2001 (12) TMI 8 - HC - Income Tax

The question which has been raised in this appeal under section 260A is the interpretation of royalty as envisaged under Explanation 2 appended to section 9(1) of the Act. By reason of this Explanation which provides that the income specified therein shall be deemed to accrue or arise in India specifies six items which would come within the scope thereof. - None of the sub-clauses in Explanation 2 under section 9(1)(vi) would in the circumstances of this case be capable of being regarded as covering the design and engineering carried out by the supplier of the machinery abroad. There is no transfer or licence of any patent invention model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of the machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together the machinery cannot be maintained in the best possible way and repaired when occasion arises. No licence of any patent is involved. Sub-clause (vi) and also (vii) of section 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected therewith - we are of the opinion that no substantial question of law arises for consideration in this appeal.

Summary

Issues:
Interpretation of "royalty" under Explanation 2 of section 9(1) of the Income-tax Act, 1961.

Analysis:
The judgment of the High Court in this case revolves around the interpretation of "royalty" as per Explanation 2 appended to section 9(1) of the Income-tax Act, 1961. The primary issue raised in the appeal under section 260A of the Act was whether the transfer of design, along with other components like engineering, manufacturing, shop testing, and packing, could be considered as royalty chargeable under the said Explanation. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal had previously found that no royalty could be charged due to the agreement between the parties. However, the appellant contended that design, being one of the components transferred, could fall within the scope of Explanation 2 to section 9(1).

Upon considering the arguments, the High Court opined that it was not feasible to separate the consideration for design from the other components transferred. The Court referred to a Division Bench judgment of the Madras High Court in a similar case, where it was held that in a contract involving design, manufacture, and supply of machinery without licensing any patent or copyright, the design supplied was only incidental to the total contract. The price paid covered all stages from design to commissioning, and the design was not meant for the buyer to manufacture the machinery themselves. The High Court found that none of the sub-clauses in Explanation 2 under section 9(1)(vi) applied to the design and engineering carried out by the supplier abroad in this case. It was concluded that the design was preliminary to manufacture and integrally connected therewith, and hence, did not attract the provisions of the Act regarding royalty.

In light of the above analysis and the precedents cited, the High Court held that no substantial question of law arose for consideration in the appeal and subsequently dismissed the appeal.