| SooperKanoon Citation | sooperkanoon.com/62924 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Jul-06-1987 |
| Judge | G Krishnamurthy, G Cheriyan, V Sz, K Dixit |
| Reported in | (1987)22ITD87(Mum.) |
| Appellant | Siemens Aktiengesellschaft |
| Respondent | income-tax Officer |
2. We will set out in broad terms the background in which the appeal has come to be heard by this Special Bench.
3. The assessment made is in the status of a non-resident. The accounting period is from 1-10-1978 to 30-9-1979. The assessee had entered into various agreements with parties in India and in the present appeal the terms of 11 such agreements came up for consideration involving payments which could be grouped together under 14 items. Different nomenclature has been assigned to different items of payments. The descriptive break-up is as under :-- The details of the 14 different items giving reference to the grounds of appeal before the Tribunal, as also to the articles/clauses in the relevant agreements, and indicating wherever such agreements had been the subject of consideration in the assessment order for the year 1979-80 are given in Armexure-1 to this order.
4. Annexure-II is a reconciliation made out between the amounts as stated in the different grounds before the Tribunal as set out in Annexure-I and the break-up of the same wherever necessary as dealt with by the Commissioner of Income-tax (Appeals) with reference to the paragraphs in his appellate order.
5. The submission before the Tribunal in substance was that though the nomenclature assigned to the various payments made (of which we have given details earlier) in terms of the different agreements, differed, in essence, none of the payments partook of the nature of 'royalty' within the meaning of the said term as used in the Agreement for Avoidance of Double Taxation notified under G.S.R. No. 1090 dated 13-9-1960 which was entered into between the Government of India and the Government of the Federal Republic of Germany which governments are hereinafter referred to as the 'high contracting parties' notwithstanding that some payments were styled as 'royalties'. The aforesaid agreement is for brevity to be referred to as 'the D.T.A.Agreement'.
6. It was the contention that under Article III(1) of the D.T.A.Agreement [excepting items rendered taxable by mention in Sub-Clause (3) thereof] tax could not be levied in India on the 'industrial or commercial profits' of a German enterprise unless such profits were derived in India through a permanent establishment of the said enterprise situated in India. It was an admitted fact in the present case (as mentioned in the assessment order) that the assessee did not have permanent establishment in India. According to the assessee, therefore, unless what the assessee received as income fell within the exceptions carried out of Article III(1) by finding specific mention in Article III(3) of the D.T.A. Agreement which articles read as under : Article III(1) - Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.
Article III(3) - For the purpose of this Agreement the term 'industrial or commercial profits' shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films.
7. The term "royalty" not having been defined in the D.T.A. Agreement, the contention was that even in the widest sense only such receipts as fell within the general meaning of the term "royalty" would fall within the ambit of Article III(3). Even this meaning, it was submitted looking to the scheme of the D.T.A. Agreement, had to be read down, and only that type of royalty which was described in Article IX which reads as under could be brought to tax : Article IX - Income from immovable property may be taxed in the territory in which the property is situated. For this purpose any rent or royalty or other income derived from the operation of a mine, quarry or any other extraction of natural resources shall be regarded as income from immovable property.
To support this proposition, it was submitted that in Article V and subsequent Articles of the D.T.A. Agreement, the species of income out of the types of income which were enumerated in Article III(3) which alone fell within the ambit of taxation were spelt out. Unless such types of income referred to in Article III(3) fell within the species specified in Article V or any of the subsequent Articles of the D.T.A.Agreement, such amount, it was contended, would not be taxable in India. In this regard reliance was placed on the decision of the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 8. According to the assessee none of the items received in terms of the different agreements in the present case, including those items which may have been specifically described as "royalty" fell within the general meaning of the term "royalty". Therefore, no item was taxable.
Even if it could be considered that any item fell within the purview of the general meaning of the term "royalty", as none of the items fell within the ambit of the particular species of royalty spelt out in Article IX of the D.T.A. Agreement none of the amounts in question were taxable.
9. The Income-tax Officer and the Commissioner of Income-tax (Appeals) on the other hand, considered that the items in question were royalty as they fell within the meaning of the term 'royalty' as found in Explanation 2 to Section 9(1) of the Income-tax Act, 1961, which reads as under : 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).
10. When the appeal for this year first came up for hearing before the Division Bench, the assessee had relied heavily on certain findings of the Tribunal for the assessment year 1979-80 in this case where in respect of some of the agreements the Tribunal had come to the conclusion that the payments thereunder were "royalty" but nevertheless the said amounts were not taxable because such income was not of the species set out in Article IX of the D.T.A. Agreement. The Division Bench referred to the contentions of the assessee to which we have adverted, and was of the view in particular that the observations in the appellate order of the Tribunal for the assessment year 1979-80 that all items which stood excluded from the expression "industrial or commercial profits" as appearing in Article III(3) to become taxable in India should be only of a non-business character, required re-consideration. There are certain other subsidiary points also in respect of which the Division Bench considered the issues required fuller examination. The Division Bench therefore made a reference to the President of the Tribunal under Section 255(3) of the Income-tax Act, 1961 and this appeal has come up for hearing before us in pursuance of the directions of the President.
11. Mr. Dastur, the learned counsel for the assessee, went on to elaborate that Explanation 2 to Section 9(1) of the Income-tax Act, 1961 on which reliance was placed by the authorities below could not be called in aid by the Revenue for considering whether any of the amounts were taxable or not.
12. The first reason put forth was that the aforesaid Explanation which finds place in the Income-tax Act, 1961 and came into force only from 1-6-1976 was non-existent when the D.T.A. Agreement was entered into between the high contracting parties at a time when the Indian Income-tax Act, 1922 was the statute for taxing income which was in force in India. Reference was made to Article 11(2) of the D.T.A.Agreement which reads as under : Article 11(2) - In the application of the provisions of this Agreement in one of the territories any term not otherwise defined in this Agreement shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that territory relating to the taxes which are the subject of this Agreement.
The submission was that the word "has" as used in the aforesaid Article was indicative that in construing the meaning of any term in the said agreement the definition in the law, as existing or as understood as the law prevailing at the time of entering into the agreement, alone could be considered. According to the learned counsel this was an instance of legislation by incorporation, and in cases of legislation by incorporation, any subsequent amendment in the original statute would not have any effect in interpreting the meanings to be given to particular terms as occurring in the statute in which such incorporation was made. In this regard reliance was placed on the decision of the Supreme Court in the case of Bolani Ores Ltd. v. State of Orissa AIR 13. Further, even the deemed definition in the aforesaid Explanation was applicable only to a particular clause of the Income-tax Act, viz., Clause 9(1) as the language in which the Explanation was couched showed. That the definition was of limited scope was further made clear from the fact that where for purposes of other Sections the definition was sought to be applied, a specific reference was made in the said section, such as Sections 115A, 44D, etc., to the definition in Explanation 2 to Section 9(1)(vi).
14. The definition also, it was next stated, was an artificial definition of the term "royalty" which took within its scope many items which really could not come within the general meaning of the term "royalty". For, e.g., technical assistance fee was an entirely new concept which was introduced into the deemed definition and fell outside the purview of the general meaning of the term "royalty" as was clear from the observations of the Karnataka High Court in the case of Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 and in particular the observations at pages 786 and 787 thereof.
Article 1(2) - The present Agreement shall also apply to any other taxes of a substantially similar character imposed in India or the Federal Republic of Germany subsequent to the date of signature of the present Agreement.
the Income-tax Act, 1961 would be a statute which would be governed by the Agreement, the definitions in the said Act when enacted originally or introduced subsequently, could be invoked only if such definition was a general one extending to the whole Act and not a definition restricted to particular clauses or particular sections of the Act.
