Approval of agreement under which assessee-company receives royalty, etc., from any concern in India which is eligible for deduction under the section - Guidelines therefor - Income Tax - 124/1973

Circular No 124 Dated 13/11/1973 SECTION 80MM - ROYALTIES, ETC., RECEIVED FROM ANY CONCERN IN INDIA Approval of agreement under which assessee-company receives royalty, etc., from any concern in India which is eligible for deduction under the section - Guidelines therefor clarification 1 Attention is invited to the Board's Circular No. 140 [F. No. 167/231/74-IT (A-I)], dated 6-7-1974 [Clarification 2], para 1(xiii), wherein it was stated that in the case of a composite agreement which specified a consolidated amount as consideration for purposes which included matters outside the scope of section 80MM, the Board may not approve such an agreement for purposes of section 80MM if, in the opinion of the Board, it was not possible to properly ascertain and determine the amount of the consideration relatable to the provision of technical know-how or services in connection with provision of such technical know-how qualifying for section 80MM. Thus, the benefit of section 80MM could be denied to the entire amount of royalty, commission, fees, etc., receivable under such an agreement. The Board has had occasion to reconsider it. It has been decided that in such cases approval would be granted by the Board subject to a suitable disallowance for the non-qualifying items, after taking into consideration the totality of the agreement, so that the balance, royalty, commission, fees, etc., which is for provision of technical know-how or services in connection with provision of such technical know-how covered by section 80MM, can be exempted. Circular : No. 332 [F. No. 167/231/74-IT(A-I)], dated 25-3-1982. clarification 2 1. Reference is invited to the Board's Circular No. 124 [F. No. 167/231/72-IT(A-I)], dated 13-11-1973 [Annex II]. Paragraph 2 of the said circular contains the guidelines which had then been evolved by the Board for the grant of its approval to agreements for the purpose of section 80MM. These guidelines have since been reviewed and modified. The revised guidelines are as follows : (i) An agreement which, in the opinion of the Board, is not bona fide and genuine and is a collusive arrangement for abuse of the tax concession admissible under section 80MM will not be approved. (ii) An agreement which does not clearly specify the technical know-how to be. provided thereunder or the services in connection with the provision of the technical know-how to be rendered thereunder, which is expressed in very general and broad terms and which is vague as to the nature and scope of the technical know-how to be provided or the services to be rendered and the consideration therefor will not qualify for approval. (iii) In cases, where grant of the tax concession envisaged, under section 80MM, will not, in the opinion of the Board, further the objectives underlying the grant of the tax concession, viz., minimising repetitive import of technical know-how from abroad and encouraging indigenous development of the technical know-how in India, the agreements will not be approved in such cases. (iv) An agreement which has not been genuinely entered into on or after April 1, 1969 will not be eligible for approval. In cases where the provision of a technical know-how or rendering of services in connection with the provision of the technical know-how is really pursuant to an agreement, whether written or oral, made before April 1, 1969, agreements entered into on or after April 1, 1969 for the provision of such technical know-how or for rendering of services in connection therewith will not be approved. (v) Agreement with a person who is not carrying on a business in India will not be eligible for approval. The person must be carrying on a business in India at the time the income which is to be the subject-matter of tax relief, under section 80MM, is received from him. Carrying on a profession or vocation in India is not equivalent to carrying on a business in India for the purpose of Income-tax Act, and therefore, an agreement with a person carrying on a profession or vocation will not qualify for approval. (vi) The technical know-how provided under the agreement must be such as, by its nature and the manner of its provision, is covered by any of the clauses of sub-section (2) of section 80MM and is likely to assist directly in any of the operations mentioned in clause (i) of sub-section (1) of the said section. [(vii) (a) Where the agreement is for provision of a technical know-how which is likely to assist in the manufacture of goods or the processing of materials or in the installation or erection of plant or machinery for such manufacture or processing, the technical know-how provided should be manufacturing/processing techno-logy and/or plant/machinery design and/or installation/erection technology of plant or machinery. (b) Agreements for provision of know-how relating to management organisation, sales, finance and accounts and for market or demand studies will not qualify for approval. (c) Agreements for preparation of feasibility or project reports for the purpose of supporting applications for assistance from financial or other institutions will also not qualify for approval. (d) Agreements for preparation of feasibility or project reports aimed at assessing the techno-economic viability of a project for the purpose of investment decisions will qualify for approval under section 80MM only if the objectives for which the report was prepared had matured so far as it relates to qualifying items under section 80MM in the project reports.] (viii) Agreements for rendering services without the provision of any technical know-how within the meaning of clause (i) of sub-section (1) read with sub-section (2) of section 80MM will not qualify for approval. In order to qualify