1. These three departmental appeals were heard together and are disposed of by a common order.
2. M/s. Sulzer Brothers Limited, Switzerland (Sulzer for short), is a well established, well-known company, having among other things, extensive know-how relating to design, development and manufacture of high duty control valves and associated equipment for bypass and pressure reducing systems which are integral part of thermal power plants, M/s. Bharat Heavy Electricals Ltd. (BHEL for short) a public sector company, specialises in the manufacture of diverse heavy electrical items including systems and sub-systems of thermal power plants of different capacity.
3. On 29-1-1976, Sulzer and BHELentered into a collaboration agreement, where under the former undertook to supply the latter "all existing documentation relating to design, layout, manufacture, tools, testing, sales, erection, commissioning, operation and maintenance of the EQUIPMENT listed in Annexure-I to the agreement during the currency of the said Agreement (which was five years "unless terminated earlier").
The EQUIPMENT related to 200 MW thermal power plants. If Sulzer modified, improved or upgraded the EQUIPMENT, information relating thereto was also to be passed on to BHEL by Sulzer. All the information was to be delivered in Switzerland.
4. During the currency of the agreement Sulzer granted to BHEL "a nonexclusive right to use all information pertaining to manufacture, use, sale, repair and service of the EQUIPMENT and their parts in India". Grant of similar non-exclusive right was also contemplated in relation to countries other than Switzerland, Federal Democratic Republic, France, U.S.A., Canada and Japan. BHEL was also granted right to sub-licence the manufacture of the EQUIPMENT to other manufacturers in India with prior permission of Sulzer.
5. The complementary right of using Sulzer patents pertaining to the EQUIPMENT and their parts as also new patents registered/applied/ acquired by Sulzer during the stipulated period was also given to BHEL.
6. Under the collaboration agreement Sulzer undertook, inter alia, to depute Sulzer personnel to assist BHEL in the areas and matters covered by the agreement. Sulzer also undertook to train BHEL personnel.
7. The said collaboration agreement contemplated payments by BHEL to Sulzer on two counts: First, a lump sum consideration of Sw.Fr. 1.35 million payable in three instalments for the supply of technical know-how relating to the EQUIPMENT and training of BHEL personnel.
Secondly, a payment "as per terms to be mutually agreed upon from time to time" towards the services of Sulzer personnel deputed to assist BHEL.
8. Under the agreement ...income-tax, sur-tax or other tax of any Governmental or local law of any degree shall be paid as follows: (a) by SULZER when such charges are due under any Federal, State or local law of Switzerland, and (b) by BHEL when such charges are due under any Governmental or other law of India.
9. The said collaboration agreement contained other terms that are usually incorporated in such agreements and these need not detain us here.
10. It is common ground that the said collaboration agreement, which was in principle approved by the Government of India on 11-11-1975, was taken on record by the Government of India on 4-3-1976.
12. In November 1981, consequent on the introduction of 500 MW plants in India as well as bypass systems of different capacities, both Sulzer and BHEL decided to extend their collaboration "to cover also bypass and pressure reducing systems for unit sizes and systems capacities different from the existing 200 MW units". The manufacture of bypass and pressure reducing systems for power plants for higher capacities naturally necessitated the acquisition by BHEL of considerable amount of technical information and training from Sulzer. For this purpose, on November 12, 1981, Sulzer and BHEL concluded an agreement, which took the form of "Appendix 'A' dated November 12, 1981 to the Agreement dated 29-1-1976". The terms and conditions relating to the said collaboration took the form, in some areas, of modifications and amendments to the agreement dated 29-1-1976. In other areas, such as consideration, fresh terms and conditions were introduced. Thus, the terms and conditions relating to the transfer of know-how relating to the new EQUIPMENT, the right to manufacture and sell the new EQUIPMENT, provision of technical assistance and supply of additional information, training of BHEL personnel, deputing of Sulzer personnel to BHEL and the like basically remain unaltered. As for consideration, BHEL had to pay an additional lump sum amount of Sw.Fr. 1,125,000 in three instalments as stipulated in the agreement. The payment for the user of Sulzer personnel deputed to BHEL was to be made by BHEL as per terms to be mutually agreed upon from time to time as before.
