1984 (1) TMI 128 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of payment for technical drawings and engineering data.
2. Classification of the payment as royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961.
3. Applicability of section 44D of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Payment for Technical Drawings and Engineering Data:
The case revolves around whether the payment made by the Indian company to the foreign company for technical drawings and engineering data is taxable in India. The foreign company supplied materials and technical data from abroad and deputed an expert to supervise the construction of a kiln in India. The Income Tax Officer (ITO) argued that the payment for technical drawings and engineering data should be considered as royalty and thus taxable. However, the assessee contended that the agreement was a single contract for the construction of the kiln and did not involve any property in India that could be exploited by the Indian company. The Tribunal concluded that the technical drawings and engineering data supplied from abroad do not constitute taxable income in India as they were part of the overall cost of constructing the kiln.

2. Classification of the Payment as Royalty:
The ITO classified the payment for technical drawings and engineering data as royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. The assessee argued that the payment was for the import of designs and drawings and not for any royalty, as there were no patent rights, copyrights, or any other intellectual property involved. The Tribunal examined the definition of 'royalty' and concluded that the payment did not fit any of the clauses under Explanation 2 to section 9(1)(vi). The Tribunal noted that the Indian company was not interested in exploiting the technical data for any purpose other than constructing the kiln, and thus, the payment could not be considered as royalty.

3. Applicability of Section 44D:
The ITO applied section 44D, which denies any other deduction under the statute for royalty payments, to tax the entire amount received by the foreign company. The Tribunal, however, found that the payment for technical drawings and engineering data did not constitute royalty and thus could not be taxed under section 44D. The Tribunal emphasized that the agreement had the approval of the Government of India, which described the payment as the 'price' for the import of designs and drawings. The Tribunal concluded that the payment was for the construction of the kiln and not for any right to use the designs and drawings, thereby annulling the assessment.

Conclusion:
The Tribunal allowed the appeal and annulled the assessment, concluding that the payment for technical drawings and engineering data supplied from abroad did not constitute royalty and was not taxable in India under section 44D of the Income-tax Act, 1961. The Tribunal emphasized the importance of reading the agreement as a whole and considering the nature of the payment as part of the overall cost of constructing the kiln.