T.K. Chandrashekhara Das, J.
1. Learned counsel for the petitioner and for the respondents.
2. The writ petition arises out of an application made for refund by the petitioner vide letter dated February 11, 1983, seeking a clearance certificate from the income-tax authority. The tax was payable by the petitioner in pursuance of an agreement entered into between the petitioner and Alcan International Ltd., Canada. By that letter they enclosed photostat copy of the authorisation of the payment to Alcan International Ltd., Canada. The clearance certificate was necessitated to send payment to Alcan International Ltd., from deducting the tax payable by them.
3. The petitioner and Alcan International Ltd., entered into an agreement for transfer and grant of full disclosure of a certain process and technology for the injection of air into rotary coke claimers through shell mounted apparatus as is described in U.S. Patent No. 3,966,560 which is called 'Method of Calcimine Coke in a Rotary Kiln'. Under Clause 1.2 of the agreement, 'technology' shall mean processes, technical information and know-how relating to the design, engineering, installation, operation and maintenance of blowers with Alkanet as in possession on the effective date of the agreement. Under the said clause, 'engineering' shall mean all necessary designs, drawings, instructions and technology which is required to enable Goa to procure, install and operate blowers on a particular rotary calciner.
4. Clauses 2, 3 4 and 5 of the agreement read as under :
'2.0 Grants :
Alkanet hereby grants to Goa and Goa hereby accepts a non-exclusive licence with full rights to use the technology in India and to use or sell the resulting calcined coke for use anywhere in the world. Goa shall not have the right to grant sub-licenses hereunder.
3.0 Disclosure of technology and rendering of assistance :
3.1 Goa shall provide Alkanet with all necessary specifications and other data in respect of the specified calciner which is required to effectively engineer blowers for it.
3.2 Alkanet shall provide to Goa the engineering for the specified calciner as soon as possible after Goa advises Alkanet in writing of the effective date and in any event not later than three calendar months after the giving of such notice. Such engineering will be of a design which, when applied to Alcan Smelters and Chemicals Limited's rotary coke calciner at Arvada Works, which is utilising commercially produced petroleum coke having a volatile content not less than seven per cent, and amoisture content not more than 15 per cent., resulted firstly in a substantial reduction in total fuel input to the kiln or calciner during continuous operation and secondly a substantial reduction in the volume and velocity of discharge emissions during production operations.
3.3 Alkanet will provide necessary site assistance up to fifteen (15) men-days to Goa for start-up and initial operation of the blowers at the site of the specified calciner. The site assistance shall consist of a trip by two people, one person who will be available for five consecutive days and the other person for ten consecutive clays during which periods they will render on site assistance but only for a reasonable period, not exceeding 12 hours in any one day. All travel and living expenses incurred by Alkanet personnel in the provision of such site assistance shall be for the account of Goa.
4.0 Royally :
In consideration for the transfer of technology and engineering provided in accordance with Clause 3.0 hereof, Goa agrees to pay Alkanet a lump sum royalty of one hundred and eighty three thousand Canadian dollars (Can.$ 183,000) as detailed below :
Can.$Lump sum royalty for transfer of technology 141,000Lump sum royalty for transfer of drawings and designs 30,000Technical engineering consulting charges 12,000---------183,000--------- Payment Schedule will be as under :
4.1 on the effective date of this agreement, the sum of sixty-one thousand Canadian dollars (Can.$61,000).
4.2 within thirty (30) days of the delivery of the engineering to be provided by Alkanet hereunder, the sum of sixty-one thousand Canadian dollars (Can.$61,000).
4.3 within thirty (30) days of the date of which the kiln is started up using the technology, the sum of sixty-one thousand Canadian, dollars (Can. $61,000).
5.0 Payments :
All amounts due to Alkanet under this agreement are payable net in Montreal, Quebec, Canada, in Canadian dollars. All costs and taxes of whatever nature including but not limited to levies, imposts, deductions or withholding registration fees, remittance fees, stamp duties or other charges imposed by any Government other than the Canadian Government or any sub-division thereof, all hereinafter referred to as 'taxes', are in addition to the fees quoted and shall be for the account of Goa which shall be responsible for their timely payment. Goa shall provide to Alkanet certificate's issued by the appropriate Government authority in a form reasonably satisfactory to Alkanet proving payment of such taxes. Anyoverdue payment shall bear interest from its due date to the date of payment at 3 per cent, above the prime lending rate quoted by the Royal Bank of Canada, head office, Montreal, Canada, on the due date of the overdue payment.'