16. In view of the aforesaid position even if the case of the Revenue was to be put up at the maximum, only such type of payments could be brought to tax in India which in terms of the relevant agreement fell within the general meaning of the term "royalty" as understood at the material time when the D.T.A. Agreement was entered into, because the term "royalty" did not at that time stand defined in the Indian Tax statute. However, the learned counsel proceeded to state that the Revenue could not even claim that such general meaning had to be attributed to the term "royalty" because according to the elucidation contained in the observation of the Andhra Pradesh High Court in Visakhapatnam Port Trust's case (supra) at p. 168 which reads as under : The words 'subject to the provisions of paragraph (3)' in art.
III(1) would in our view indicate that while 'industrial or commercial income' of the foreign enterprise are not taxable in India, the rents, royalties, interest, dividends, etc., derived by the foreign enterprise from sources in India are taxable....Further, in our opinion, the items : rents, royalties, dividends, interest, etc., are taxable only when they satisfy the conditions mentioned for their liability to tax as envisaged in the various specific articles such as arts. V, VI, VII, VIII, etc.
only that type of royalties would be taxable to which there may be reference in Article V and Articles subsequent thereto. The only reference to 'royalty' is in Article IX and the royalty envisaged by such Article is only that royalty derived from the operation of a mine, quarry or any other extraction of natural resources.
17. The submission of the learned counsel was that to the extent it went, the D.T.A. Agreement was a self-contained code and where there was a conflict between the provisions of the Income-tax Act, 1961 and those of the D.T.A. agreement, the Board had categorically stated in Circular No. 333 dt. 2-4-1982 reproduced at pages 1 and 2 (Statutes) of 137 ITR as under : It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the assessing officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.
2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Doable Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income-tax Act, 1961 also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act.
Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.
that the provisions of D.T.A. Agreement will prevail over the general provisions contained in the Income-tax Act. After placing reliance on the observations of the Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45, the learned counsel submitted that since the terms of the D.T.A. Agreement now under consideration were the subject-matter of interpretation by one of the High Courts, viz., the High Court of Andhra Pradesh, and that was the only decision on the interpretation of such agreement by a High Court which was available, following the ratio of the decision of the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 the Tribunal had to follow the ratio enunciated in the aforesaid decision and it was reiterated that only such items of royalty as fell within the purview of Article IX of the D.T.A. Agreement could be brought to tax.
18. Adverting to the general meaning of the term 'royalty' the learned counsel referred to certain definitions of the term as appearing in standard treatises which were as under ; Royalty, a payment reserved by the grantor of a patent, lease of a mine or similar right and payable proportionately to the use made of the right by the grantee. It is usually a payment of money, but may be a payment in kind, that is, of part of the produce of the exercise of the right. See RENT. Royalty also means a payment which is made to an author or composer by a publisher in respect of each copy of his work which is sold or to an inventor in respect of each article sold under the patent.
Compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. A payment which is made to an author or composer by an assignee, licensee, or copyright holder in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent.
Royalty is share of product or profit reserved by owner for permitting another to use the property. In its broadest aspect it is share of profit reserved by owner for permitting another the use of property--Alamo Nat. Bank of San Antonio v. Hard, Tex, Civ. App. 485 S.W. 2d 335, 338.
In mining and mineral operation, a share of the product or profit paid to the owner of the property--Marias River Syndicate v. Big West Oil Co. 98 Mont. 254, 38P 2d 599, 601.
19. According to the learned counsel royalties paid were (1) only for user of property in contradistinction to the price paid for properties which have been sold outright. He stated that if such was not the case even purchase price paid outright could be termed to be royalty which was a proposition totally foreign to law ; (2) payments made periodically as distinct from payments made in lump sum could alone be considered as royalty. Lump sum payments, it was stated, would therefore be excluded from the concept of 'royalty' and in this regard reliance was placed on the decision of the House of Lords in the case of Rolls-Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580 in particular observations at page 586 ; (3) only amounts payable for the user of property which was statutorily protected, such as patents, trade marks, copy rights, etc., would fall within the scope of the term "royalty".
20. The learned counsel then took us through the provisions of Explanation 2 to Section 9(1) and submitted that the Explanation which defined the term "royalty" only for the purposes of Clause (1) of Section 9 went considerably beyond the acceptable general meaning of the term 'royalty' and took within its ambit, consideration paid, for the outright transfer of all or any rights in patents, trade marks, etc., also. The definition also took within its purview amounts paid for rendering of any services in connection with the various activities referred to in the Explanation, viz., imparting of information, relating to user of patents, designs, secret formula, etc., as also the outright transfer of rights relating to such items of property.
21. According to the learned counsel, property for which royalty had to be paid had to be such that it was statutorily protected, namely, patents, trade marks, etc., and would not apply to payments made for the user of know-how which was not a statutorily protected property. It was also specifically stated that the payments made for services rendered could never be royalty. They would only be a remuneration in the general sense of the word.
22. The learned counsel then proceeded to examine the different agreements. In relation to agreements in Annexure-I hereto where payments were described as being for fees as in agreement with Siemens India Ltd. dt. 16-9-1975 (Rs. 9,431) (Reference was made to page 53 of the compilation of agreement in Paper Book No. II). The contention was that the consideration was payable in terms of Clause 6.1 for 'the rights granted and the supply of technical know-how and the training of Siemens India Personnel by the assessee with regard to Contract Products'. The submission, therefore, was that such payments could not partake the nature of royalty but represented only charges for services rendered. No statutorily protected rights were parted with and therefore even though know-how was supplied the question of the payment being royalty could not arise, particularly so because according to the assessee know-how does not partake the nature of property, and payment for know-how was not payment for user of any property and, therefore, could not be classified as royalty. The argument regarding other items of payments described as fees under the agreement with Siemens Ltd. dt.
17-7-1975 (Rs. 4,29,013) (page 132 of paper book I) and with B.E.L. dt.
15-3-1967 (Rs. 35,440) (page 179 of paper book I) and with Bharat Bijli Ltd. dt. 26-7-77 (Rs. 2,62,536) (page 101 of paper book II) were the same except that the amount of Rs. 35,440 was exclusively technical assistance fee. It was pointed out that the agreements with Siemens and B.E.L. had been the subject of consideration by the Tribunal for the assessment year 1979-80 in paragraphs 26 to 29 of its order dated 30-4-1986 in IT A No. 1424/85 and the eventual finding was that in any event the payments could not be taxed in India.
23. The learned counsel next took up the items which were described as service charges paid, for delegation of personnel, which were made in terms of the agreement with C.C.I. Ltd. dt. 6-6-1977 (Rs. 3,79,375) (at page 6 of the paper book No. II) and the agreement with B.H.B.L. dated 28-10-1975 (Rs. 19,227) (page 54 of the paper book No. I). The submission was that these payments were exclusively for delegation of personnel by the assessee and such remuneration paid to the assessee was not royalty. The payments in question as far as the payments to C.C.I. Ltd. was in pursuance of Article 4.1 and 4.2 of the agreement which provided for the delegation of Siemens' technical personnel to India : on the terms and conditions and for the periods to be mutually agreed upon. The learned counsel stated that separate consideration was payable for other items as provided in the agreement and, therefore, the amount of Rs. 3,79,375 did not partake of the nature of royalty.
24. The payment to B.H.E.L. of Rs. 19,227 was made in terms of article 5 of the said agreement and again the payment for personnel deputed was on terms and conditions to be mutually agreed upon. For other items which were covered by the agreement there were separate payments made.
The learned counsel submitted that this agreement had been considered in paragraph 33 of the order of the Tribunal dt. 30-4-86 for the assessment year 1979-80 in ITA No. 1424/85 and it had been held that the amount in question was not taxable. The Tribunal in coming to this conclusion had also referred to certain orders passed by the Delhi Benches in appeals preferred by B.H.E.L. wherein it was held that no tax was deductible at sources in ITA Nos. 2581/DEL/79 dt. 3-6-1980 and ITA No. 2579/DEL/79 dt. 6-12-1980.
