Delhi High Court
M/S. Shri Ram Refrigeration Industries ... vs Union Of India & Ors. on 14 November, 2008
Author: Mukul Mudgal
Bench: Mukul Mudgal, Manmohan
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CM No. 15536/2008 in W.P.(C) No.1884/1992
Date of Decision: November 14, 2008
M/s. Shri Ram Refrigeration Industries Ltd. .....Petitioner
Through : Mr. Peeyosh Kalra
Mr.Tushar Vaibhav, Mr.Gaurav Pratap Singh, Advocates.
Versus
Union of India & Ors. .....Respondents
Through : Mr.Rakesh Kumar Singh and Mr. Jitendra Kumar, Advocates.
CORAM:
HON'BLE MR. JUSTICE MUKUL MUDGAL
HON'BLE MR. JUSTICE MANMOHAN
1. Whether the Reporters of local papers may be allowed to see
the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
JUDGMENT
14-11-2008 : MUKUL MUDGAL,J. (ORAL)
1. This is an application seeking restoration of the writ petition with the following prayers:-
"In the premises it is most respectfully prayed that this Hon'ble Court may be pleased to-
a) Recall the order dated 10.11.2008 and restore the Writ Petition to its original number;
b) Pass such order or orders as this Hon'ble Court may deem just and proper in the facts and circumstances of the case."
2. For the reasons mentioned in the said application which state that the default occurred due to a wrong noting of the date by the learned counsel for the petitioner seeking restoration of the writ petition, the application is allowed and the writ petition is restored to its original number and position.
3. With the consent of the learned counsel appearing for the parties, the writ petition is taken up for final hearing.
4. The writ petition has been filed by M/s. Shri Ram Refrigeration Industries Ltd. against the respondents, Union of India; Technology Development Board and the Reserve Bank of India with the following prayers:-
"(a) issue a writ or certiorari/prohibition or any other appropriate writ order or direction under Article 226/227 of the Constitution of India quashing and nullifying the levy and prohibiting realization of Research and Development Cess on royalty payment made to TECUMSEH PRODUCTS COMPANY, a Michigan Corporation of TECUMSEH, United States of America, under the Agreement.
(b) issue a writ, order or direction particularly in the nature of mandamus directing Respondents to allow remittance of all subsequent instalments against the agreed royalty to TECUMSEH without the petitioner being subjected to pay Research & Development Cess at the rate of 5% as has been done in the past;
(c) issue a writ, order of direction particularly in the nature of mandamus directing the Respondents to refund to the petitioner such amounts as have already been paid as and towards Research & Development Cess on remittances made to TECUMSEH together with interest at such rate as this hon'ble court may deem fit and proper;
(d) award cost of this petition in favour of the petitioner and against the respondents."
5. The petitioner, M/s. Shri Ram Refrigeration India Ltd., pursuant to the Agreement dated 10.1.1987 with M/s. TECUMSEH of USA for acquiring technical know how for making and marketing components paid to M/s. TECUMSEH a lumpsum of US $ 4,95,000/-. The petitioner was in addition required to pay royalty to TECUMSEH at the specified rates for certain exclusive and non-exclusive rights in respect of products manufactured with the know how provided by TECUMSEH.
6. The only dispute which arises in the present case is whether the amount paid towards such royalty is a payment towards import of such technology.
7. The relevant statutory provisions of the Research and Development Cess Act, 1986 (hereinafter referred to as 'the Act') reads as under: -
"3. Levy and collection of cess on payments made towards import of technology, -
(1) There shall be levied and collected, for the purposes of this Act, a cess at such rate not exceeding five per cent, on all payments made towards the import of technology, as the Central Government may, from time to time, specify, by notification, in the Official Gazette.
(2) The cess shall be payable to the Central Government by an industrial concern which imports technology on or before making any payment towards such import and shall be paid by the industrial concern to any specified agency."
4.1 The Central Government vide notification No.880 (E). No. F-1/4/86-FT & I dated 5th October, 1987 has specified the rate of cess as five per cent. 2 (d) "Import", in relation to any technology, means the bringing into India of, such technology from a place outside India;
The word "technology" has been defined in clause (h) of Section 2 of the Act as under: -
"Technology means any special or technical knowledge or any special service required for any purpose whatsoever by an Industrial concern under any foreign collaboration and includes designs, drawings, publications and technical personnels.