for approval, the services rendered under the agreement must be in connection with the provision of such technical know-how and these should be rendered by the person providing such technical know-how. There should be an inter-connection and inter-relationship between the services rendered and the provision of such technical know-how. (ix) Agreements for the provision of technical know-how relating to civil construction or for rendering services in connection therewith will not qualify for approval except where the technical know-how provided is such as is likely to assist directly in any of the operations mentioned in clause (i) of sub-section (1) of section 80MM and the services rendered are in connection with the provision of such technical know-how. (x) Agreements for the supply, erection, installation and commissioning of plant or machinery whether designed and engineered by the supplier itself or not, on turnkey basis will not qualify for approval unless the supplier is also required under the agreement to provide technical know-how within the meaning of clause (i) of sub-section (1) read with sub-section (2) of section 80MM or to render services in connection with the provision of such technical know-how. Mere furnishing of copies of designs and drawings of the plant or machinery supplied under the agreement, as also giving of information concerning the working, maintenance, etc., of such plant or machinery will not be regarded as provision of technical know-how within the meaning of sub-section (2) of section 80MM. (xi) An agreement for the provision of technical know-how to a person who obtains it merely for the purpose of trading in it and who would thus be acting as a middleman between the person from whom he receives the technical know-how and the third party to whom he will further pass on the technical know-how for use in the operation likely to be assisted by it will not qualify for approval. (xii) In cases where the amount of the consideration receivable under an agreement for the provision of technical know-how and/or for rendering services in connection with the provision of the technical know-how is, in opinion of the Board, is unreasonably excessive or is motivated by other considerations, the Board may refuse to give approval in respect of such an agreement. (xiii) In cases where the amount of consideration payable under an agreement is consolidated composite figure for provision of a technical know-how or for rendering of services in connection with the provision of such technical know-how within the meaning of section 80MM as also for provision of technical know-how or goods or services outside the scope of section 80MM and, in the opinion of the Board, it will not be possible to properly ascertain and determine the amount of the consideration relatable to the provision of the technical know-how or for rendering of services in connection with the provision of technical know-how covered under section 80MM, [the approval would be granted by the Board subject to suitable disallowance for the non-qualifying items, after taking into consideration the totality of the agreement, so that the balance royalty, commission, fees, etc., which is for provision of technical know-how or services in connection with provision of such technical know-how covered by section 80MM, can be exempted.] (xiv) Agreements for rendering general technical consultancy services will not qualify for approval. 2. Consequent to the amendments made to the provisions of section 80MM by section 7 of the Finance Act, 1974, the tax relief, under section 80MM, will be available with effect from April 1, 1975 only to an Indian company and will not be available to any other assessee. Accordingly, agreements entered into by a person other than an Indian company for the provision of a technical know-how or for rendering services in connection therewith, will not be eligible for approval for the assessment year 1975-76 and onwards. Further, approval already given in respect of the agreement entered into by any such person will also cease to be operative as from April 1, 1975 and such person shall not be entitled to the tax relief, under section 80MM, in the assessments for 1975-76 and later years. 3. Two certified copies of such agreement should be sent to the Board along with the application for its approval. In cases, where the agreement is through exchange of letters, two certified copies of all the relevant letters constituting offer and acceptance should be enclosed with the application for approval of the agreement. 4. The applicants should also furnish information in the proforma enclosed [Annex I] along with the application or as soon thereafter as possible. The information furnished should be duly signed and certified to be correct by the person authorised to sign the return of income on behalf of the applicant. Circular : No. 140 [F. No. 167/231/74-IT (A-I)], dated 6- 7-1974, as modified by Circular No. 332 [F. No. 167/231/74-IT(A-I)], dated 25-3-1982 and Circular No. 360 [F. No. 167/231/74-IT (A-I) ], dated 16-5-1983. ANNEX I - REVISED PROFORMA OF APPLICATION 1. Particulars of the applicant for approval of the agreement : (i) Name and address (ii) Status (whether Individual/HUF/Firm/AOP/Company) (iii) If a company, whether an Indian company within the meaning of section 2(26) (iv) If not a company, whether resident in India (v) Nature of business(es) and/or other activities (vi) Designation of the ITO having jurisdiction for assessment purposes and Permanent Account Number or General Index Number 2. Particulars of the other party to the agreement : (i) Name and address (ii) Whether he is carrying on a business in India; if so, the nature of the business, its name and style and location (iii) Designation of the ITO having jurisdiction for assessment purposes, and Permanent Account Number or General Index Number 3. The date on which the agreement was entered