25. Adverting to the agreement with B.H.E.L. dt. 28-7-1975 the payment of Rs. 2,68,059 was stated to be in terms of Article 5 (page 14 of the paper book No. I) where the payment was described to be for additional assistance to be rendered by the assessee for certain specific services as spelt out in para 5.1, namely assistance was to be rendered for technical planning for manufacture of contract products, lay out of shop facilities for the manufacture of contract products, procurement of special jigs, tools or fixtures, vetting designs of contract products made by BHEL or any other specific engineering services, etc.
Here again, in terms of article 5.3 charges were to be paid as were to be mutually agreed upon. The amount of Rs. 2,68,059 which was for additional assistance was again stated to be for specific services and therefore would not partake the nature of royalty. In this regard, in particular the learned counsel submitted that the nature of additional assistance in terms of this agreement had come up for consideration for the earlier year before the Tribunal, Bombay Benches and the Tribunal had dealt with it in paragraphs 30 to 32 of its order for the assessment year 1979-80. The Tribunal had categorically stated that these amounts were not payments in the nature of royalty but were more in the nature of technical fees. They also stated that since the agreement had been entered into prior to 1976 such payments would even go outside the purview of Section 9 of the Income-tax Act, 1961. The Tribunal, it was stated, had also referred to an order of the Delhi Bench in ITA Nos. 4259 & 4260/DEL/80 dt. 7-11-1981 where the Delhi Bench had accepted the contentions of BHBL that no tax need be deducted at source on payments made in terms of the article.
26. Coming to amounts paid as lump sum fees made in terms of agreement dated 6-6-1977 with C.C.I. Ltd. (Rs. 1,96,968) the contention was that these payments were made in terms of Article 8 (page 9 of the paper book No. II). The payment, it was stated according to Article 8.1 was in consideration of documentation prepared and transmitted in Germany and technical assistance rendered in Germany comprising the training of C.C.I. personnel. The entire lump sum payment was to be of DM 1,30,000 to be paid in three equal instalments. The submission was that the payment being in lump sum could not partake the nature of royalty and in any event even if it was held that any portion thereof could pertain to royalty an apportionment had to be made so that payment attributable to technical assistance would be excluded from taxation because the payment was a composite one and payment for technical assistance in any view of the matter could not be royalty.
27. Next the lump sum payment of Rs. 90,009 paid to Siemens India Ltd. in terms of agreement dated 27-7-1978 was referred to. This payment was made in terms of the consideration stipulated in article 5 of the agreement dated 27-7-1978 (page 74 of paper book No. II). Here again, the payment was of lump sum of DM 30,000 and as stated in respect of C.C.I. Ltd. the payment could not be royalty because it was in lump sum, and secondly, even if any portion was to partake the nature of royalty an apportionment had to be made because the payment was a composite one in terms of article 5 for, documentation prepared, as well as technical assistance rendered, and the payment relating to technical assistance could never partake the nature of royalty.
28. Coming to the agreement with Khandelwal Hermann dated 17-2-1976 (page 42 of paper book No. II) the amount was stated to be payable in lump sum and was, therefore, not royalty and apart from it because the agreement was entered into prior to 17-2-1976 (though the agreement was approved by the Government by the letter dated 31-3-1978) the amount in question was not taxable.
29. Taking up lastly the agreements where payments made were described as royalty, viz. with B.H.E.L. dated 15-3-1967 where the payment was of Rs. 1,06,327 (reference page 179 of paper book No. I, Clause 11 of the agreement) and Es. 2,65,831 payment to Siemens India Ltd. (page 158 of paper book No. I, Clause 11) and the payment of Rs. 20,19,009 to B.H.E.L. (page 103 of paper book No. I, Clause 10(1) and Clause 10(2) and lastly the payment of Rs. 22,000 to C.C.I. Ltd. in terms of agreement dated 6-6-1977 (page 9 of paper book No. II, article 8.2), it was submitted that these payments though described as royalty, really did not partake the nature of royalty because they were primarily for the supply of information, and other rights, payment for which, since they were not of a protected nature, would not partake the nature of royalty. Again it was contended that if any portion was to be considered as royalty for the use of patents, etc., an apportionment should be directed. In this regard it was also brought to notice that the payment described as royalty in respect of B.H.E.L. and Siemens India Ltd. were the subject of decision by the Tribunal for the assessment year 1979-80, already referred to above, and the Tribunal, though it considered that some of the payments would partake the nature of royalty, held that in view of the provisions of D.T.A. Agreement which prevails over the statute the royalty was not of such a type as would fall within the pale of taxation in India and was, therefore, exempt from taxation.
30. The learned Departmental Representative, Shri Prashant Ray started by pressing into service the ratio of the judgment of the Bombay High Court in the case of Aziende Colori Nazionali Affini v. CIT [1977] 110 ITR 145. He submitted that this judgment is clear authority for the proposition that every agreement had to be read as a whole. If each of the agreements in the present case was read as a whole, he submitted that it would be clear that the assessee was exploiting the special knowledge it possessed, by imparting the same to the Indian parties for fee variously described. This was an instance where the know-how, which is clearly property, was parted with, for an amount. The bifurcation of the amount into different items, such as fees, amounts relating to services, etc., was only a clever arrangement. The submission of the learned Departmental Representative was that such artificial splitting up of the consideration payable in terms of the agreement should be ignored and each part of the entire payment, by whatever name it was described in each of the agreements, was nothing but a payment towards royalty. This, the learned departmental representative submitted, would be the position even if the provisions of Explanation 2 to Section 9 were not called in aid, and only the general meaning of the term "royalty" was considered.
31. For the general meaning of the term "royalty", the learned departmental representative referred to us two decisions. The first was the decision of the Gujarat High Court in the case of CIT v. Ahmedabad Mfg. & Calico Printing Co. [1983] 139 ITR 806 and the second was the decision of the Calcutta High Court in the case of CIT v. Stanton & Stanely (Overseas) Ltd. [1984] 146 ITR 405. The decision of the Gujarat High Court, the learned departmental representative submitted, had reviewed the definition of the term "royalty" as appearing in well-known treatises and laid down the parameters of the expression "Royalty" by whatever name called. Having regard to the concepts in those treatises and quoting extensively from the different recognised books of law and the Encyclopaedia Britannica specifically extracted in Ahmedabad Mfg. & Calico Printing Co.'s case (supra), at p. 821 the Gujarat High Court came to the conclusion that an amount paid though styled as "research fee" was nothing but royalty. In particular he stated that the exposition in the Encyclopaedia Britannica which was approved by their Lordships, referred to the supply to the licensee of technical know-how, apart from patented inventions, and it was also mentioned in the aforesaid extract that the form of legal protection afforded did little to change the system of royalty payments. According to the learned departmental representative, therefore, it was not only where user of payments were permitted but even where know-how was transferred the payments would partake of the nature of royalty. The fact that the secret processes of know-how may not in some cases be protected statutorily by patents would not make any difference. He emphasised that almost all the agreements contained clauses which prohibited the Indian party from divulging the information supplied to it, or the documentation given to it by the assessee, to outsiders and, therefore, by virtue of the contract with the Indian parties the assessee had ensured the protection of the rights granted. The contractual protection which the assessee reserved to itself, he stated, was adequate to hold that even where right to patents was not transmitted payments made for the right to use the know-how which was exclusively in the knowledge of the assessee would amount to royalty.
32. The learned departmental representative submitted that the Calcutta High Court in the latter case had also referred to the various definitions of the term "royalty" in law books as well as the write up as to the concept of 'royalty' from the Encyclopaedia Britannica and had come to the same conclusion as to the general concept of the term 'royalty' to which the Gujarat High Court had come to earlier. If the meanings attributed to the term 'royalty' by the Gujarat and Calcutta High Courts were applied, the learned departmental representative submitted that the payments under the present agreements, reading the agreements as a whole in each case, would be nothing but royalty.