5. In reply to the letter dated February 11, 1983, as aforesaid, the Income-tax Authority, Panaji, by letter dated November 27, 1984, has segregated the total amount of contract, namely, 183,000 Canadian dollars as follows :
Total consideration Can. $183,000 at Rs. 9.23 per $ = Rs. 16.89,090
Tax thereon at 40% (Can. $ 73.200) = Rs. 6.75.636
6. The Income-tax Officer has given a break-up of the total amount so as to levy the income-tax at the rate of 40 per cent, on the foreign company. Being aggrieved by this order, the petitioner filed a revision before the Commissioner of Income-tax, Karnataka, Bangalore, Camp Panaji-Goa. By exhibit 'E' the Commissioner of Income-tax, Karnataka, rejected the revision and confirmed the order of the Income-tax Officer. Before the revisional authority, two contentions have been taken by the petitioner : one is that by virtue of Clause (ii) of Sub-section (1) of Section 115A, the petitioner contended that the rate of tax applicable to the transaction is only 20 per cent, of the total amount because all the designs and drawing which were delivered out of India were handed over by Alcan International Ltd. vide letter dated March 3, 1983, to the chairman of the company, Shri Vasantrao Dempo, while on foreign tour at Parklane Hotel, New York, U.S.A. Therefore, the entire transaction attracts tax only at the rate of 20 per cent.
7. Another alternate contention taken by the petitioner is that even by going through Explanation 2 to Section 9, the remittances were not in respect of fees for technical services but they were in respect of royalty and, therefore, the rate of tax applicable to the agreement is 20 per cent. For better appreciation of the contentions of counsel for the petitioner, it is necessary to extract Section 115A of the Income-tax Act and also Section 9, Explanation 2, of the aforesaid Act.
'115A. Tax on dividends, royalty and technical service fees in the case of foreign companies.--(1) Subject to the provisions of Sub-section (2), where the total income of an assessee, being a foreign company, includes any income by way of-
(a) dividends ; or
(b) royalty or fees for technical services received from an Indian concern in pursuance of an agreement made by the foreign company with the Indian concern after the 31st day of March, 1976, and approved by the Central Government,
the income-tax payable shall be the aggregate of-
(i) the amount of income-tax calculated on the amount of income by way of dividends, if any, included in the total income, at the rate of twenty-five per cent. ;
(ii) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income-
(1) on so much of the amount of such income as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, at the rate of twenty per cent. ;
(2) on the balance of such income, if any, at the rate of forty per cent. ;
(iii) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of forty per cent. ; and
(iv) the amount of income-tax with which it would have been chargeable had its total income been reduced by the amount of income referred to in Clause (a) and Clause (b).
Explanation.-- For the purposes of this section,--
(a) 'fees for technical services' shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 ;
(b) 'foreign company' shall have the same meaning as in Section 80B ;
(c) 'royalty' shall have the same meaning as in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9.
(2) Nothing contained in Sub-section (1) shall apply in relation to any income by way of royalty received by a foreign company from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1976, if such agreement is deemed, for the purposes of the proviso to Clause (vi) of Sub-section (1) of Section 9, to have been made before the 1st day of April, 1976 ; and the provisions of the annual Finance Act for calculating, charging, deducting or computing income-tax shall apply in relation to such income as if such income had been received in pursuance of an agreement made before the 1st day of April, 1976.
9. Income deemed to accrue or arise in India.--. . .
Explanation 2.--For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for-
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process, or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in Sub-clauses (i) to (v);
(vii) income by way of fees for technical services payable by-
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : . . .
Explanation-- For the purposes of this clause 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'.
(2) Notwithstanding anything contained in Sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in Article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.'
8. Learned counsel for the petitioner Mr. Usgaonkar, has contended that what has been shown in the agreement in respect of royalty on the entire charges of technology, know-how in favour of the petitioner by the foreign company and the amount of royalty that is to be paid is shown in Clause 4 of the agreement. In Clause 4, the royalty has been calculated at three heads :
(1) For transfer of technology ;
(2) For transfer of drawings and designs ;
(3) Technical, engineering and consulting charges.