into. If the agreement was in fact entered into on a date earlier than that on which the agreement has been reduced to writing, please also mention such earlier date 4. Is the present agreement in renewal, extension or modification of any previous agreement, oral or written? If so, please give particulars of such previous agreement(s) 5. Did the applicant provide any technical know-how or render any service in connection therewith to the party at (2) above or to some other person on his behalf, before the present agreement? If so, please give particulars of any such previous agreement and of the nature of the technical know-how, etc., provided 6. Did the applicant provide or is providing similar know-how or services as under the present agreement to any other person ? If so, please give brief particulars thereof, also indicating whether the agreement(s) in respect thereof was/were approved by the Central Government/Board 7. Is the present agreement for provision of technical know-how or for rendering services in connection with the provision of technical know-how, or both? In case the agreement is for rendering services only, please specify who is providing the technical know-how in connection with which the services are rendered by the applicant and how the rendering of services by the applicant is connected with the provision of the technical know-how by another person. 8. Whether the technical know-how is provided and/or services are rendered under the present agreement in India or outside India? If outside India, whether wholly or partly, please specify the technical know-how provided and/or services rendered outside India and the amount of the consideration in respect of them. Also indicate the party to whom the technical know-how is provided/services are rendered. 9. Whether the technical know-how provided under the present agreement is : (i) a patent, invention, model, design, secret formula or process or similar property. (Please specify the cate-gory in which it falls and explain how); or (ii) an information concerning industrial, commercial or scientific knowledge, experience or skill. (Please briefly describe the information and specify in which category it falls.) 10. If the technical know-how falls under para 9(i) above, please indicate : (a) how the applicant acquired it or what arrangements he has made for acquiring it; (b) what are the applicant's own rights in respect thereof ; (c) whether its provision to the other party to the agreement involves : (i) transfer of all or any rights of the applicant in respect of it; if so, please specify the nature and extent of the right transferred and the manner of its transfer; (ii) the imparting of any information concerning its working or use; if so, please specify the information imparted and the manner of its imparting; (iii) its use by the other person to the agreement; if so, please specify the nature and manner of the use. 11. If the technical know-how falls under para 9(ii) above, please specify : (i) the arrangements available with the applicant for obtaining and imparting it; (ii) the manner of imparting it. 12. Please refer to the provisions of clause (i) of sub-section (1) of section 80MM and give the following information in respect of each type of technical know-how provided under the agreement : Sl. No. Brief particulars of the technical know-how provided, its nature and the manners of its provision. (Please also cite reference of the appropriate entry under paras 9, 10 and 11 above as may be applicable) Which of the activities mentioned in the said clause is likely to be assisted in, viz., (i) the manufacture or processing of goods or materials; (ii) the installation or erection of machinery or plant for such manufacture or processing; (iii) in the working of a mine, oil well or other source of mineral deposit; (iv) in the search for, or discovery or testing of, mineral deposits or the winning of access to them; (v) any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing Please give a precise description Please indicate how a particular activity will be assisted Amount of consideration receivable/ received 13. Are any services also rendered under the agreement in addition to the provision of technical know-how ? If so, please give the following information in respect of each such service : Sl. No. Nature of the service rendered service is Whether the rendering of the the service in connection with the provision of a know- how If answer to col. 3 is yes, please specify the technical know-how in connection with which is rendered (please also cite reference to the Sl. No. under para 12 above against which the particular know-how is mentioned) Please explain how the rendering of the service is in connection with the provision of a technical know-how Amount of consideration receivable/ received 14. Does the agreement cover provisions of a know-how, services and/or goods other than those mentioned in paras 12 and 13 above? If so, please specify them and also the amount of consideration receivable/received in respect of them. 15. Does the applicant (including any of its members/partners/directors, as the case may be) has any family relationship with the other party to the agreement (including any of its members/partners/directors, as the case may be)? If so, please give details thereof. 16. Does the applicant (including any of its members/partners/directors, as the case may be) has any interest, other than that under this agreement, in the business of the other party to the agreement (including any of its members/partners/directors, as the case may be)? If so, please give details thereof. 