Rule 3 of the Cess Rules provides that for the purpose of levy of cess under section 3 of the Act, "payment" shall include: -
(a) Payment made towards import of technology as approved by the Central Government in terms of any foreign collaboration agreement;
(b) Payment made towards the cost of drawings, and designs as approved by the Central Government;
(c) Payments made to foreign collaborators or to any other person for or in connection with deputation of technical personnel to India in accordance with the approval granted by the Central Government or the Reserve Bank of India;
(d) any other payment made towards the import of technology as approved by the Central Government."
(emphasis supplied)
8. The principal plea of Mr. Peeyosh Kalra, the learned counsel appearing on behalf of the petitioner is that the word 'royalty' does not fall within the definition of 'technology' and accordingly, the payment being made subsequently for the use of the technology could not fall within the term technology or user thereof. In support of his plea, Mr. Kalra, the learned counsel for the petitioner has relied upon the judgment of a Division bench of this Court in the case of Additional Commissioner of Income-Tax, Delhi-II vs. Shama Engine Valves Ltd. (1982) 138 ITR 216. In particular, he had laid emphasis on the following passages of the judgment: -
"It would, therefore, appear to us that what the assessee has obtained is a licence to manufacture valves, a right to sell the same and assistance in carrying this out. The recurring payment of royalty is for the use of the know-how/assistance and not for its acquisition.
The payment of royalty is a recurring charge on the "net selling value" and no advantage of enduring benefit has been obtained. The restriction pertaining to confidentiality of information would further indicate that no secret process or technical know-how has been sold to Khanna (assessee) and there was no permanent parting of technical know-how. ....
...Therefore, we are in the agreement with the view of the Tribunal that the expenditure must be treated as revenue."
9. The learned counsel for the petitioner submitted that the principle laid down in the above judgment will squarely apply to the facts of the above case. The petitioner's counsel has also relied upon certain provisions of the Agreement between the petitioner and its foreign collaborators to buttress his plea that the payment for royalty could not form part of payment of technology, and has relied in particular, the Articles 1,2,4,6,7,8,9,11,14,17,22,23,24,26,31,32 and 33 of the said agreement. He further submitted that the royalty is payable only upon the commercial production and that the royalty is payable only to avoid competition and grant of franchise by the foreign company to any other competitor in the market.
10. The learned counsel for the respondent placed reliance on the following paragraphs in the counter affidavit: -
"1. That the petitioner has suppressed a vital and relevant point before this Hon'ble court namely approval granted to the petitioner by the government of India and which form part of the foreign collaboration agreement. The approval dated 4.6.1987 as amended on 17.4.1990 which is already annexed to the counter affidavit filed by the respondent No.1. The same may kindly be referred.
2. That a perusal of the approval granted to the petitioner would clearly show that it has been granted on the condition, inter alia, that the petitioner pays 5% royalty subject to tax for a period of 5 years. In the context of the long term fiscal policy, a relevant extract of the same is annexed with the counter affidavit filed by respondent No.1. After reading the policy with the Research and Development Cess Act, 1986, there can be no manner of doubt that the payment of Royalty is an approved payment for the purpose of Rule 3 of the Research & Development Cess Rules, 1987 and thus the R & D Cess is leviable under the said Act, on the Royalty payments also. ..........
...In reply to para No.1 of the writ petition, I submit and state that it is incorrect to say that the amount in respect of which the levy of R&D cess is challenged is a payment by way of royalty. As is submitted in the following paragraphs, it is a deferred payment of the consideration for import of technology. Even assuming but not conceding that the said amount represents royalty payment, the petitioners contention that the cess levied on the royalty payment is illegal, misconceived, based on wrong interpretation of the various provisions of Research & Development Cess Act, 1986. It is submitted most payment of the royalty amount is a payment towards import of technology as contemplated under Section 3(1) of the said Act and Rule 3 (d) of the R&D Cess Rules, 1987, as such the cess sought to be recovered on the said payment is in accordance with the Act and the Rules. ...........
