1. These two cross-appeals are by the assessee and the revenue against the order of the Commissioner (Appeals), dated 10-2-1982. The only issue for our consideration in these cross-appeals is, whether the Commissioner (Appeals) has erred in holding that 50 per cent of the export commission of Rs. 11,87,683 is taxable under Section 9(1)(vi) and Section 9(1)(vii) of the Income-tax Act, 1961 ('the Act'). The assessee claimed that commission in question is not taxable, while the revenue claimed that the entire commission is taxable.
2. The relevant facts are that the assessee has received a sum of Rs. 11,87,683 as export commission from Ceat Tyres of India Ltd. and claimed before the ITO that this is not taxable. The assessee had entered into an agreement with Ceat Tyres of India Ltd. on 9-9-1977. As per the agreement, the Indian company was to pay to the assessee Rs. 11,87,683 for the services rendered under the agreement vide clauses (a) The assessee would forego in favour of the Indian company exports in various markets and in certain cases export orders were to be transferred to the Indian company.
(b) The assessee was to allow the use of channels of distribution in overseas markets to the Indian company and after-sales services in those markets.
(c) Detailed market information was to be furnished to the Indian company through their representatives in major international markets at the expense of the assessee.
(d) The benefit of advertising expenditure of the assessee to establish Ceat brands in overseas was to be permitted.
This commission was at the rate of five per cent provided the company fulfilled its obligation to export 15 per cent of the production subject to a minimum value of Rs. 4.70 crores. According to the assessee, this amount cannot be treated as royalty/technical service fee as defined in the Explanation to Section 9(1)(vi) and Section 9(1)(vii). The IAC found that the amount so received is fully covered by the provisions of Section 9(1)(vi) and Section 9(1)(vii), as they are royalty and technical service fees.
Being aggrieved, the assessee carried the matter before the Commissioner (Appeals). The Commissioner (Appeals) found that the assessee was supposed to render four types of services. Out of the four types of services, the Commissioner (Appeals) found that services in Clauses (b) and (d) of the agreement are fully covered by the term 'royalty', as defined in Explanation 2 to Section 9(1)(vi) and reduced the addition to 50 per cent of the total receipt.
3. Being aggrieved, the assessee came in appeal before us. The submission of the learned Counsel for the assessee, Shri B.A.Palkhivala, was that the services mentioned in Clauses (a), (b), (c) and (d) of the agreement are not covered by the expressions 'royalty and 'technical services fee'. He submitted that here the assessee has rendered four types of services. First is, that the assessee would forego in favour of the Indian company its exports in various markets, so far as the product of Indian company is concerned. In some cases, the assessee has transferred its export orders to the Indian company.
The second is that the assessee has allowed the Indian company to use its channels of distribution in overseas markets and the third type of service is that the assessee will furnish detailed market information to the Indian company through their representatives in major international markets. The fourth and last type of service is that the assessee has allowed the benefit of advertising expenditure incurred by them to establish Ceat brands of goods in overseas markets, by the Indian company.
According to Shri B.A. Palkhivala, all these services are not covered by the definition of 'royalty' because the assessee is not imparting any special information such as technical, industrial commercial, or scientific knowledge experience or skill. Here the requirement is, some secret or special information should be parted with the assessee.
Merely obtaining information from the markets and passing on to the Indian company is not covered by this definition. When the assessee is not rendering such services, the receipts are not covered by the provisions of Section 9(1)(vi) and Section 9(1)(vii). He further submitted that the idea to bring these amendments was to curb the mischief of various foreign concerns, which were rendering technical assistance to Indian companies and were claiming that the entire royalty or technical service fees received were either not taxable in India or were liable to be heavily reduced by proportionate expenditure. His further submission was that the interpretation of the provision should not be made which is contrary to the Legislature's intention. If, such types of services are taken to be covered by the provisions of Section 9(1))(vi) and Section 9(1)(vii), the interpretation will be contrary to the intention of the Legislature, as can be seen from Section 35B of the Act where the assessee gets a weighted deduction on exports. He also submitted that the meaning of the expressions 'royalty' and 'technical services fee' should not be taken to destroy the normal meaning. If such services are taken to be covered, that means the normal meaning of the expression is destroyed.
He further submitted that at the most, services mentioned in Clause (b) of the agreement can be taken as covered by the definition of 'royalty'.
On the other hand, the submission of the learned departmental representative, Shri Roy Alphonso, was that the services mentioned in Clauses (a) to (d) of the agreement are fully covered by the definitions given by the Legislature in Sections 9(1)(vi) and 9(1)(vii). He submitted that the Legislature is fully competent to give a particular meaning with the intention of restricting or enlarging the scope of the word, to achieve a particular object and from the plain reading of the definition of the words 'royalty and technical services fees' it is clear that all the services are covered by that definition.
No further interpretation of the definition is required. Further, it does not destroy the normal meaning of the words 'royalty and technical services'.