13. As in the case of agreement dated 29-1-1976, so in the case of Appendix-A dated November 12,1981, it was specifically provided that the amount payable under the terms and conditions of the said Appendix would be subject to Indian income-tax.
14. It is common aground that the said Appendix-A dated November 12, 1981 was taken on record by the Government of India on November 30, 1981.
15. Acting under the said Appendix BHEL availed itself of the services of Sulzer personnel from time to time with the prior approval of the Government of India. It is also a matter of record that BHEL made payments to Sulzer, again with the approval of Government of India/ Reserve Bank of India for the user of services of Sulzer personnel. It also paid Sulzer a lump sum consideration (Sw.Fr. 1,125,000) by instalments as stipulated in the said Appendix.
16. In its capacity as the representative-assessee, the case of BHEL before the Assessing Officer was that Indian income-tax was exigible as detailed below:Asst.Year Lump sum payment Special engineering Rate of Services tax1985-86 Rs. 17,66,250 - 20%, - Rs. 1,31,079 40%1986-87 - Rs. 1,40,560 40%1987-88 - Rs. 1,64,710 30% Clearly the aforesaid claim of the assessee was founded on the following considerations: (a) Appendix-A dated November 12,1981 was a new agreement concluded after 1-4-1976.
(b) The lump sum consideration of Sw.Fr. 1,125,000 payable under the said new agreement was royalty properly so called, payable in consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specifications relating to any patent, invention, model, design, secret formula or process of trade mark or similar property.
(c) Therefore, under the provisions of Section 115A(1)(b)(ii)(1), as they stood at the relevant point of time, tax was exigible on the said lump sum royalty at 20% only.
(d) The payments made for securing special engineering services of Sulzer personnel were in the nature of fees for technical services and were, therefore, taxable at the rates indicated above under Section 115A(1)(b)(iii) as amended from time to time.
None of the aforesaid contentions found favour with the Assessing Officer. Taking the line that the Appendix-A dated November 12,1981 was nothing but the continuation of the original agreement dated 29-1-1976, he held: - that the lump sum consideration was chargeable to tax at 50% (as stipulated in the Finance Act); and - that the payment for special engineering services must be brought to tax at the rate of 70% for the assessment years 1985-86and 1986-87 and at the rate of 65% for the assessment year 1987-88 (as provided in the Finance Act).
17. Predictably, the assessee took up the matter in appeal before the first appellate authority, who, on an examination of the facts and circumstances of the case, held as follows: Appendix-A dated November 12, 1981 is a new agreement, because it governed EQUIPMENT relating to 500 MW power plant and the "size, capacity, range, pressure-rating, temperature-tolerance etc." of the new EQUIPMENT were totally different from those relating to the EQUIPMENT meant for use in 200 MW units governed by the agreement dated 29-1-1976. Since the said agreement was concluded after 1-4-1976, tax at the rate of 20% only was exigible on the lump rum royalty of Rs. 17,66,250. Similarly, the payments made by the assessee for special engineering services under the new agreement were chargeable to tax as claimed by the assessee. In this regard he also took into consideration the fact that if the Appendix-A dated November 12, 1981 was to be taken as continuation of the agreement dated 29-1-1976, then by virtue of the proviso to Section 9(1)(vi) and the proviso to Section 9(1)(vii), no tax would be exigible either on the lump sum royalty or on the fees paid for special engineering services.
18. It is in these circumstances that the Department is now before us.
It needs to be highlighted here that the Department's objection is limited or restricted to the decision of the CIT(A) on the issue relating to the rate of tax to be applied to the payments made by the assessee for securing special engineering services from the Sulzer personnel deputed to it.
19. Shri Y.R. Rao, the learned Departmental Representative, strongly supported the impugned orders of the Assessing Officer.