...3.5 In reply to para No.3.5 of the writ petition, it is submitted that a look at the agreement dated January 30, 1987 entered between the petitioner and the foreign suppliers, TECUMSEH, will reveal that both the amounts viz. US $ 495,000 styled as Disclosure Fee in Article 6 of the agreement and further payment to be calculated in the manner provided in Article 14 are the payments made for one single consideration viz. the performance of its obligations by TECUMSEH. The agreement nowhere describes any part of the payment as a royalty payment. This is a significant fact. It is submitted that the amount of consideration is made payable in two forms viz. (i) liquidated predetermined amount as mentioned in Article 6 and the deferred payment as specified in Article 14. Despite this Division, it is really one single consideration for the same transaction and is a payment made for import of technology in terms of Section 3 of the R&D Cess Act. In any case, as submitted above, even the royalty payment attracts cess under the said Act."
11. In so far as the question of reliance on the Agreement between the petitioner and its foreign collaborator is concerned, in our view, it will not have and cannot have any bearing on the interpretation of the statute and the rules framed thereunder. Accordingly, we are not reproducing the aforesaid articles relied upon by the petitioner. It may be noted that the Agreement did not describe any part of payment as 'royalty payment' and only referred to 'liquidated predetermined amount' and 'deferred payment'. However, this plea of the Respondent is not being considered as we have also not considered the plea of the learned counsel for the petitioner with respect to the Agreement between the petitioner and its foreign collaborator. In our view, the agreement between the parties cannot define the scope of the Statute.
12. In so far as the plea relating to the payment of the royalty only upon commercial production being commenced is concerned, in our view there is no question of levy of cess unless and until the commercial production begins. Accordingly, this plea cannot come to the aid of the petitioner. The other plea of the petitioner that the payment of royalty is to avoid competition is concerned, may be perfectly valid but this plea has no bearing on the interpretation of the statute and the nature of the payment for import of technology.
13. We asked the Petitioner's counsel as to whether in the event the petitioner failing to pay the royalty amount, would the petitioner be entitled to use the technology offered by the foreign collaborator. He fairly conceded that if the royalty was not paid, then the petitioner would not be allowed to use the technology offered by the foreign collaborator.
14. Further, what is relevant to be noted is that the permission was granted to the petitioner upon the agreement to pay 5% royalty cess which permission has been utilized by the petitioner. Even though the petitioner did not furnish an undertaking, since Petitioner has utilized the said permission, it is estopped from challenging the same.
15. The learned counsel for the petitioner had relied upon the judgment of the Hon'ble Supreme Court in the case of Shama Engine Valves (supra) to strengthen his contentions. However, the issue raised in the afore-mentioned judgment was whether the payment of royalty is in the nature of capital expenditure or revenue expenditure and hence the principle as laid down by the Hon'ble Supreme Court does not apply to the facts of the present case.
16. Section 3 (1) of the Act levies a cess of not more than 5% on all payments made towards the import of technology (emphasis supplied). This definition is very wide and since it covers all payments made towards the import of technology all we are required to consider is the issue whether the payments towards royalty are payments for import of technology. The definition of technology in Section 2(h) of the Act makes this even more clear as technology is defined to mean any special or technical knowledge on any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration. This is further amplified and technology is defined to include designs, drawings, publications and technical personnel.
17. It is thus, evident that not only all payments towards import of technology covered by the charging Section 3 but Section 2(h) defining technology covers all special or technical knowledge required for any purpose whatsoever. The manufacture of products which attracts royalty certainly involves utilization of such technology and payment of royalty thus would clearly fall within the definition of technology. Even if it is assumed that there was any ambiguity, this is further clarified by Rule 3(d) as the payment was pursuant to the approval by the Central Government.
18. In view of the above, and in light of the Rule 3 of the Research and Development Cess Rules, 1987, we are of the view that payment of royalty under the Agreement can be termed as payment towards import of technology. Accordingly, we are satisfied that there is no merit in the writ petition and the same is dismissed with no order as to costs. If any amount is payable by the petitioner towards the impugned cess, it shall be paid not later than 15th of December, 2008.
(MUKUL MUDGAL) JUDGE (MANMOHAN) JUDGE November 14, 2008 sk