1999 PLP 3060 (PTD)
COMMISSIONER OF INCOME-TAX Versus KREBS & CO. (and vice versa)
| Citation | 1999 PLP 3060 (PTD) |
| Forum / Court | 229 I T R 615 |
| Bench Members | A. K. Mathur, C. J. and S. K. Kulshrestha, J |
| Parties | COMMISSIONER OF INCOME-TAX Versus KREBS & CO. (and vice versa) |
| Primary Law | Income-tax |
Q1: What are the key laws and sections cited in 1999 PLP 3060 (PTD)?
This judgment primarily cites: Income-tax as referenced in Pakistani case law index.
Q2: Which judicial bench decided the case 1999 PLP 3060 (PTD)?
The case was heard and decided by the 229 I T R 615 bench comprising: A. K. Mathur, C. J. and S. K. Kulshrestha, J.
Q3: What is the official citation format for this judgment on Pakistan Law Portal?
Cite this legal precedent as: 1999 PLP 3060 (PTD) (COMMISSIONER OF INCOME-TAX Versus KREBS & CO. (and vice versa)). Read the full summary and cross-referenced laws free on Pakistan Law Portal.
Laws Cited
Headnotes / Summary
Non-resident
Income deemed to accrue or arise in India
Agreement for supply of know-how, complete engineering and services to Indian company by assessee
Out of total fee payable to assessee particular sum stated to be cost of supervision of erection and commissioning of plant
Actual sum paid by assessee to employees for technical assistance and services alone deductible
Balance to be treated as royalty
Indian Income Tax Act, 1961, S.9(1)(vi), (vii). An agreement, dated May 5, 1975, was entered into between the assessee, a Swiss Company, and an Indian Company, for supplying know how, complete engineering and services for the extension of the existing chlorine and caustic soda plants of the Indian company. The agreement was approved by the Government of India. The assessee undertook to perform all engineering services necessary for the supply of imported items and for procurement of indigenous items by the Indian company and to integrate all such equipment into the existing plant in order to raise the production capacity of the chlorine and caustic soda plants to a certain limit. The fee for supply of engineering and rendering of services was agreed at 4,59,795 Swiss francs. The assessee also undertook to provide technical information, drawings, specifications and operating instructions to enable the Indian company to erect, repair and maintain the plant and, on its part, the Indian company undertook to use such drawings solely for the purpose of erection, repair and maintenance of the plant and equipment to be supplied by the assessee, and not to use them or pass them on to other parties for use in the construction on operation of any other plant. The assessee also undertook to place at the disposal of the Indian company one erection supervisor for nine months and one chemical engineer for two months to supervise erection and starting of the plant. The fee for supervision of erection and commissioning of the plant was agreed to be paid by the Indian company to the assessee in the sum of 2,04,032 Swiss francs. Thus, the total amount of consideration for the agreement was 6,68,827 Swiss francs. The Income-tax Officer held that the payment of 4,59,795 Swiss francs did not accrue in India and so was not taxable. The Income-tax Officer, after deducting the remuneration paid to the two engineers from the sum of 2,04,032 Swiss francs, taxed the balance, which on conversion into Indian rupees worked out of Rs.7,60,
100. The Tribunal held that the entire amount of 2,04,032 Swiss francs was not paid for the technical services and there was an element of royalty in the said agreement. The Tribunal, therefore, assessed the royalty at 20 per cent of the total consideration which worked out to 40,806 Swiss francs, equivalent to Indian rupees 1,87,
300. On references at the instance of the assessee and the Department: Held, that "royalty" has been defined in Explanation 2 to clause (vi) of subsection (1) of section 9 of the Income Tax Act, 1961, as consideration, inter alia, for the transfer of all or any rights including the granting of a licence in respect of patent, invention, model, design, secret formula or process or trade mark or similar property, the imparting of any information concerning the working of or the use of ,a patent, invention, model, design, secret formula or process or trade mark or similar property. Sub-clause (vi) of Explanation 2 includes within the meaning of royalty, the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v). Clause (vii) of subsection (1) of section 9 which talks about income by way of fees for technical services, lays down in Explanation 2 thereto that fees for technical services include any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but do not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". The proviso to clause (vi) of section 9(1), provides that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Therefore, the fees which had been paid for technical services by virtue of the agreement in question dated May 5, 1975, were not subject to tax by virtue of this proviso, which was inserted by the amendment by Finance (No.2) Act of 1977 with effect from April 1, 1977. An analysis of the provisions of section 9(1)(vi) and (vii) would show that what had been made not taxable was only the fees paid for technical services and not royalty. Clause (4) of the agreement made it clear that out of 6,63,827 Swiss francs, a sum of 2,04,032 Swiss francs, would be the cost of supervision of erection and commissioning of the plant. The Tribunal while discussing the matter had treated 20 per cent of this sum as royalty. There was no basis for this. The assessee was entitled to get, a rebate on the actual amount paid by it to its employees for their technical assistance and services and the rest of the amount had to be treated to be as royalty. Abhay Sapre for the Commissioner. H. S. Shrivastava for the Assessee.