33. Adverting to the D.T.A. Agreement, the learned departmental representative submitted that the basis of taxability under such agreements was the territorial nexus. If income was derived in India by the assessee by exploitation of its know-how, etc., it stood to reason that such income should be taxable in India. Where such income was royalty, Article III(3) of the D.T.A. Agreement recognised this concept, and clearly stated that such royalty income was taxable. The learned departmental representative stated that Article IX of the D.T.A. Agreement did not enact any restriction in the taxability of royalty. According to the said Article certain types of royalty were to be deemed to be immovable property for the purpose of computation of income (i.e.) determination of Head of income. The Article did not restrict taxation of royalty only to royalty derived from hiring of mines, etc. The observations of the Andhra Pradesh High Court on which reliance was placed by the learned counsel, it was submitted, had to be read in the context, and on a plain reading of Article III(3) and Article IX, there could be no scope for reading down the general meaning of the term "royalty". The learned departmental representative pointed out that the rule of interpretation relied on by the Bench of the Tribunal in deciding the appeal for the assessment year 1979-80, viz., that of noscitur a sociis would be applicable only where there is a doubt about the meaning of the term on a plain reading. In the present case there was no such doubt and hence the rule of interpretation on which the Tribunal relied in the earlier year, it was submitted, could not be invoked.
34. The learned departmental representative, apart from relying on the decisions of the Gujarat and Calcutta High Courts already referred to, and the decision of the Andhra High Court in Rajah Manyam Meenakshamma v. CIT [1956] 30 ITR 286, also relied on the Commentary on Income-tax by Kanga & Palkhivala, Seventh Edition, page 150 to support the stand that royalty could be paid even in lump sum.
35. While not disputing the proposition that after the introduction of Explanation 2 to Section 9(1) in 1976, the general provisions of Section 9(1) would not apply to determine whether a payment was royalty, or not, with reference to agreements executed after that date, the submission of the learned departmental representative was with reference to agreements executed before 1976 all payments were taxable by virtue of Section 5 read with Section 9(1) because there was clearly a business connection between the assessee and the Indian parties. In short, the argument was that since the application of Sections 5 and 9(1) to the agreements executed prior to 1-4-1976 had not been examined by the authorities below who had proceeded only on the basis of Explanation 2(vi) to Section 9(1), the present assessment should be set aside to be re-done in the light of the effect of Section 5 read with Section 9(1) of the Income-tax Act, 1961.
36. Another point made by the learned departmental representative was that in some D.T.A. Agreements entered into with some other countries prior to the D.T.A. Agreement now under consideration, there was a definition of the term 'royalty'. This aspect was taken due note of by the Gujarat High Court. As India was one of the high contracting parties in the case of all the agreements the learned departmental representative submitted that it should be presumed that in using the term "royalty" the earlier meanings assigned to it were kept in view during the negotiations with Germany. As far as the expression "laws in force" appearing in Article II(2) was concerned, it was stated that Article XVI of the D.T.A. Agreement provided that expressions in taxation laws were to have the same meaning, when there was nothing in the agreement to the contrary, and in the present case there was nothing in the agreement which was contrary to the definition in Explanation 2 to Section 9(1).
37. The learned departmental representative submitted dealing with the aspect of legislation by incorporation, on which stress was placed on behalf of the assessee, that the D.T.A. Agreement and the Income-tax Act formed a single statute and there was no question of pressing into aid the concept of legislation by incorporation in the present case since there were no two different statutes so that the provisions of one could be incorporated into the other.
38. In reply the learned counsel for the assessee submitted that the extract from the Encyclopaedia Britannica which had been set out in the judgments of the Gujarat High Court and the Calcutta High Court, relied on by the learned departmental representative has not figured in earlier or later editions of that treatise. He went on to reiterate that know-how was not a type of property for which payment would be royalty. While not disputing that every agreement has to be read as a whole, he stated that the judgment of the Bombay High Court in Aziende Colori Nasionali Affini's case (supra), relied on by the learned departmental representative, did not go to the extent of saying that other relevant considerations in interpreting a document should be ignored. He emphasised that there was a material difference between royalty and technical fees and he submitted that even the C.B.D.T. had recognised that in cases where consolidated payments are stipulated in an agreement an apportionment would be justified. This circular had been referred to by the Calcutta High Court in Stanton & Stavely (Overseas) Ltd.'s case (supra) at pp. 415 and 416 which was a case relied on by the learned departmental representative.
39. The learned counsel also stated that there was no basis or warrant for sending back the present case for a fresh assessment because the case had been fully examined by the authorities below and they had taken a view that the provisions of Explanation 2 to Section 9(1) were applicable. It had only to be determined whether the payments were royalty, or not, and whether the approach of the Revenue in coming to the conclusion that they did, was correct.
40. We have carefully considered the rival submissions. Article I of the D.T.A. Agreement states as under : Article I.--(1) The taxes which are the subject of the present Agreement are : imposed under the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter referred to as "Indian-tax") ; (2) The present Agreement shall also apply to any other taxes of a substantially similar character imposed in India or the Federal Republic of Germany subsequent to the date of signature of the present Agreement.
By virtue of Article I(2), taxes imposed under the Income-tax Act, 1961 would also be governed by the terms of the agreement, because, the Act of 1961 was enacted subsequent to the date of signature of the aforesaid agreement. But this is not to say that every definition in the new Act whenever it is introduced by way of amendment, or otherwise, will operate as a definition for considering the import of a term used in the D.T.A. Agreement. The learned counsel for the assessee had stressed on the point that in view of the terminology used in Article II(2) of the D.T.A. Agreement, it should be considered that there was legislation by incorporation of the statutory provisions of the Income-tax Act in India as it stood at the time of signing of the D.T.A. Agreement and no further changes in the said Act could be called in aid for interpreting the terms in the D.T.A Agreement. To support this stand he also submitted that in 1984 when the D.T.A. Agreement was amended a definition of "royalty" had been introduced in the D.T.A.Agreement, which differed from that in Explanation 2 to Section 9(1).
[Definition appears in Article IX(3) in the amended agreement, set out in 156 ITR Statutes, page 90.] 41. In "Principles of Statutory Interpretation" by G.P. Singh, 3rd Edition (1983), it has been stated at page 226 as under : A distinction has also been drawn between a mere reference or citation of one statute into another and incorporation. In the former case a modification, repeal or re-enactment of the statute that is referred will also have effect for the statute in which it is referred : but in the latter case any change in the incorporated statute by way of amendment or repeal has no repercussion on the incorporating statute. It is a question of construction whether a particular former statute is merely referred to or cited in a later statute or is wholly or partially incorporated therein.
It has also been stated that the rule that the repeal or amendment of an Act which is incorporated in a later Act has no effect on the later Act, or on the provisions incorporated therein is subject to certain exceptions. In the present case we are concerned with only a short point, namely whether the definition in Explanation 2 to Section 9(1) of the term "royalty" would apply in interpreting the scope of the term "royalty" as occurring in Article III(3) of the D.T.A. Agreement.
42. In the case of Visakhapatnam Port Trust (supra), the Andhra Pradesh High Court had traced out the history of how Double Taxation Agreements came into being. The High Court had considered the effect of Article XVI of the Agreement on Section 9(1) of the Income-tax Act. Article XVI reads as under :-- The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Agreement.
Thereafter, after examining the scope of Article III(1), the Court stated at page 159 as under :-- It is true that under Section 9(1)(i) of the Act all income accruing or arising whether directly or indirectly through or from any 'business connection' in India, or other income mentioned in that section shall be deemed to accrue or arise in India. But the charging provision, Section 3, as well as Section 5 of the Act defining the 'total income' of either a resident or a non-resident are expressly made 'subject to the provisions of the Act', including agreements made under Section 90.
Therefore, the legal position on the second point may be summarised as follows : The provisions of Sections 4 and 5 of the Act are expressly made subject to the provisions of the Act which means that they are subject to the provisions of Section 90. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Govt. of India.
Therefore, the income arising or accruing to a foreign company through or from any 'business connection' in India which is deemed to arise or accrue in India, being part of the total income specified in Section 4 and chargeable to income-tax under Section 4 is, also subject to the provisions of the Agreement to the contrary.