17. What are the arrangements and facilities available with the applicant for providing the technical know-how and/or for rendering services in connection therewith as under this agreement 18. Has the applicant made any agreement or arrangement with any other person, in India or abroad, for obtaining the technical know-how to be provided under this agreement or for rendering services in connection therewith? If so, please give the following information : (i) the name and address of such other person ; (ii) details of the agreement or arrangement together with a certified copy of the written agreement, if any; (iii) the nature and extent of applicant's relationship and association with such other person. 19. Was any application made previously for the approval of this agreement under section 80MM of the Income-tax Act ? If so, please state : (i) the date on which the application was made; (ii) whether approval was granted or refused (please quote the letter number under which the decision regarding approval/refusal was communicated) 20. If the agreement is a turnkey contract involving manufacture, supply, erection, etc., of a plant, please state : (i) whether the process know-how/product design, and/or the plant design and engineering know-how is being provided by the other party to the agreement, if not, how has the applicant acquired this know-how ? If he is acquiring it from some other person, the name and address of such other person, the particulars of the agreement/arrangement made with such other person in this behalf and particulars of any family relationship or other association and interest between the applicant and such other person; (ii) the amount of the consideration relatable to the provision of technical know-how, if any, or for rendering services, if any, in connection therewith, and the amount of the consideration relatable to the price of the machinery/plant as such. The basis on which the total consideration receivable under the agreement is so split up as may also please be specified. 21. If the agreement involves provision of technical know-how consisting of plant designing and engineering, please state whether the process know-how or pro-duct design has been provided by the other party to the agreement, if not, has the applicant acquired it from some other person? In case the applicant is receiving/has received it from some other person, please specify : (i) the name and address of such other person; (ii) the particulars of the agreement/arrangement made with such other person in this behalf; (iii) particulars of any family relationship or other association or interest between the applicant and such other person. 22. Any other information which the applicant considers relevant. ANNEX II - CIRCULAR NO. 124, DATED 13-11-1973 REFERRED TO IN CLARIFICATION 1. The Finance Act, 1969 introduced, with effect from April 1, 1970, a new provision in section 80MM for the concessional taxation of income received by an Indian company by way of royalties, technical service fees, etc., from any business concern in India in consideration of providing technical know-how or rendering services in connection with the provision of such technical know-how. Under the provision, a company was entitled to a deduction of 40 per cent of such income in the computation of its taxable income. The section has been amended by the Finance Act, 1970 and the Finance (No. 2) Act, 1971. With effect from April 1, 1972, the tax concession has been extended to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers, such as individuals, Hindu undivided families, partnership firms, etc. The requirements of the section are as under : (a) The deduction is allowable only it the technical know-how (whether patented or not) provided by the assessee is likely to assist in the manufacture or processing of goods or materials or in the installation or erection of machinery or plant for such manufacture or processing, or in the working of a mine, oil well or other source of mineral deposits, or in prospecting for and testing of mineral deposits or winning access to them, or in carrying out any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing. Royalties, commission, fees, etc., received in consideration of provision of technical know-how relating to production of electricity or construction of ships will also qualify for deduction. (b) The term "provision of technical know-how" has been defined in sub-section (2) to mean— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or similar property; (ii) the imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or similar property; (iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill. The agreement for the provision of technical know-how need not provide for all the matters listed in clauses (i) to (iv). This is because clauses (i) to (iv) of sub-section (2) of section 80MM have to be read disjunctively and an agreement which provides for any matter referred to in any one of these clauses would fall within the ambit of section 80MM. It is, however, important to note that the provision of technical know-how must directly assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture or processing or in any one or more of the other operations or activities specified in sub-section (1) of section 80MM. (c) The technical know-how or services should be provided under an agreement entered into by the assessee on or after April 1, 1969. (d) Deduction under the section will be allowable only if the agreement in question has been approved by the Board. Approval of the Board will, however, not be necessary in cases where the agreement was approved by the Central Government for the purposes of this section before April 1, 1972. All applications for approval made to the Central Government, which had not been disposed of before April 1, 1972 have been transferred to the Board for disposal. (e) In order to be eligible for this deduction, the technical know-how and services should be provided under an agreement entered into by the assessee on or after April 1, 1969 and the approval of the Board to such agreement should have been applied for before 1st October of the relevant assessment year. Once a valid approval has been granted, it would hold good for the life of the agreement provided the conditions laid down in the law continued to be satisfied. (f)In the case of non-corporate taxpayers other than co-operative societies, the deduction under the section will be allowed in respect of the agreements which have been approved only if the accounts of the relevant previous years have been audited as provided in sub-section (2A) and the assessee furnishes along with his return of income the report of such audit in Form No. 3C prescribed under rule 6AB duly signed and verified by the auditor. (g) No deduction is allowable under this section in respect of any income which is chargeable under the head "Capital gains". (h) No deduction under the section will be allowed in relation to any income if the assessee is entitled to a deduction under section 80-O in respect of the same income. 