1987 (12) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Classification of payments as royalty vs. technical service fees.
2. Basis of the estimate made by the Commissioner of Income-tax (Appeals) regarding the proportion of payments classified as royalty.
3. Taxability of 80% of the royalty income in India.

Detailed Analysis:

1. Classification of Payments as Royalty vs. Technical Service Fees:
The core issue was whether the payments made by the Indian company to the non-resident assessee under the agreement dated July 8, 1964, should be classified as royalty or technical service fees for income tax purposes. The Tribunal had determined that the payments were for the use of rights akin to a patent, thus classifying them as royalty, even though no patent was formally obtained. However, some payments were identified as technical service fees, such as those for setting up the plant and training staff.

The Tribunal affirmed that 50% of the payments were royalty and the remaining 50% were fees for technical services, a decision upheld by the Commissioner of Income-tax (Appeals).

2. Basis of the Estimate Made by the Commissioner of Income-tax (Appeals):
The assessee contended that the Commissioner's estimate of 50% royalty and 50% technical service fees was arbitrary and lacked legal basis. The argument was that the Commissioner made this estimate without any evidence or material. The assessee argued that a larger proportion of the payments should be considered as fees for technical services.

The Tribunal and the court noted that the assessee failed to provide a detailed breakdown of the payments, which was within its special knowledge. The authorities had only the agreement as material on record, which listed various services and technical know-how to be provided. Based on this, the Commissioner made an estimate, which the Tribunal found reasonable given the circumstances.

3. Taxability of 80% of the Royalty Income in India:
The Tribunal had previously upheld that 80% of the royalty income was taxable in India. The court noted that the assessee did not provide evidence or material to challenge this allocation effectively. The court found that the estimate, though not mathematically precise, was not made without any material and was reasonable given the limited information available.

Conclusion:
The court answered the first question in the negative and in favor of the Revenue, affirming that the payments classified as royalty were correctly identified as such. The second question was not pressed by the assessee and thus was not answered. The reference was disposed of with no order as to costs.