On his part, Shri R. Vijayaraghavan, the learned counsel for the assessee, highlighted the fact first that the case of the assessee was that tax was exigible not only on the lump sum consideration but also on the payments for engineering services, on the footing that Appendix-A dated November 12, 1981 was a new agreement. Secondly, as rightly pointed out by the CIT(A), if Appendlx-A were to be regarded as Just a continuation of the old agreement, which was a pre 1-4-1976 agreement, then no tax at ail would foe exigible to the assessee's case. He drew our particular attention to the fact that the Department has not objected to the decision of the CIT(A) to the effect that the lump sum royalty paid by the assessee under Appendix-A dated November 12, 1981 was chargeable to tax at 20% only for the assessment year 1985-86. The said decision of the CIT(A) could be understood only on the premise that the said Appendix was a new, post-31-3-1976 agreement.
It should, therefore, follow that the Department's objection to the decision of the CIT(A) on the rate of tax applicable to the payment made by the assessee for securing special engineering services is, to say the least, unintelligible.
In view of the foregoing, therefore, Shri Vijayaraghavan contended that the C!T(A) had rightly rejected the view taken by the Assessing Officer on the issue involved in this case and that consequently the common order of the CIT(A) under attack by the department does not invite any interference.
20, We have looked into the facts of the case. We have considered the rival submissions.
21. The first and indeed the basic issue that falls to be resolved is whether the Appendix-A dated November 12, 1981 is a collaboration agreement that was entered into after 1-4-1976 or whether it was just a continuation of the old collaboration agreement dated 29-1-1976. As already pointed out, Appendix-A dated November 12, 1981 governs the terms and conditions relating to the EQUIPMENT that are integral to 500 MW units. It is a matter of record that the agreement dated 29-1-1976 concluded by Sulzer and BHEL governed the EQUIPMENT necessary for putting up 200 MW units. It is also not disputed that the said agreement ran its course. It is also a matter of record that, being desirous of obtaining the EQUIPMENT necessary to put. up 500 MW units, BHEL sought for and secured technical and technological know how from Sulzer. In this context it naturally became necessary to reduce to writing the related terms and conditions. And Sulzer and BHEL incorporated the related terms and conditions in what they chose to label "Appendix-A dated November 12, 1981 to the Agreement dated 29-1-1976". The mode and mechanics adopted by them for this purpose was to take the agreement dated 29-1-1976 as the starting point and to make certain amendments to the terms and conditions contained therein. At first blush, it would appear as though Appendix-A dated November 12, 1981, taking as it did the form of amendment to the agreement, dated 29-1-1976, was just a continuation of the old agreement with certain modifications. For a fact, the Assessing Officer permitted himself to be influenced by the mode and mechanics adopted by Sulzer and BHEL to reduce to writing the terms and conditions governing the EQUIPMENT relating to 500 MW unit and particularly the format of Appendix-A so much so that he misdirected himself as to the true nature and character of the said Appendlx-A. As we see it and as rightly pointed out by the CIT(A), Appendix-A dated November 12; 1981 was very much a new agreement, its format notwithstanding. While the old agreement related to the EQUIPMENT that went into the manufacture of 200 MW units, the new agreement related to the EQUIPMENT necessary for putting up 500 MW units. Secondly, the technological specifications involved in setting up high capacity thermal power plants (500 MW units here) are qualitatively different from a 200 MW units. Between them there is such technological gap as the one that exists between, say, Ford T and Marati-1000. Thirdly, the mode and mechanics adopted by Sulzer and BHEL to reduce to writing the terms and conditions relating to the EQUIPMENT necessary for 500 MW unit is not conclusive of the matter. For a fact, the so-called amendments to the old agreement incorporated in Appendix-A dated November 12, 1981, it will be readily seen, related to the basic features of the new agreement. As for the general terms and conditions, which are normally incorporated in such collaboration agreements, such as force mqjeure, arbitration clause, etc., the parties to the contract simply stated that the terems and conditions applicable to such matters that had been incorporated in the earlier agreement would continue to apply to the new agreement also. The point to be noted is that, while drafting the agreement relating to 500 MW units, Sulzer and BHEL could well have produced a self-contained document. Or, again, adopting the earlier agreement as the starting point, they could have just as well indicated the changes/amendments/modifications necessitated or warranted by the new circumstances, namely, the desire of BHEL to secure technical and technological know-how on matters relating to the setting up of 500 MW units. And in the case before us, the parties have adopted the latter course. But the significant point to be noted here is, the new agreement dealt with a totally different type of EQUIPMENT. In this milieu the format actually adopted becomes immaterial.
