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TMI Blog1991 (9) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to borrow the special designs of those kilns evolved by the British company. As it is the policy of the Indian Government not to permit the wholesale import of the constructed kilns from foreign countries and it would give permission only for constructing the kilns after using the locally available material, the Indian company had to approach the British company to establish one Tunnel Kiln and one Shuttle Kiln at their industrial site at Ranipet, the models of which were designed by them. The Indian company entered into a contract bearing No. K 921-1 dated 1-7-1985 with regard to Bricesco Twin Track Shuttle Kiln for the refiring of vitreous china sanitary ware, and another contract bearing No. K922-1 dated 1-7-1985 with reference to Bricesco Tunnel Kiln for the first firing of vitreous china sanitaryware. Copies of these two agreements are furnished to this Tribunal at the time of bearing. Under the terms of each of these agreements, the foreign company undertook to construct, commission and operate a Bricesco Twin Track Shuttle Kiln and a Bricesco Tunnel Kiln. The British company agreed to construct these kilns with the indigenous materials procured by the Indian company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pipework. (c) Ductwork. (d) Steel construction and rails. (e) Kiln cars and transfer cars. (f) Foundation drawings for the kiln and tracks. (g) Safety and control equipment. (h) Setting of kiln cars. (i) Advice on choice of indigenous materials. (j) Fans and combustion equipment. (k) Instrumentation and controls. (l) Electrical wiring diagrams. Total ....................... pound 40,000 The following items are agreed to be furnished under the head "Drawings and Specifications" under contract No. K-922-1 with reference to the constructions, commissioning and operation of Bricesco Tunnel Kiln: Bills of Material. Detailed Specifications. Maintenance and Operation Instructions for the following : (a) Refractory/Insulation lining. (b) Pipework. (c) Ductwork. (d) Steel construction and rails. (e) Kiln cars and transfer cars. (f) Foundation drawings for the kiln and tracks. (g) Safety and control equipment. (h) Setting of kiln cars. (i) Advice on choice of indigenous materials. (j) Fans and combustion equipment. (k) Instrumentation and controls. (l) Electrical wiring diagrams. (m) Hydraulic pusher unit. (n) Mechanical handling equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the appeal before him at para 2.3 of his order. It is as follows : " 2.3. The purpose of the contracts which the appellant entered into with the UK Company, was to get erected in its factory a tunnel kiln and a shuttle kiln. The lump sum payments for drawings and specifications were a part of the contracts for acquiring the equipment concerned. The appellant is certainly not in the business of manufacturing kilns. It cannot, therefore, be inferred that these drawings and specifications contain a specialised knowledge which the appellant will be able to exploit for making income through manufacture and erection of similar kilns. These drawings and specifications are relevant only for the kilns erected in its factory. In such a situation, the payments for the drawings and specifications cannot be described as royalty. This is precisely the rationale behind the decision of the Tribunal referred to above-Klayman Porcelains Ltd. v ITO [1984] 8 ITD 265 (Hyd.). The Tribunal also took into account the settled position in law that technical drawings, constituting know-how, would also be 'plant' as held by several High Courts including the Madras High Court in CIT v. Festo Elgi (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioning of their own designed kiln. How to design them, what are the materials to be used in their construction, what are the dimensions of the kilns, what sort of foundation they require, what sort of material is to be used for constructing the kiln, what are the special electrical fittings which a kiln should be having, what type of pipe work, duct work it requires, were all known to the British company. In short, the foreign company is helping the Indian company in erecting a replica of their design or model of the shuttle kiln and tunnel kiln respectively, at Ranipet which is the factory site of the Indian company. The foreign company is charging separately for the material which it is supplying and also for the experts it agreed to depute to supervise the commissioning as well as erection of the kilns. How to work their own evolved model of the kiln is known only to the foreign company and it is in fact the expert knowledge which they alone had possessed and which they were parting to the Indian company on payment of pound 40,000 and pound 65,000 respectively under the two contracts in question. The drawings and specifications included the maintenance and operating instruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including films or video tapes for use in connection with television or tapes, for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v). " As can be clearly seen that under clause (ii) of the Explanation, imparting of any information concerning the working of the model or design should be clearly understood as "royalty". Here the Shuttle Kiln and the Tunnel Kiln are two special designs evolved by the British company. How to operate them is the exclusive preserve of the foreign company and under the stipulations of these agreements it is parting with that knowledge by way of giving maintenance and operating instructions to the Indian company. Thus the payment made towards imparting of information concerning the working of the model or design is nothing but royalty. The learned Departmental Representative drew our attention to section 44D and section 115A of the I.T. Act. He argued that under section 44D(b), since these are intended payments to be made under the stipulations entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Porcelains Ltd.'s case does not apply to the facts of the case because the kiln constructed in that case is not stated to be a special design or model evolved by the foreign company. Therefore, there was no scope to hold that the kiln constructed in India with the assistance of the West German company in that case cannot be said to be the property of the West German company, whereas in this case the two types of kilns constructed were no other than the replicas of the special models designed by the foreign company and, therefore, the foreign company has got property in the specialised design and models wherever such models are reproduced. Under the agreements, such models were reproduced maintenance and operating instructions were intended to give the clues as to how those kilns are to be worked. Therefore, the payments towards imparting of information concerning the working or use of the patented model or design is nothing but royalty. The learned Departmental Representative argued that what we have to see is the nature of the receipt in the hands of the foreign company but not in the hands of the Indian company. The payments made towards these instructions is to be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stituted royalty and whether 20 per cent of the payment to be made to the foreign company