9. He also brought to our notice Clause 3 of the agreement and contended that under Clause 3, the foreign companies are obliged to provide necessary site assistance up to 15 days for start-up and initial operation of the blowers at the site of the specified calciner and it cannot be termed as 'fee for technical services'. Mr. Usgaonkar drew our attention to what is 'fee for technical services' as explained in Explanation to Clause (vii) of Explanation 2 to Section 9 of the Income-tax Act. The aforesaid Explanation has explained the 'technical services' as 'managerial, technical or consultancy services including the provision of services of technical or other personnel.' According to the counsel, so long as there is no provision in the agreement for doing such services, it cannot be said that the agreement between the petitioner and the foreign company is an agreement to transfer technical services.
10. Learned counsel for the Department has contested this contention and argued that on the petitioner's own showing what has been transferred is only the documents and the design, engineering, operation and maintenance of blowers. The transfer of the related documents occurred only outside India and, therefore, that part of the contract alone is entitled to 20 per cent, rate as envisaged under Section 115A of the Income-tax Act. In this context it may be pointed out that in the revision application before the Commissioner of Income-tax, the petitioner has taken a specific plea that all these documents have been handed over to the petitioner-company in the foreign country. Therefore, the tax applicable is at the rate of 20 per cent. Surprisingly, the Income-tax Commissioner has not adverted to this aspect of the matter in the revisional order. In this context learned counsel for the Department has submitted that since the matter was omitted to be dealt with by the Income-tax Commissioner it is appropriate for this court to remand the matter back to consider that aspect by the Department. We cannot accede to his request due to long lapse of time. The Department did not even choose to file reply in this case. Therefore, we take it that the Department has rejected that contention of the petitioner. Whatever that may be, that controversy does not deter us from going into the merits of the case as contended by counsel for both the parties.
11. As we discussed earlier, the entire amount of 183,000 Canadian dollars will fall under the definition of 'royalty' as meant under Explanation 2 to Section 9 of the Income-tax Act. Learned counsel for the Department, however, has strongly contended that the 20 per cent, rate is only applicable to technical engineering consultancy charges amounting to 12,000 Canadian dollars because, according to him, royalty for transfer of drawings and designs alone attracts tax at the rate of 20 per cent. All other two heads,namely, for transfer of technology and technical engineering consulting charges will come under technical services. As indicated above, the Explanation to Clause (vii) of Explanation 2 to Section 9 of the Income-tax Act has clearly defined what is ''technical services'. 'Technical services' have been defined as managerial, technical or consultancy services including the provision of services of technical or other personnel. But the agreement in question does not provide initial services in India by the foreign company. Therefore, it is very difficult to accept the argument of learned counsel for the Department. Barring the royalty for transfer of drawings and designs, what has been provided in the contract is technical services. As we indicated earlier, what are the services to be rendered by the company in India is only sending two persons for 15 days just to start the machinery and go. In the light of the express provisions made in the agreement, it is difficult to accept the contention of counsel for the Department that royalty for technical engineering consulting charges is for technical services. As we read the agreement in toto, we cannot ascribe to such an interpretation as was attempted to be made out by counsel for the Department. In the light of the aforesaid discussion, we have no hesitation to hold that what is covered by the agreement is only royalty for technology or transfer of technology by the foreign company to the petitioner and what is stipulated to be paid is the consideration for the transfer done and not as fee for technical services. As a consequence of that, that payment attracts income-tax only at the rate of 20 per cent. Since no issue has been raised before us for the refund, we are not passing any order on that prayer clause.
12. In the result, the writ petition is allowed. Rule is made absolute in terms of prayer Clauses (a) and (b). No order as to costs.
13. Prayer Clauses (a) and (b) :
(a) That this court may be pleased to issue under Article 226 of the Constitution of India an appropriate direction, under or writ including a writ in the nature of certiorari calling for the record of the case after, satisfying itself as to the legality thereof, quash and set aside the said order dated February 24, 1994 (exhibit 'E').
(b) That this court may be pleased to issue under Article 226 of the Constitution of India an appropriate direction, order or writ including a writ in the nature of mandamus directing respondent No. 1 to pass an order holding that the petitioner should deduct the tax at source at the rate of 20 per cent, from the lump sum consideration paid by the petitioner to Alcan under an agreement dated November 4, 1982, and issue 'No objection certificate' for allowing the petitioner to remit two instalments of Canadian S61,000-each to Alcan after paying tax at 20 per cent.