Therefore, even assuming for a moment that all the profits of the German company are to be deemed to have accrued or arisen in India by virtue of Section 9 of the Act, the terms of art. III of the Agreement prevail over Section 9 of the Act. In effect, the industrial or commercial profits of the German company are not liable to tax under Section 9 of the Act except to the extent permitted by Article III.Article III of the D.T.A. Agreement, therefore, prevails over Section 9 of the Act. The High Court of Andhra Pradesh is categorical on this point.S. Sundaram Pillai v. V.R. Pattabiraman AIR 1985 SC 582 has examined the scope of a "proviso" and an "Explanation", in a statute and in relation to an Explanation their Lordships have stated as under : Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is-- (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve ; (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful ; (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment ; and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hinderance in the interpretation of the same.
44. Explanation 2 to Section 9(1) has been set out by us earlier in the order and the Explanation starts with the words "For the purposes of this clause 'royalty' means....The definition, therefore, explains the meaning and intendment of items which come within the purview of Section 9(1). The Explanation cannot take away a right which a person has already been clothed with under the statute, nor can it become an hinderance in the interpretation of the same. The Andhra Pradesh High Court has, as we have observed, categorically held that in effect industrial or commercial profits of the German company are not liable to tax under Section 9 except to the extent permitted by Article III of the D.T.A. Agreement. They have also stated that the terms of Article III of the agreement prevail over Section 9 of the Act. Therefore, a definition introduced in the Act of 1961, solely as an Explanation to Section 9(1), cannot have any impact in interpreting the scope of terms used in Article III of the D.T.A. Agreement as it stood in this assessment year. This conclusion that we have arrived at, is not because this is a case of legislation by incorporation, but because of the manner in which the provisions of the D.T.A. Agreement vis-a-vis the taxing statutes prevailing in one of the contracting States, is to be interpreted. Therefore, in deciding the present case we have to go only by the general meaning of the term "royalty" as it is understood.
45. The case before the Calcutta High Court in the case of Stanton & Stavely (Overseas) Ltd. (supra) related to the assessment years 1965-66, 1966-67, 1967-68 and 1969-70 and their Lordships of the Calcutta High Court referred to, with approval, the ratio of the judgment of the Gujarat High Court in the case of Ahmedabad Mfg. & Calico Printing Co. (supra) where the Court quoted with approval the definition of the term "royalty" in Encyclopaedia Britannica, 1972 Edition. The Calcutta High Court in Stanton & Stavely (Overseas) Ltd.'s case (supra) at p. 421 observed as under : 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 (pp. 819 & 820 of 139 ITR) : 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 centuries gold and silver mines were the property of the Crown ; such 'royal' metals could be mined only if a payment ('royalty') were made to the Crown....An individual inventor without capital or plant must licence others to manufacture his invention.
When owners of rights make arrangements for such exploitation by others, the remuneration they received in exchange is often in the form of a royalty, usually based on the actual extent of the exploitation.
As to inventions, a royalty may be said to be a compensation paid under a licence granted by the owner of a patent ('the licensor') to another person ('the licensee') who wishes to make use of the invention, the subject of the patent. The patent remains the property of the licensor. A licence may be exclusive, in which case the patent owner precludes himself from granting licences to third parties, or non-exclusive, in which case the patent owner may grant licences to as many persons as he wishes. The granting of licence and the payment of royalties thereunder are purely a matter of contract between licensor and licensee. It is essential that all relevant matters be provided for in the contract, especially the amount of royalties, and the precise method of computing them. A licence may be limited or not, according to the intentions of the parties. It may be limited to certain purposes or to geographical areas or in any other way permissible under the national laws having jurisdiction over the transaction. It will normally be for the full term of the patent.
A royalty may be a single payment covering the whole use of the patent for the term, but the more usual practice is to make periodic payments and to relate the amounts of those payments to the actual use of the patent by the licensee. It is common to charge royalties on the basis of a percentage of the price for which the licensee sells the articles or on the basis of the number of the articles made under the patent. Although the amount of royalties is generally a matter of free bargaining between the licensor and the licensee, in some countries governments preclude their nationals from paying royalties to foreign patent owners in excess of a certain maximum fixed by the Government. Some governments also reserve the right to approve the entire licence contract concluded between their nationals and aliens.
Royalty payments may be in excess 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 the 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.
and then stated with reference to the judgment of the Gujarat High Court, 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 the 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 paid might be correlated to the extent of exploitation. Then, the court discussed the agreement between the parties before their Lordships and held that the payment made in that case was nothing else but royalty as known to law and to the international commercial world. But it is to be borne in mind that these expressions which are not defined in the Act should be construed in the background of commercial point of view having regard to certain well-known concepts (as to) how people in the trade or commerce of the natural world understand it. It is also to be emphasised, as emphasised in several decisions, that any nomenclature given by the parties in the agreement between them which is not defined in the Act, would not be conclusive or decisive of the matter.
It is thus clear that the general concept of the term "royalty" does not rule out "lump sum payments" being considered as "royalty" as well as payments made for know-how. The mere fact that a particular knowledge which is imparted may not be statutorily protected as in the case of a patent or trade mark would not take it outside the purview of the term "royalty". It may be that the knowledge imparted is only contractually protected. It may even be that there is no protection for the knowledge so granted. Even so the observations which we have set out above clearly show that the form of legal protection has no conclusive impact in determining whether payment is "royalty" or not, nor the nature and mode of payment whether lump sums, single, or periodic, nor the question that it does not cover know-how. The Dictionary meanings of the term "royalty" relied on by the learned counsel for the assessee and adverted to in paragraph 18 of our order are only indicative of circumstances to which payments can be considered to be royalty and are not exhaustive as to the content of the term.
46. The next point which arises is whether the general concept of "royalty" as enunciated by the Gujarat High Court and approved of by the Calcutta High Court in the judgments referred to requires limited application or, in other words, the observations of the Andhra Pradesh High Court, relied on by the learned counsel for the assessee limit the application of the term "royalty" to what is provided for in Article IX of the D.T.A. Agreement. We have already referred to the judgment of the Andhra Pradesh High Court in Visakhapatnam Port Trust's case (supra) and have derived considerable support therefrom in our attempt to interpret the true scope of the term "royalty". The High Court was considering whether certain items of interest were taxable, and in that regard, the High Court found that Article VIII of the Agreement had spelt out the types of interest which could be taxed. Article VIII reads as under : Article VIII.--Interest on bonds, securities, notes, debentures or any other form of indebtedness, derived by a resident of one of the territories from sources in the other territory may be taxed in both territories.
It is clear that Article VIII spelt out different types of interest and the Court held that for interest to be taxable in terms of Article III(3) it must fall within the specie enumerated in Article VIII and the type of interest the assessee received in that case was not one of the specie enumerated in Article VIII. The learned counsel for the assessee had sought to support his stand from the following observations at page 168 by the High Court of Andhra Pradesh in Visakhapatnam Port Trust's case (supra): The words 'subject to the provisions of paragraph (3)' in art.
III(1) would in our view indicate that while 'industrial or commercial income' of the foreign enterprise are not taxable in India, the rents, royalties, interest, dividends, etc., derived by the foreign enterprise from sources in India are taxable. Obviously, Sub-clause (3) cannot be construed as excluding these items from the taxable income of the permanent establishment by applying Sub-clause (3) to the latter part of Article III. Sub-clause (3) has relevance only to the first part of Article III(1). Further, in our opinion, the items : rents, royalties, dividends, interest, etc., are taxable only when they satisfy the conditions mentioned for their liability to tax as envisaged in the various specific articles such as arts.
V, VI, VII, VIII etc. Article VIII refers to the taxability of interest in India.
Article IX.--Income from immovable property may be taxed in the territory in which the property is situated. For this purpose any rent or royalty or other income derived from the operation of a mine, quarry or any other extraction of natural resources shall be regarded as income from immovable property.