22. In view of the foregoing, therefore, we hold that the CIT(A) was justified in coming to the conclusion that Appendix-A dated November 12, 1981 is a new agreement altogether - one that was entered into after 1-4-1976.
23. Since the said Appendix is a new agreement entered into after 1-4-1976, the provisions of Section 9(1)(vi) and (vii) and Section 115A of the Act would clearly apply.
24. The question that then arises for consideration is whether the payments made by BHEL under the said Appendix are royalty as defined by and under Section 9(1)(vi), or fees for technical services as defined in Section 9(1)(vii). In the case of Nodit Ltd. v. Dy. CIT [1992] 42 ITD 187 (Mad.) we had examined the scheme of the Act in matters relating to taxation of royalty and technical fees, particularly after the 1976 amendment to Section 9(1) of the Act. On a detailed examination of the scheme we have held: - that the question whether the payment made under a collaboration agreement is royalty or fees for technical services must be decided strictly In accordance with the definitions contained respectively in Section 9(1)(vi) and 9(1)(vii); - that the provisions of Section 9(1)(i) are more general in nature than those of Section 9(1)(vi) and 9(1)(vii) and that as between Section 9(1)(vi) and 9(1)(vii), the former contained special provisions; - that the contractual obligations contained in a collaboration agreement must be examined against the backdrop of the definitions of the terms "royalty" and "fee for technical services" so as to ascertain the true nature of the payment made under the collaboration agreement; and - that under the scheme of the Act, there is no warrant for apportioning the payments under the two heads, viz. "royalty" and "fees for technical services".
25. Now, what is the position in the case before us? The details extracted in the concordance table below will clearly indicate that not only the lump sum consideration of Sw.Fr. 1,125,000 payable under Appendix-A dated November 12, 1981, but also the amounts payable under the agreement towards special engineering services partake the characterisation of royalty within the meaning of Section 9(1)(vi) of the Act:Reference to the Sulzer's obligations RelevantArticles of App- provisionsendix-A dt. 12-11 of Explana--1981, read with tion-2 to Sec-Agreement dt. 29- tion9(1)(vi)1-19761.1 Sending to BHEL (ii) all existing docum-1.2 Passing on to BHEL -do- information on modi-1.3 Supply of additional -do- information1.5 Training of BHEL (iv) & (vi) technical personnel1.6 & Deputing to BHEL -do- of Sulzer technical2 Right to manufa- (i) & (iii) cture and sell6 User of Sulzer pat- (iii) ents pertaining to 26. The legal consequences of the above finding are first that, for the assessment year 1985-86, the lump sum amount of Rs. 17,66,250 will be chargeable to tax at 20% under Section 115A(1)(b)(ii)(1) as it stood at the relevant point of time.
Secondly, the payments made by BHEL to Sulzer for the user of the services of Sulzer technical personnel deputed to BHEL will be chargeable to tax as indicated below:Asst. Year Payments for Rate of Section special engi tax1985-86 Rs. 1,31,079 40% 115A(1)(b)(ii)(2)1986-87 Rs. 1,40,560 40% -do-1987-88 Rs. 1,64,710 30% 115A(1)(b)(ii) (as substituted by the 27. The foregoing analysis will indicate that the claim made by the assessee and upheld by the CIT(A) is in accord with the provisions of the Act. [We will only add that even though the CIT(A) was justified, in principle, in allowing the assessee's claim relating to the payment for special engineering services, he misdirected himself in law when he proceeded on the footing that the payments in question were fees for technical services. As demonstrated above, they are royalty within the meaning of Section 9(1)(vi) of the Act.
28. In view of the foregoing, therefore, we decline to interfere in the matter