I.L. is also contained in the same article. Under this, U.C.I.L. has the right to refer specific problems relating to the production of the pesticides to the assessee for the assessee's "consideration and advice". U.C.I.L. may also send to the assessee samples of the pesticides manufactured by it for examination, testing and evaluation by the assessee. The third type of service rendered by the assessee is that it should convey to U.C.I.L. its current production experience in respect of the pesticides by keeping U.C.I.L. informed of all its production processes and working methods in so far as they are relevant and applicable to the pesticides manufactured by U.C.I.L. These services, namely, the first three types of services, which are described in clause 2.1 of Article II of the agreement may be rendered by the assessee also by way of documentation by means of written instruction, advice, reports, procedures, formulae, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or data received from the assessee to any other Indian party, if it is necessary to do so. One condition is that the third party shall use the information only in India. The other condition is that the disclosure would be made subject to the conditions imposed by the assessee, and shall also be subject to the approval of the Government of India. 16. Article V provides for payment of "royalty" of 2.5% on the factory selling price of the pesticides sold by U.C.I.L. as consideration for the "technical services" rendered by the assessee under the Agreement. 17. Under Article XI, U.C.I.L. is under an obligation to disclose to the assessee any invention or improvement relating to the manufacture of carbamate pesticides which are discovered by it during the currency of the Agreement. Such information regarding improvements should be given to the assessee free of charge. 18. Under Article XII, it is provided that the Agreement shall remain in force for a period ending five years from the date on which U.C.I.L. manufactures 1,000 M.T. of saleable carbamate pesticides or for a period ending eight years from the date on which the Agreement has become effective, whichever is earlier. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also clause (v). These two clauses refer to the transfer of any right in respect of a patent, invention etc. The Agreement in the present case does not contain any provision for the transfer of any such rights. This is made clear by clause 2.6 of Article II. As noticed earlier, this clause sets a, rest any doubts that may crop up in the minds of the person who reads the Agreement as to whether there has been a transfer of any right under any patent acquired or owned by the assessee. The clause clearly states that the Agreement shall not be so interpreted as conferring any such right on U.C.I.L. Therefore, the applicability of these two clauses is ruled out. 21. We may now examine whether clauses (ii), (iii) and (iv) of Explanation 2 are applicable in respect of any of the services contemplated by the agreement. These clauses do not contemplate the transfer of any right in the patent, invention, etc. They state that consideration for imparting of any information relating to the working or use of the patent, etc., or for the use itself of the patent, etc. and the imparting of information relating to technical, industrial, (commercial or scientific knowledge, experience or skill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional usage in the commercial field "royalty" is understood as consideration paid from time to time for the exploitation of the right, inter alia, to the knowledge regarding secret process, patent, registered trade mark etc. In fact, in that judgment, the Gujarat High Court, though it was concerned with an agreement entered into prior to 1-4-1976 and which was applicable in respect of a period prior to the introduction of the definition of the word "royalty" in Explanation 2 to section 9(1)(vi) of the Act, still referred to clause (iii) of the Explanation and held that the definition enacted by the Legislature lent support to its conclusion that in the field of international commercial usage the word "royalty" had come to acquire the particular meaning which they have attributed to it. 23. The contention that unless there is a legally protected right or a patent, the consideration for the use of the knowledge in the particular field cannot be treated as being in the nature of "royalty" has not found favour in England. We may refer to a few decisions in this connection. In Handley Page v. Buttenworth 19 TC 328, it was held that the owner of a secret process stood in the same posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of U.C.I.L. The Calcutta High Court did not accept a similar contention advanced on behalf of the assessee in the decision referred to above. In that case also, the agreement between the foreign company and the Indian company contained provisions requiring the Indian company not to treat the information furnished by the foreign company as its own property. The Court considered this clause as indicative of the fact that the foreign company had intended and treated the information to be supplied by it to the Indian company as its own property. This position is clear from the observations of the High Court at page 538 of the report. The argument that only payments for a legally protected can be called royalty was rejected by the High Court. The following portions of the judgment extracted from pages 538 and 539 of the report will make this position amply clear: " 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 inventions, the original invention remains exclusive to the inventor and it is conceivable that such an inventor might exploit his invention permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be termed as "royalty". 28. Having thus concluded that the assessee's case would fall under clauses (ii), (iii) (iv) of Explanation 2 to section 9(1)(vi) of the Act, our next task is to examine the agreement with reference to the various services rendered by the assessee to U.C.I.L. and endeavour to find out which of the services can be fitted into those clauses. From a perusal of clause 2.1 of Article II of the agreement, we find that the assessee has to make available to U.C.I.L. all technical information which is generally or specially connected to the production and use of carbamate pesticides. This not only includes the general information, but also includes specific information relating to the production and use of carbamate pesticides. This service clearly falls within the clauses (ii) and (iv) of Explanation 2. The information to be supplied is also to be in respect of raw-materials, production processes, formuale etc. The second type of service which is also found in the same clause of the agreement is that the assessee has to deal with the specific problems pertaining to the production of pesticides and offer its advice to U.C.I.L. This process also involves testi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion before the Supreme Court was whether the payment made under an agreement was capital expenditure or revenue expenditure. In that case, the assessee was engaged in the manufacture of antibiotics. Under the agreement, it acquired from the Japanese company know-how to produce higher yield of sub-culture of high yielding strains of pennicilin. The question was whether by making the payment the assessee acquired an asset of enduring advantage or benefit. It was in this context that the Supreme Court made the observations at page 390 of the report which are as under : "It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical, industrial, commercial or scientific knowledge, experience or skill, Explanation 2 to section 9(1)(vii) would apply where no such information is involved. In the present case itself, we have seen on a perusal of the different types of services rendered by the assessee, that it is possible to bifuracate them into services involving imparting of such Information regarding the production of carbamate pesticides and those which do not involve imparting of any such information. The two provisions have no doubt to be harmoniously construed and as far as possible we should avoid a "headon clash" between the two as held by the Supreme Court in Raj Krushna Bose's case. We are also aware that whenever it is possible to do so, we should construe provisions of the same Act, which appear to conflict, in such a manner that they harmonise. We are under a duty to construe the provisions of the Act in such manner as to avoid redundancy or tautology on the part of the Legislature. The Legislature cannot be deemed to have wasted its words or to have said something in vain. In our understanding, therefore the provisions of Explanation 2 to section 9(1)(vi) of the Act which define the word "royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocate or apportion the payments under the agreement between the two. We are aware of the difficulties in making an accurate allocation or apportionment. However, there can be no dispute regarding the fact that the assessee had rendered all the types of services contemplated by the agreement during the relevant year. Presumably because of the polarisation of the views of the assessee on the one side and the Income-tax Department on the other there has been no attempt by either side to make an apportionment. The assessee's case is that nothing was taxable as royalty whereas the department's case is that the entire payment should be assessed as royalty. We have already held that these extreme views cannot be accepted. The only question would be as to what would be the reasonable estimate to be made on the material available on record. It is stated that in the earlier years 20% of the payment was allowed to suffer tax on the ground that it represented royalty. We do not however, have the details showing the basis upon which such estimate was arrived at. in N. V. Philips' Gloeilempenfabriken v. CIT (No. 2) [1988] 172 ITR 541, the Calcutta High Court has held that in such cases, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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