Judgment & Decree
The whole controversy centres round this agreement. Section 9 of the Income-tax Act deals with income deemed to accrue or arise in India. Clauses (vi) and (vii) of subsection (1) of section 9 of the Income-tax Act are relevant. The relevant portion thereof for our purpose is quoted below: "Section
9. Income deemed to accrue or arise in India.
(1) The following incomes shall be deemed to accrue or arise in India
. . (vi) income by way of royalty payable by
(a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India: or (c) a person who is a non-resident, where the royalty is payable respect of any right, property or information used or services utilised; for the purposes of business or profession carried on by such person in India or for the purposes of making or, earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent; invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976 and the agreement is approved by the Central Government. Explanation 2:
For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for
(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 trade mark 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 trade mark or similar property; . (iii) the, use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work 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); (vii) income by way of fees for technical services payable by
(a) tile Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 and approved by the Central Government. Explanation. 1.
For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.
For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the, recipient or consideration which would be income of the recipient chargeable under the head 'Salaries' "Royalty" has been defined in Explanation 2 to clause (vi) of subsection (1) of section 9 as consideration including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "capital gains" for the transfer of all or any rights including the granting of a licence in respect of patent, invention, model, design, secret formula or process or trade mark or similar property; the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property. Sub-clause (vi) of Explanation 2 lays down for rendering of any services in connection with the activities referred to in sub clauses (i) to (v). Clause (vii) of subsection (1) of section 9 which talks about the income by way of service, lays down in Explanation '2 that any income which has been paid for technical services in any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel), but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". The proviso further provides that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Therefore, the fees which have been paid for technical services were not subject to tax by virtue of this proviso, which was inserted by the amendment by Finance (No.2) Act of 1977 with effect from April 1, 1977. An analysis of the provisions of section 9(1)(vi) and (vii) clearly shows that what is not made taxable is only the fees paid for technical services and not the royalty part. Clause (4) of the agreement makes it clear that out of 6,63,827 Swiss francs, 2,04,032 Swiss francs will be the cost of supervision of erection and commissioning of the plant. So far as the purchasing of other material from abroad is concerned, that has been excluded. Therefore, our attention centers around this amount, whether this amount relates to a fee levied by technical personnel and whether it has an element of royalty or not. The Tribunal while discussing the matter has taken 20 per cent: as a royalty and the rest of the amount has been left as fee from technical services. We have not been able to understand as to on what basis the Tribunal has come to the conclusion and has taken the amount of Rs.1,87,300 as the value of the royalty. Hence, we hold that the assessee is entitled to get a rebate on the actual amount paid by them to their employees for their technical assistance and services and the rest of the amount will be treated to be a royalty. In the result, we answer the first question in favour of the Revenue and against the assessee and the second question is answered against the assessee and in favour of the Revenue. M.B.A./3063/FC Reference answered.