1993 (9) TMI 150 - AT - Income Tax

Assessing Officer Assessment Year Business Income Fees For Technical Services Indian Company

Summary

Issues Involved:
1. Taxability of the amount received under the "Technical Service Agreement" as "royalty" under section 9(1)(vi) of the Income-tax Act, 1961.
2. Interpretation of the terms "royalty" and "fees for technical services" under the Income-tax Act.
3. Applicability of the proviso to section 9(1)(vi) and section 9(1)(vii) of the Income-tax Act.
4. Apportionment of payments between "royalty" and "fees for technical services".

Detailed Analysis:

1. Taxability of the Amount as "Royalty":
The primary issue was whether the amount of Rs. 43,57,233 received by the assessee from U.C.I.L. under the "Technical Service Agreement" was taxable as "royalty" under section 9(1)(vi) of the Income-tax Act, 1961. The Income-tax Officer (ITO) determined that the payments were assessable as "royalty" within the meaning of Explanation 2 to section 9(1)(vi), despite the agreement being named "Technical Service Agreement". The ITO overruled the assessee's contention that the amounts were fees for technical services exempt under section 9(1)(vii) read with Explanation 2.

2. Interpretation of "Royalty" and "Fees for Technical Services":
The CIT (Appeals) upheld the ITO's view, stating that the sums received under the agreement represented "royalty" within Explanation 2 to section 9(1)(vi). The CIT (Appeals) emphasized that section 9(1)(vi) being specific, excluded the applicability of the more general section 9(1)(vii). The CIT (Appeals) relied on the Gujarat High Court decision in Meteor Satellite Ltd. v. ITO, which held that specific provisions exclude the general ones, thereby affirming that the payments were taxable as royalty.

3. Applicability of the Proviso to Section 9(1)(vi) and Section 9(1)(vii):
The CIT (Appeals) rejected the assessee's argument that the sums were fees for technical services exempt under the proviso to section 9(1)(vii), as the payments did not consist of any lump-sum amount. The CIT (Appeals) also dismissed the assessee's contention that the earlier assessment practice of treating only 20% of the amounts as royalty should continue, citing the principle that there is no res judicata in income-tax proceedings.

4. Apportionment of Payments:
The Tribunal examined the agreement's clauses and determined that the services rendered by the assessee included both technical services and those qualifying as "royalty". The Tribunal concluded that the agreement involved imparting technical information and services that fell within the definition of "royalty" under Explanation 2 to section 9(1)(vi). However, it also recognized that some services were purely technical, falling under section 9(1)(vii).

The Tribunal decided to allocate the payments between "royalty" and "fees for technical services". It noted the difficulty in making an accurate apportionment but decided that 50% of the payment should be treated as royalty and 50% as fees for technical services. Since the agreement was entered into before 1-4-1976, the fees for technical services were exempt under the proviso to section 9(1)(vii), while the royalty payments were taxable.

Conclusion:
The Tribunal directed the ITO to modify the assessment by treating 50% of Rs. 43,57,233 as royalty, thereby partly allowing the appeal.