1996 (4) TMI 37 - HC - Income Tax

Foreign Company Income Deemed To Accrue Or Arise In India Indian Company Technical Services

Summary

Issues Involved:
1. Whether only 20% of the fee of 2,04,032 Swiss francs was taxable.
2. Whether there was an element of royalty included in the fee of 2,04,032 Swiss francs and if so, whether the Tribunal was right in estimating 20% of the gross fee as the value of the royalty.

Detailed Analysis:

Issue 1: Taxability of 20% of the Fee
The Tribunal had to determine whether only 20% of the fee of 2,04,032 Swiss francs was taxable. The assessee, a foreign company, had an agreement with Nepa Mills to supply know-how, engineering services, and supervision for the expansion of chlorine and caustic soda plants. The Income-tax Officer held that the payment of 2,04,032 Swiss francs was due during the accounting period as the plant's commissioning was completed in that period. The Tribunal initially held that the income did accrue or arise to the assessee in India, and the amount of technical fee was not chargeable to tax under clause (vii) of sub-section (1) of section 9. However, the Tribunal also identified an element of royalty in the agreement, leading to the conclusion that 20% of the fee was taxable as royalty.

Issue 2: Element of Royalty in the Fee
The Tribunal had to decide whether there was an element of royalty included in the fee of 2,04,032 Swiss francs. The agreement between the assessee and Nepa Mills included provisions for the supply of technical information, drawings, specifications, and operating instructions. These were to be used solely for the erection, repair, and maintenance of the plant and not for any other purpose. The Tribunal found that the agreement involved the transfer of certain rights for exclusive use, which constituted royalty under Explanation 2 to clause (vi) of sub-section (1) of section 9. The Tribunal concluded that the transfer was not an outright transfer but was restricted by certain conditions, thus categorizing part of the amount as royalty.

Tribunal's Findings and Court's Judgment
The Tribunal assessed the liability at 20% of the total consideration, equating to 40,806 Swiss francs, or 1,87,300 Indian rupees, as the value of the royalty. The court, however, found that the Tribunal's basis for determining the 20% royalty was unclear. The court held that the assessee is entitled to a rebate on the actual amount paid to their employees for technical assistance and services, and the rest of the amount should be treated as royalty.

Final Decision
The court answered the first question in favor of the Revenue and against the assessee, and the second question against the assessee and in favor of the Revenue. The court concluded that the fee for technical services was not subject to tax by virtue of the proviso to clause (vii) of sub-section (1) of section 9, but the element of royalty was taxable.

Conclusion
The judgment clarified the distinction between fees for technical services and royalty, emphasizing that while the former might be exempt under certain conditions, the latter remains taxable. The court's decision underscores the importance of understanding the specific terms of agreements and their implications under tax law.