Article IX only speaks of the taxability of immovable property. For that limited purpose the article deems 'royalty' derived from mine, quarry or any other extraction of natural resources as "income from immovable property" along with rent or other income. This article only classifies (a) that the nature of receipt derived from that particular source as "royalty" and then states that, that receipt designated as royalty should be taxed as income of immovable property. Article IX does not spell out as Article VIII does in respect of interest, the types of royalty which are taxable. Therefore, we hold that nothing in Article IX can lead to the interpretation that the general meaning which is to be attributed to the term "royalty" as occurring in Article III(3) of the D.T.A. Agreement requires to be limited to royalties derived from mines, quarries, or any other extraction of natural resources, and the present items fall outside its purview. Therefore, we will have to examine each of the agreements with reference to the general meaning of the term "royalty" as set out earlier, i.e., as understood by the Gujarat and Calcutta High Courts. The source from which the royalty is derived if the receipt in question satisfies the general meaning of "royalty" will be of no consequence in determining whether the amount is taxable or not.
47. The learned departmental representative had advanced an argument that the assessment should be set aside for determining the applicability of Section 5 and Section 9(1) of the Income-tax Act, 1961 in respect of agreements entered into prior to the year 1976. This plea was opposed on behalf of the assessee. As far as the admissibility of pleas of the respondent are concerned, the Madras High Court has observed in the case of N.P. Saraswathi Ammal v. CIT [1982] 138 ITR 19 at page 22 as under :-- On the issue as to the Tribunal's jurisdiction, learned counsel on both sides cited a pleathora of cases. We, however, need refer, in some detail, to only one reported decision as an authoritative exposition on the subject, namely, the Supreme Court's decision in Hukumchand Mills Ltd. [1967] 63 ITR 232. In that case too, as in the present one, a new plea was sought to be raised by the department while it figured as a respondent in an assessee's appeal before the Tribunal. The assessee's first contention in that case was that the Tribunal was confined to the subject-matter of the appeal, and they cannot travel outside it and determine questions which had not been mooted at the earlier stages of the proceedings. The Supreme Court rejected this contention, holding that, short of enhancing an assessment, the Tribunal can determine any point that is raised in the appeal. The assessee's next contention before the Supreme Court was that while Rule 27 of the Appellate Tribunal Rules enabled a respondent before the Tribunal to support a decision in his favour on a ground decided against him, that rule did not allow the department to raise before the Tribunal altogether a new plea at the hearing of an appeal preferred by the assessee. The Supreme Court rejected this contention as well. They observed that the Appellate Tribunal Rules were not exhaustive, and the full plenitude of the Tribunal's jurisdiction can by no means be spelled out from their own Rules. In that view, the Supreme Court upheld the decision of the Tribunal based on the new plea raised for the first time by the department as a respondent in the assessee's appeal.
We regard this decision of the Supreme Court as an authoritative ruling on the scope of the Tribunal's appellate jurisdiction generally and more particularly as an enunciation of the power of the Tribunal to entertain a new plea put forward by the respondent to an appeal.
Three more examples from the law reports were cited before us on the point by the learned standing counsel for the department. There were also cases where courts had upheld the Tribunal's action in entertaining a new plea which happened to be urged by a respondent to the appeal. Two of the cases cited are from the Bombay High Court. They are CIT v. Gilbert & Barker Mfg. Co. [1978] 111 ITR 529 (Bom.) and D.M. Neterwalla v. CIT [1980] 122 ITR 880 (Bom.). In one case the respondent happened to be the assessee. In the other, the respondent was the department. The power of the Tribunal to dispose of an appeal on a new plea raised by a respondent was upheld in both these cases. The other decision is from Delhi, reported as CIT v. Edward Keventer (Successors) (P.) Ltd. [1980] 123 ITR 200. The Delhi High Court in their judgment observed that a new plea from a respondent must be entertained by the Tribunal as a matter of practice on principles of natural justice. The value of these three decisions as precedents, however, is so much the less because none of them refers to the decision of the Supreme Court in Hukumchand Mills Ltd. [1967] 63 ITR 232. Nevertheless, they disclose a consensus of judicial opinion on the amplitude of the Tribunal's appellate jurisdiction as including the power to entertain a new plea even if it is raised by a respondent to an appeal.
In the present case, the Tribunal did not have to go in for fresh facts while entertaining the department's new plea and deciding it.
They did so by applying the relevant statutory provisions to the facts already on record.
48. In the case before us there are no facts found on the basis of which the plea put forth by the learned departmental representative about the applicability of the provisions of Section 5 and Section 9(1) can be examined because in the assessment order there is a clear finding that the assessee does not have a permanent place of business in India and there are no facts on the basis of which it can be found out whether the activities of the assessee can be held to constitute a business connection with persons within the taxable territories, which is a pre-requisite for the applicability of Section 9. That apart, we have quoted extensively from the observations of the Andhra Pradesh High Court in Visakhapatnam Port Trust's case (supra) about the extent and scope of applicability of Section 5 and Section 9 as also the charging Section 4 of the Income-tax Act, 1961. The court has made it clear that the provisions of the D.T.A. agreement would override the provisions of the Sections referred to. No further examination of the type canvassed for by the learned departmental representative is, therefore, called for, and what has to be determined is only whether the amounts are taxable or not by applying the provisions of Article III of the D.T.A. agreement. It has been accepted at the stage of assessment that the assessee does not have a permanent establishment in India in this assessment year. This being the case, industrial or commercial profits of the assessee in India would not be taxable unless such industrial or commercial profits are of the nature of income which falls under Article III(3). The Madras High Court in the case of N.P.Saraswathi Ammal (supra) had observed at page 26, after considering a catena of decisions as to what would be the scope of the term "Body of Individuals" :-- It is not our intention to lay down what we mean by a BOI and lay it down in an authoritative or definitive fashion. Parliament has not attempted a definition. And, if we may adopt a saying of Lord Reid, judges should not rush in where the Legislature has feared to tread.
All we have attempted here is to mark the distinction between an AOP and a BOI, by reference to certain broad features of each. It is needless to say that it would be a matter for the IT authorities as well as the Tribunal and the courts to consider the facts in each case to find out if any given group of people are to be regarded as a BOI or not.
Having regard to the note of caution, far be it for us to attempt, in the present case, therefore, any definition of the term "royalty" as appearing in Article III(3) of the D.T.A. Agreement under consideration, which term, the high contracting parties had thought fit to leave undefined. It is only for us to see whether the payments made, and which are now under adjudication by us, fall within the term "royalty" in Article III(3), i.e. whether each such item falls within the general meaning of the term "royalty", the scope, and the parameters of which, we have set out earlier. We proceed to examine the different payments in the light of such criteria.
49. The first group of agreements which have to be considered are those dated 16-9-1975 with Siemens India Ltd., 17-7-75 with Siemens India Ltd., 15-3-1967 with B.E.L. and 26-7-1977 with Bharat Bijlee Ltd. Under these agreements which are the subject of consideration the amounts are Rs. 9,431, Rs. 4,29,013, Rs. 35,440 and Rs. 2,62,536. The contentions of the learned counsel for the assessee regarding these agreements have been set out in paragraph 22 of our order which gives a reference to the pages of the compilations in which the respective agreements appear. The payments made under these agreements are referred to as "fees". As far as the payments of Rs. 9,431, Rs. 4,29,013 and Rs. 2,62,536 are concerned, the payments are made according to substantially similar clauses in the different agreements and as a specimen we set out Clause 6.1 of the agreement dated 17-7-1975 (at page 132 of the paper book No. I) with Siemens India. This clause reads as under :-- 6.1. In consideration of the supply of technical know-how and training of Siemens India personnel by Siemens with regard to Contract Products (for which Siemens India or its licensees already held manufacturing licences granted by the Government of India) as well as in consideration of the supply of technical know-how on New Developments, Siemens India shall pay to Siemens fees at the rates specified in Annex A hereto, on the basis of the "ex-factory selling price" of the respective Contract Products and parts thereof manufactured and sold by Siemens India and its licensees during the validity of this agreement as defined in Article 9.1 hereof. With regard to this Agreement, Contract Products shall be considered as "sold" when invoiced, by Siemens India to the purchaser ; or if not invoiced, when delivered, dispatched or set apart for the own use of Siemens India.