2. The incentive has been provided with the twin objectives of minimising repetitive import of technology and of encouraging development of local know-how by providing tax relief as explained above in respect of income arising from the transfer and servicing of technical know-how. Keeping in view the purpose behind the incentive and the requirements of the statutory provisions, the Board have evolved the following guidelines for grant of such approval : (i) The agreement should have been entered into bona fide and not collusively for the purpose of tax avoidance. (ii) An agreement which is in very broad terms or is vague may not be approved. (iii) The agreement should have been genuinely entered into on or after April 1, 1969. An old agreement in a new garb will not qualify for approval. (iv) In the case of resident non-corporate taxpayers, agreements genuinely entered into on or after April 1, 1969 will be considered for approval, but the benefit under section 80MM will be available to them only for and from the assessment year 1972-73. (v) The know-how provided must be such as will minimise repetitive import of technology or will contribute to the development of local technology. (vi) Agreements for rendering services will qualify for approval under section 80MM only if such services are rendered in connection with the provision of technical know-how by the person providing the know-how. Services rendered as a consultant or in any other capacity otherwise than in connection with the provision of technical know-how will not qualify under the section. (vii) Agreements for preparation of project reports dealing with the feasibility of the project from the point of view of the availability of raw materials, the market, the nature of the equipment, size of the plant, etc., for making a techno-economic decision will normally qualify for approval under the section. Agreements for provision of commercial information in the fields of management, accounting, sales, etc., or for rendering of services in connection therewith, will, however, not qualify for approval unless the provision of such information will directly assist in the manufacture of goods, etc. (viii) Agreements for provision of technical know-how relating to civil construction, or for rendering services in connection therewith, will not qualify for approval unless the civil construction is directly and intricately connected with the process or the plant. (ix) "Turnkey contracts" for the erection and supply at site of a ready-built plant will not qualify for approval. Where, however, they involve transfer of a right in a patent or design or imparting any know-how relating to any formula or operation or the supply of designs and drawings relating to manufacture or operation, or the provision of manuals concerning manufacturing operations, the fees attributable to such provision of technical know-how will qualify for deduction. (x) The agreement should be with a person carrying on business in India. For this purpose the expression "person" will include "Govermnent". It is necessary that there should be a nexus between the technical know-how provided and the business. The test to be applied will be whether or not the provision of know-how is likely to assist in manufacture or processing of goods or materials or other specified operations. Conveyance of know-how to a person who merely trades in know-how will not qualify for approval. Know-how conveyed or services rendered in connection therewith to promoters of industrial undertakings will, however, qualify notwithstanding that the promoters and the undertakings are distinct legal entities. (xi) It is necessary that the industry in which the technical know-how will be utilised should be located in India. Know-how provided, which is meant to be exported and utilised in setting up an industry outside India, will not qualify for the purpose of approval under the section. (xii) The payment under the agreement should be reasonable both in relation to its quantum and its tenure. Where the payments appear to be excessive or motivated by other than commercial considerations, the application is liable to be rejected. (xiii) In the case of composite agreements specifying a consolidated amount as consideration for purposes which, inter alia, include matters outside the scope of section 80MM, such as use of trade marks, supply of equipment, imparting of information which cannot be considered as technical know-how, imparting of technical know-how which is not likely to assist in the manufacture or processing of goods or materials or other operations specified in the section, or services not rendered in connection with the provision of technical know-how, the amount of the consideration relating to the provision of technical know-how or rendering services in connection therewith will have to be determined separately on an investigation of all the relevant facts. Where, however, such an ascertainment is not possible, the Board reserves the right to refuse the grant of approval to such a composite agreement.