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Issues Involved
1. Whether the payments of lb40,000 for Shuttle Kiln and lb65,000 for Tunnel Kiln to British Ceramics Service Co. Ltd. should be taxed at 20% as royalty payments. Detailed Analysis Issue 1: Nature of Payments for Shuttle Kiln and Tunnel Kiln Facts Leading to the Appeal: The Indian company, E.I.D. Parry (India) Ltd., entered into contracts with British Ceramics Services Co. Ltd. to construct and commission a Tunnel Kiln and a Shuttle Kiln. The British company provided drawings, specifications, materials, and specialist supervision. The payments for these services were lb40,000 for the Shuttle Kiln and lb65,000 for the Tunnel Kiln. CIT (Appeals) Decision: The CIT (Appeals) ruled that the payments for drawings and specifications were not royalty but part of the cost of machinery. The CIT (Appeals) emphasized that the Indian company was not in the business of manufacturing kilns and thus could not exploit the drawings and specifications for income generation. The CIT (Appeals) relied on the decision in Klayman Porcelains Ltd. v. ITO, which held that payments for technical drawings and know-how should be considered as part of the cost of machinery. Department's Argument: The Department argued that the payments should be considered as royalty under section 9(1)(vi), Explanation 2 of the Income Tax Act. The Department emphasized that the foreign company was imparting specialized knowledge concerning the working of their patented kiln designs, which should be considered as royalty. The Department also cited sections 44D and 115A, which state that no deductions are allowed for expenditures related to royalty payments and that such payments should be taxed at 20%. Tribunal's Analysis: The Tribunal agreed with the Department's view that the payments were in the nature of royalty. The Tribunal noted that the foreign company had patented designs for the kilns and was imparting specialized knowledge to the Indian company. The Tribunal emphasized that the payments were for the use of the foreign company's proprietary designs and models, making them royalty payments under section 9(1)(vi), Explanation 2. Conclusion: The Tribunal concluded that the payments of lb40,000 and lb65,000 should be taxed as royalty payments. The Tribunal set aside the CIT (Appeals) order and restored the ITO's decision, which directed the Indian company to deduct 20% tax from the payments to the foreign company. Separate Judgments No separate judgments were delivered by the judges in this case. Final Order The appeal was allowed, and the order of the CIT (Appeals) was set aside, restoring the ITO's decision.
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