The payment is for the supply of technical know-how, the training of Siemens India personnel as also for the supply of technical know-how on new developments for contract products. Contract products are those products which have been set out in Annexure 'A' to each of the relevant agreements. In the present agreement they are motors, low voltage switchgear, switchboards, high voltage switchgear, etc. The term "new developments" has also been defined. This definition comes in para 1.5 at page 126 of paper book No. I and reads as under :-- 1.5. The term "New Development" means changes in the electrical design of Contract Products involving different executions of electrical technology, or innovations in electrical layouts, or substitution of materials used in electrical or magnetic circuits, or changes in the mechanical design of Contract Products involving different executions of mechanical construction or complete changes in dies or tools and manufacturing processes, insofar as such new developments will either be successfully incorporated in or will form part of the manufacturing or engineering technique of Siemens and will be applicable to the operations of Siemens India.
From the extracts set out above it is clear that what is described as fee is for supply of technical know-how with regard to contract products as well as technical know-how for new developments. That, this know-how may not be subject to protection by patents in many cases, would not make any difference to the nature of payment. Para 9.2 states that after the termination of the agreement the rights acquired under information and the patent rights shall expire and para 9.3 states that after termination of the agreement Siemens India may continue to use the information and Indian patent rights furnished to them under the agreement free of charge. Interpretation of some of these agreements had come up for consideration before the Tribunal for the assessment year 1979-80 and the Tribunal had discussed this in paragraphs 26 to 29 of its order. The Tribunal had considered that these payments partook the nature of 'royalty' having due regard to the definition in Section 9(1)(vi) of the Income-tax Act, 1961 which was also the provision relied on by the CIT (Appeals) in this year in paragraphs 13, 14 and 20 of his order. The Tribunal, however, eventually had held that though the payments were 'royalty' within the meaning of the definition referred to in Section 9(1)(vi) of the Income-tax Act, they could not be subjected to tax because it was not of the nature of royalty specified by the agreement, that is, in particular Article IX.50. We have, therefore, to examine in the light of what we have stated earlier would be the true concept of "royalty" in Article III(3) as to what portion of the amounts of Es. 9,431, Rs. 4,29,013 and Rs. 2,62,536 would constitute "royalty". The Agreement has to be read as a whole.
But nevertheless if the payments are for different purposes, an apportionment has to be made. From the purposes as set out in para 6.1 of the agreement for which the payments are made, it is clear that the payments are made not only for know-how but also for the training of Siemens India personnel by the assessee. That portion which pertains to the supply of technical know-how including technical know-how for new developments would definitely partake of the nature of royalty, as it comes within the ambit and scope of the said term, the understanding of which according to us we have elaborated upon earlier. We consider that an apportionment would be called for, because part of the payment is towards training of Siemens India personnel and the personnel of other like companies by the assessee. That part of the payment would not consititute royalty. An apportionment has to be made on an estimated basis. Since we consider that a larger part of the components could be attributed to the supply of technical know-how because it includes the continued supply of know-how for new developments, we are of the view that 60% of the amount in each case would constitute royalty within the meaning of the term to which we have referred. 60% of each of the amounts of Rs. 9,431, Rs. 4,29,013 and Rs. 2,62,536 will, therefore, clearly be liable to tax in India. As far as the balance of 40% is concerned, since we have attributed to it nature of re-imbursement for the imparting of training of personnel by the assessee that would fall outside the scope of the term "royalty" and would not be taxable in India. Here, we may add, that both the parties left it to us to estimate the portion that may be attributed to training of personnel.
51. Coming to the agreement dated 15-3-1967 with B.E.L. the relevant clause is item 11.1 in the said agreement (page 179 of the paper book No. I). The payment clause reads as under : 11.1.1. For services rendered and to be rendered in Germany, a technical assistance fee of 1% of the total aggregate of the net selling prices of the CONTRACT TUBES and CONTRACT SHIELDS produced and sold by BEL reduced by the landed cost of the components and raw materials supplied by SIEMENS in accordance with Clause 9 and consumed in the production of the said CONTRACT TUBES and CONTRACT SHIELDS sold.Under the contract, there was consideration to be paid for know-how and technical assistance. Since the payments in question only relate to technical assistance and not to know-how and for which there is separate provision for payment, we are of the view that the amount of Rs. 35,440 does not constitute 'royalty' but is only a technical assistance fee of a re-imbursable nature and hence would not be taxable in India.
52. The next set of agreements which come up for consideration are those where payments were described as service charges paid for delegation of personnel by the assessee. Such agreements are referred to in paragraphs 23, 24 and 25 of our order where we have dealt with them specifically in detailing the arguments of the assessee. These agreements are those dated 6-6-1977 with C.C.I. Ltd. where the amount is Rs. 3,79,375, the agreement dated 28-10-1975 with B.H.E.L. where the amount involved is Rs. 19,227 and the agreement dated 28-7-1975 with B.H.E.L. where the amount involved is Rs. 2,68,059. In the last instance the payment is referred to as "additional assistance". The relevant clause in the agreement of 6-6-1977 with C.C.I. Ltd. is Clause 4 (page 6 of paper book No. II) and Clause 5 in the agreements with B.H.E.L. dated 28-10-1975 and 28-7-1975 (which appear at pages 54 and 14 respectively of the paper book No. I). These have been dealt with in paragraph 4 [ground No. 2(b)], paragraph 21 [ground No. 7(b)] and paragraph 21 [ground No. 7(c)] in the order of the CIT (Appeals). The reasons for sustaining the additions were the reasons adduced in the earlier year which were apparently with reference to the definition of Section 9(1)(vi) only. If we go through the relevant clauses the payments made were to be, on terms and conditions, and for periods to be mutually agreed upon, and was for the purpose of sending suitable specialists to India in order to train personnel in the factories of respective Indian parties and for providing general technical assistance by active participation in establishing production, quality control etc. In some of the agreements the personnel were to be delegated for the erection of manufacturing equipments also. The common thread which runs through all the clauses for which payments were made was that these payments were made towards deputation of personnel which would be in the nature of payment, other than, for royalty. In the agreement with B.H.E.L. dated 28-7-1975 the additional assistance was to be for assisting B.H.E.L. in the layout of shop facilities procurement of special jigs, tools etc. and vetting designs made by B.H.E.L. These payments are all for specific services to be rendered.
The last agreement was the subject of consideration by the Tribunal in the earlier year also in paragraphs 30 to 32 of its order and the Tribunal came to the conclusion that these were in the nature of technical fees. Independently applying the criteria which we have applied this year for determining whether the payments are of the nature of royalty or not, we have no hesitation in coming to the conclusion that none of the payments of Rs. 3,79,375, Rs. 19,227 or Rs. 2,68,059 partake of the nature of royalty. Reading closely the relevant clauses enumerated above, we get the impression that they are by way of reimbursement of expenses to be incurred or payment for specific service. Therefore, they are exempt from taxation in view of Article III (3) of the D.T.A. agreement and none of the three items can be brought to tax.
53. We now come to the category described as lump sum fees and these have been referred to in paragraphs 26 to 28 of our order in dealing with the assessee's contention. The amount of Rs. 1,96,968 is payable in terms of agreement dated 6-6-1977 with C.C.I, Ltd. in terms of article 8 (page 9 of paper book No. II). The relevant Clause 8.1 reads as under :-- 8.1 In consideration of the documentation prepared and transmitted in Germany and the technical assistance rendered in Germany comprising the training of CCI personnel by SIEMENS in Germany as per Article 3, CCI shall pay to SIEMENS a lump sum payment of DM 1,30,000 (one hundred thirty-thousand Destuche Marks), subject to the applicable Indian taxes, in three equal instalments as detailed below : (a) 1/3 on the agreement having been taken on record by the Central Government.
(c) 1/3 within one month after the commencement of commercial production.
