Engineering fee in nature of royalty u/s 9(1). - Income Tax - 1342/CBDT

INSTRUCTION NO. 1342/CBDT Dated: July 29, 1980 A case has come to the notice of the board, brief facts where of are that an Indian company had entered into a collaboration agreement with a non-resident company providing for rendering of technical assistance for the manufacture of certain diesel engines by the Indian company. In consideration of the services to be rendered, the non-resident company was to receive engineering fees from the Indian company. For the assessment years 1960-61 to 1965-66, the ITO had held that 75% of the engineering fees received by the foreign company related to services rendered in India and hence taxable. The AAC in appeal held that only 25% of the engineering fees was to be taxed as relating to services rendered in India by the assessee under the agreement. The Tribunal dismissed the appeal of the department and upheld the order of the AAC. 2. At the instance of the Department, the Tribunal referred the matter to the High court. Before the High court the department for the first time contended that there was no question of allocation because the payments were really in the nature of royalty income and therefore in fact the entire payment to the foreign collaborator was taxable in India. The High court refused to look into the nature of the receipts in order to determine whether these were in the nature of royalty for the exploitation of the non-resident company's patents etc. in India on the ground that such a considerations does not arise on the frame of the question referred to the High court. It was therefore not open to the department to contend at that stage that the entire engineering fees was assessable to tax in India. It has been decided in consultation with the Ministry of Law that the High court rightly decline to consider the question that the entire payment was really, in the nature of royalty income, as this was taken up by the department for the first time before the High court and therefore it cannot be said that any substantial question of law calling for a decision of the supreme court arises. 3. It is likely that there might be a few cases of this type in which the payment in question would be fully taxable if it is viewed as royalty income but must be allocated u/s.9(1)(i) if it is treated as fees for technical or engineering services. If in such cases the ITO assessed the amounts as engineering fees without examining the basic issue properly and the matter is pending before the appellate authorities, it is necessary that proper representation is made before them for taxation of the amount under the correct head. 4. There may also be cases which will be governed by the proviso to section 9(1)(vii) which provides that nothing contained in sec.9(1)(vii) shall apply if the fees is paid in pursuance of an agreement before 1-4-76 and approved by the Government. In such cases the law applicable would be as it existed before the amendments introduced by the Finance Act 1976. It is therefore necessary that in such cases as well proper care is taken to give a definite finding whether the engineering fees is in the nature of royalty. Wherever such a finding has not been given the matters should be raised if warranted by the facts before the AAC/ITAT. 5. The above instructions may be brought to the notice of the officers working in your charge.