4. We have heard the rival submissions and considered the material on record. Under the agreement dated 9-9-1977, the assessee has agreed to render the services vide Clauses (a), (b), (c) and (d) mentioned in para 2 above. The Legislature has defined the word 'royalty' in Explanation 2 to Section 9(1)(vi), which we are reproducing for ready reference as under: 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 (r) to (v) ; Similarly, the Legislature has defined the expression 'fees for technical services' by inserting Explanation 2 to Section 9(1)(vii), which reads as under: 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'.
The facts are not in dispute that the assessee has received this amount of Rs. 11,87,683 for the services mentioned in Clauses (a), (b), (c) and (d) in the agreement. The main emphasis of Shri B.A. Palkhivala was that if we take the ordinary meaning of the information and managerial service or commercial service, as given in the definition of royalty and fees for technical services, that will destroy the normal meaning of the words 'royalty and fees for technical services'. We do not agree with the learned Counsel for the assessee. Firstly, the basic rule of interpretation is that we should take the plain meaning of the words and if it is not fitting in the scheme of the section of the Act, then only we can take the other meaning than the normal meaning of the words given in the definition here. Secondly, the information regarding the commercial market, experience of the assessee and managerial service and further to promote the goods of the Ceat brand in the overseas markets does not destroy the normal meaning of the words 'royalty and fees for technical services'. Here in fact, the assessee has a world-wide network of offices and it uses the offices for the purpose of the goods of the Indian company. To get the information from abroad regarding the market cannot be considered just an ordinary information.
It requires a thorough experience and well-established organisation. A layman straightaway cannot go and get the order for selling his goods abroad. In their letter dated 4-12-1982, by the assessee to Ceat Tyres of India Ltd., they have pointed out that they have worldwide network of offices through which they will ascertain and pass on the latest market intelligence in respect of the demand trends. Not only that, they will agree to transfer the orders for export which they obtain to Ceat Tyres of India Ltd. Further, the assessee agreed to advertise the Ceat Tyres free of cost and they will also provide after-sales service to Ceat Tyres of India Ltd. These services cannot be said to be an ordinary information. This information requires a well-established organisation and a systematic method of marketing, for which the assessee has received the amount in question. Further, we also do not agree with the claim of Shri B.A. Palkhivala that if such interpretation will be accepted, that will go contrary to the object of Section 35B. In our view, each section has its own object. The only thing to be seen is that the interpretation does not go contrary to the scheme of the Act. Here, in Section 9, we are concerned with the deemed income which the Legislature wants to tax. When the intention of the Legislature is to tax such income by giving a wider meaning to the words 'royalty and fees for technical services', that does not affect the object of Section 35 as each section has its own objects and raison d'etre in the statute. Keeping these facts in view, we now take Clauses (a), (b), (c) and (d) of the agreement as follows.
Clause (a) of the agreement provides that the assessee would forego in favour of the Indian company export sales in various markets and in certain cases export orders will be transferred to the Indian company.
In our view, merely by foregoing the export sales in the various markets abroad does not cover by any of the clauses in the definition of royalty/fees for technical services (sic).
Clause (b) of the agreement provides that the assessee shall allow the use of channels of distribution in overseas markets to the Ceat Tyres of India Ltd. and also allow other after-sales services in those markets. In our view, this service is covered by the definition of royalty. As the assessee has provided the well established machinery for sale abroad to the assessee and its experience by helping in export of the Ceat Tyres of India Ltd., that is amounting to an imparting of information regarding sale or experience or skill which the assessee has acquired in its business. Further, it was indirectly admitted by the assessee that at the most, services in Clause (b) can be taken as covered by the provisions of Section 9(1)(vi).
Clause (c) of the agreement deals with the service of the assessee by furnishing detailed market information to the Indian company through their own representative operating in all major international markets and the assessee shall incur all the expenses connected therewith. In our view, this is also covered by the definition of royalty, as the assessee is imparting the information regarding experience and skill in the commercial market.
The last Clause (d) in the agreement provides that the assessee shall permit the benefit of advertising expenditure incurred by them to establish Ceat brands in overseas markets. Under this clause, the Indian company will use the trade mark or similar goods to establish Ceat brands outside India with the benefit of advertising expenditure.
In our view, this is also covered by the definition of royalty given in Section 9(1)(vi).
5. To sum up the case, the information regarding fees for technical services are covered by the words 'royalty and fees for technical services', as defined in Section 9(1)(vi) and Section 9(1)(vii).
Considering the facts in this case, the services mentioned in Clauses (b), (c) and (d) are covered by the above definitions. Therefore, 75 per cent of the export commission of Rs. 11,87,638 is taxable under Sections 9(1)(vi) and 9(1)(vii).
6. In the result, the appeal of the assessee is dismissed while the appeal of the revenue is partly allowed.