As far as the payment of Es. 90,009 to Siemens India Ltd., is concerned, it is in terms of article 5 of the agreement dated 27-7-1978 (page 74 of paper book No. II). These payments are for documentation prepared and transmitted as well as for technical assistance rendered in Germany. No doubt, the payments are payable as lump sum fees but as we have already stated, merely because payments are to be in lump sum they do not fall outside the purview of the term "royalty" solely for such reason. As far as the component of technical assistance rendered in Germany for training the personnel of the companies are concerned, such payments would clearly not be taxable because it would not partake of the nature of royalty. For various types of information supplied, services rendered etc. different payments are payable in terms of the agreement. However, we consider that payments made for the use of documentation would partake of the nature of royalty. In the agreement with C.C.I. Ltd. there is also a secrecy clause that such matter is to be kept confidential and such obligation is to survive even after the termination of the agreement. These are, therefore, to be considered as contractually protected also. In our view, an apportionment has to be made between payments which would partake of the nature of royalty and other payments. Considering that part of the payment is only for documentation supplied and the other part for technical assistance, we would consider that 50% of the amount would partake of the nature of royalty and the other 50% would not fall within the meaning of the term "royalty" as set out by us. Thus, 50 % of the amount of Us. 1,96,968 and 50% of the amount of Rs. 90,009 would both be taxable in India.
54. There is another amount of Rs. 1,00,000 payable to Khandelwal Hermann. This is in terms of the agreement dated 17-2-1976 (page 42D of paper book No. II). The payment was to be made in terms of article 8.11 of the preliminary agreement. This was the agreement dated 17-2-1976 and in terms of article 8 technical assistance comprising supply of information as well as training of personnel was involved. Here again, that portion relating to supply of information would be for know-how and would partake of the nature of royalty. That relating to training of personnel would, of course, not relate to payment of royalty. We consider that apportionment has to be made here also and 50% of the amount we would consider to be royalty and taxable in India and the balance of 50 % not being royalty would be exempt in view of Article III(3) of the D.T.A. agreement. For the sake of completeness we may state that these items have been dealt with in ground No. 2(a) (Rs. 1,96,968--paragraphs 3 and 5); ground No. 5 (Ra. 90,009--paragraphs 15 and 16) and ground No. 3 (Rs. 1,00,000--paragraphs 7 to 10) of the order of the CIT (Appeals) and the reasons for holding that the amounts were taxable by him were substantially the same as in respect of other items, set out earlier, viz., that the payments fell within the definition of the term "royalty" in Explanation 2 to Section 9(1).
55. We are now left with payments which were specifically termed as "royalty". These are covered by the agreements with B.E.L. dated 15-3-1967 (Rs. 1,06,327) (page 179 of paper book No. I, articles 11.1.1 and 11.1.2 thereof), Siemens India Ltd. dated 22-2-1973 (Rs. 2,65,831) (page 158 of paper book No. I, article 11.1 thereof), B.H.E.L. dated 21-6-1974 (Rs. 20,19,009) (page 103 of paper book No. I, articles 10.1 and 10.2 thereof) and C.O.I. Ltd. dated 6-6-1977 (Rs. 22,000) (page 9 of paper book No. II and article 8.2 thereof). The submission of the learned counsel for the assessee was that though the items were described as "royalty" since the rights granted under the agreements were not of a protected nature, they would not partake of the nature of royalty. We have discussed this contention earlier and we have come to the conclusion that if a payment is really of the nature of royalty the extent of legal, or other protection, available in relation to the subject-matter of the contract for which payment was made is not determinative in coming to a finding as to whether the payment is royalty or not. The parties to the agreement have clearly referred to the payments in question as royalty and the payment is based on percentage of the net selling price. This payment is over and above specific payments in the contracts for other types of services rendered etc. We have, therefore, no hesitation in agreeing with the learned departmental representative that each of the aforesaid payments constitutes royalty and the full amount in each such case would, therefore, be taxable in India by virtue of the provisions of Article III(3) of the D.T.A. agreement.
56. Another ground raised is that if any amount is held to be taxable in India, then appropriate deduction should be allowed for the expenditure incurred by the assessee for earning such income. In this regard it was submitted that in terms of Section 44D it had been provided that a deduction not exceeding 20% could be allowed of the gross amount of royalty or fees, as reduced by lump sum consideration, for transfer outside India in respect of agreements entered into before the first day of April, 1976. Thereafter no expenditure is to be allowed as a deduction. For the purposes of Section 44D, royalty was to have the same meaning as in Section 9(1)(vi). In the present case, we have determined what is royalty within the meaning of Article III(3) of the D.T.A. agreement. The concept differs from the definition referred to. It is of course clear that only income in a commercial sense can be brought to tax. Therefore, the plea of the assessee that some deduction should be allowed for expenses is entitled to weight where the agreements have been entered into before 1-4-1976 or after that date.
Lump sum royalties in respect of agreements prior to 1-4-1976 were exempt by virtue of the proviso to Section 9(1)(vi) and Explanation thereto but here we have to make the computation de hors of Section 9(1). In our view, an estimate has to be made as to expenditure, that is allowed as deduction. Since the royalty is received for supply of know-how, designs, drawings, information regarding secret processes etc. expenditure to be allowed as a deduction would have to relate to paper work, courier and corresponding salaries of staff etc. mainly because the information is already developed and available to the assessee. We consider that for such expenses a deduction of 20% in respect of each amount, which we have held to be taxable, would be in order. Such deductions would be made from each payments, which we have held to be taxable.
57. Another point urged is that the income in each year should be taxed only on the receipt basis and not on the accrual basis. The Tribunal in the immediately preceding year had considered this issue and had come to the conclusion that income was taxable on the accrual basis. The Tribunal relied on the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 in coming to this conclusion. On behalf of the assessee reliance was placed on the decision of the Orissa High Court in CIT v. American Consulting Corpn.
[1980] 123 ITR 513. We would follow the decision of the Tribunal in the earlier year and hold that income is taxable on the accrual basis. In this regard, for the sake of completeness, we will set out the treatment which the ITO afforded in making the assessment which has been dealt with in paragraphs 29 to 31 of the order of the CIT (Appeals), which reads as under :-- 29. Ground No. 11 is that the ITO erred in taxing the same income twice, once on the accrual basis and again on the receipt basis.
30. In the assessment order, the ITO has computed the appellant's income from royalty at Rs. 1,14,15,222. This income is in respect of DM 25,11,349. Out of this a sum of DM 924,902 has been included by the ITO on accrual basis and the remaining sum of DM 15,86,447 on receipt basis. In para 15 of the draft assessment order, which is a part of the assessment order, the ITO has observed that the amounts actually received are taken as part of the appellant's total income on a protective basis and as and when the assessments in which these amounts have been assessed on accrual basis become final the amounts assessed on protective basis will be deleted.
31. I agree with the appellant's counsel that the amounts which were assessed in earlier years on accrual basis cannot be assessed again as the income of this year on receipt basis. It is well settled that the same income cannot be assessed twice by the ITO. I, therefore, direct the ITO to exclude such of the amounts included by him on receipt basis as were assessed in earlier years on accrual basis.
58. The last ground urged is that the dividend income should be assessed by applying the provisions of Rule 114 of the Income-tax Rules, 1962. This point had also come up for consideration before the Tribunal in the earlier year and following the decision of the Special Bench of the Tribunal in the case of Allied Chemical Corpn. v. IAC [1983] 3 ITD 418 (Bom.) the Tribunal declined to accept the contention.
The same decision would hold good for this year also.
59. Before we take leave of this order, we feel it our pleasant duty to place on record our deep sense of appreciation for the able assistance provided to us by Shri Dastur on behalf of the assessee and by Shri Prashant Ray on behalf of the Department. An otherwise difficult and abstract subject has been made highly interesting and absorbing by the way it is presented to us. In particular, we wish to compliment Shri Prashant Ray, the Departmental Representative, who represented the department's case in a very able manner.