could be deducted. In that case, it was held that technical documents constituted know-how and will also be plant and it would be eligible for depreciation. If the drawings and technical documents are to be treated as plant, the supply of the same from abroad in the same manner as supply of material would have the same consequences. If there is no taxable profit element in the supply of material because they were sent from abroad, there could not similarly be any taxable element in the supply of engineering data. The learned Bench held that from this angle alone the assessee is entitled to succeed. Next, dealing with the question of 'royalty' it was held that 'royalty' in the ordinary sense is rent or revenue attributable to the use of an asset belonging to one person by another. The bench found that there was no such 'royalty' in the arrangement between the assessee-foreign company and the Indian company. It was specifically found in that case that the foreign company undertook to supply, erect and commission a kiln in India, the only services rendered in India being that of supervision by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed specialists in the world the Indian company approached them with a request that the foreign company should furnish drawings and specifications etc. of their model designs of Shuttle Kiln and Tunnel Kiln (specifically named as Bricesco Twin Track Shuttle Kiln and Bricesco Tunnel Kiln). The foreign company for the purpose of construction of the kilns offer advice as to the materials to be used for construction, the availability of such material in India, supply of certain machinery from abroad and they should depute their engineers both at the time of construction as well as at the time of commissioning of the kilns. So with the help and assistance of the foreign company, the Indian company was able to produce a replica of the patent or design or model of one Shuttle Kiln and one Tunnel Kiln invented by the foreign company at the factory site of the Indian company at Ranipet. It is easy to be seen that the foreign company had its property in the special design or model evolved by them in the construction of the same type of Shuttle Kiln and Tunnel Kiln. Thus the model or design which was copied in India is the property of the foreign company. How to work the Shuttle Kiln and the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reamble of each of the contracts is as follows : " We, British Ceramic Service Co. Limited, undertake to supply to E.I.D. Parry Limited the following drawings, information, essential components and specialist supervision/commissioning engineers to enable E.I.D. Parry to procure the necessary indigenous materials and construct, commission and operate Bricesco Twin Track Shuttle Kiln for the refiring of vitreous china sanitaryware. " A similar preamble also occurs in the other contract concerning the Tunnel Kiln. It is very clear that the kilns constructed at Ranipet were only replicas of Bricesco Twin Track Shuttle Kiln and Bricesco Tunnel Kiln which are the specialised version of the foreign company. It is very clear that for construction, the foreign company is obliged to supply even from the stage of drawings the essential components as well as information. Therefore, from the very beginning till the end, the construction must be done as per the advice of the foreign company. Schedule 7 speaks of guarantee and performance and schedule 7.1 speaks of structure and equipment and it is stated in that paragraph : " We guarantee the kiln structure and lining for 300 firings or 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will have to understand the meaning of the word "royalty" as it is given under section 9(1)(vi), Explanation 2. Only for that limited purpose, the provisions of section 9 are relevant. We are not concerned with the rest of the section. No doubt, section 9 deals with income deemed to accrue or arise in India. We are not concerned with the deemed income arising in India. It is not necessary that before royalty is to be taxed in the hands of the foreign company, it should be the income deemed to accrue or arise in India. We have to only see whether the provisions of section 115A are complied with or not. Now in this case the provisions of section 115A(1)(b) are fully complied with since we hold that the amount receivable by the foreign company was in the nature of "royalty" from an Indian concern and the said sum was payable in pursuance of an agreement made by the foreign company with the Indian concern after 31st March, 1976 and the said agreement was also approved by the Central Government. Therefore, according to us, the amounts of pound 40,000 and pound 65,000 before they being paid to the foreign company, 20 per cent should be deducted towards tax deducted at source. 8. The S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court in Carborandum Co.'s case is not at all relevant to be considered in this case and hence Carborandum Co.'s case cannot be of any help to the assessee. 9. Again our attention was drawn to be C.B.D.T. Circular No. 23 dated 23-7-1969 found quoted at page 779 of Sampath Iyengar's Law of Income-tax, Eighth Edition. Our particular attention was drawn to paras 7(i) and (ii) of the Circular No. 23 of 1969 dated 23-7-1969. The text of the circular is as follows : " 7(i) Where the technical know-how obtained, relates to the design and engineering of the plant in India or the erection and commissioning of the plant, the payment should be treated as forming part of the cost of the machinery and plant and depreciation and development rebate should be allowed thereon. Where, however, the technical know-how is not directly relatable to the depreciable assets and cannot be regarded as forming part of their cost, the expenditure though treated as capital, would not be eligible for the allowance of depreciation and development rebate. (ii) As regards technical know-how obtained in the form of drawings and designs and technical information and knowledge concerning the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the C.B.D.T. Circular was not a clarification given as to how the payment is to be treated in the hands of the foreign supplier. It deals with the nature of the payment in the hands of the the recipient Indian party only. Further, the C.B.D.T. Circular is given under section 9 of the I.T. Act, 1961, with which we are not concerned in this appeal. We have already clarified that we are mainly concerned with the interpretation of section 115A and 44D of the I.T. Act, 1961. Thus the C.B.D.T. Circular cannot be of any avail to the assessee. 10. The learned Departmental Representative relied upon the Andhra Pradesh High Court decision in Skoda Export's case. There, the question was whether any income accrued or arose to the non-resident company in respect of fee for consulting activity as a result of operations carried out by it within the taxable territories and whether there was any business connection. Again, we are not on the question of business connection at all since we are not dealing with this case under section 9(1)(i) of the I.T. Act. In our opinion, the ratio of the Andhra Pradesh High Court decision is not relevant for the purpose of this case. 11. In the view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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