Income Tax Appellate Tribunal - Kolkata
Union Carbide Corpn. vs Inspecting Assistant Commissioner on 30 September, 1993
Equivalent citations: [1994]50ITD437(KOL)
ORDER
R.V. Easwar, Judicial Member
1. This appeal filed by the assessee is directed against the order of the CIT (Appeals) dated 24-2-1986. The assessment year involved is 1982-83 for which the. accounting year ended on 25-12-1981. The assessee M/s. Union Carbide Corporation (U.C.C. in short) is a company incorporated in the U.S.A. It is assessed in the status of a non-resident company in India. In the present appeal, we are concerned with the only question whether the amount of Rs. 43,57,233 received by the assessee from M/s. Union Carbide India Ltd. (U.C.I.L. for short) under a "Technical Service Agreement" dated 13-11-1973 was taxable in its hands as "royalty" under Section 9(1)(vi) of the Income-tax Act, 1961.
2. In the. course of the assessment proceedings, the Income-tax Officer took the view that the payments made under the technical service agreement by U.C.I.L. was assessable in the hands of the assessee as "royalty" within the meaning of Explanation 2 to Section 9(1)(vi) of the Act. According to him, the fact that the nomenclature of the agreement was "Technical Service Agreement" did not determine the nature of the receipt. He over-ruled the assessee's contention that the amounts received under the agreement were fees for the technical service and were exempt as such under Section 9(1)(vii) of the Act read with Explanation 2 thereto. Certain other contentions regarding the applicability of the provisions of Section 9(1)(vi) were also taken before the Income-tax Officer which were overruled by him. These will be discussed at a later stage since they are not very relevant for our purpose at this juncture. The Income-tax Officer, in this view of the matter brought to tax the amount of Rs. 43,57,233 as the business income of the assessee.
3. On appeal, the assessee repeated the contentions it has raised before the Income-tax Officer. The CIT (Appeals) did not accept them. According to him, the case of the assessee was not governed by the proviso to Section 9(1)(vi), since the payments made under the technical service agreement did not consist of any lump-sum payment. Therefore, the fact that the agreement in the present case was entered into and approved by the Government of India prior to 1-4-1976 was not of any help to the assessee. Dealing with the principal contention of the assessee that the sums received by it under the Agreement did not partake the character of royalty but represented fees for technical services within the meaning of Section 9(1)(vi) read with Explanation 2 thereto and were therefore exempt under the proviso to that section, the CIT (Appeals) negatived the same and agreed with the ITO's conclusion that the amounts represented royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Act. According to him, the provisions of Section 9(1)(vi) being specific, it was not open to refer to Section 9(1)(vii) which is a more general provision. Relying on the decision of the Gujarat High Court in Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311, he held that the specific provisions excluded the applicability of the general provisions and the payments received by the assessee were clearly taxable as royalty. Certain other decisions in support of the assessee's contentions were cited before him but the CIT (Appeals) distinguished them on the ground that those decisions related to the period prior to the introduction of the provisions of Section 9(1)(vi) of the Act, and were therefore inapplicable. The CIT (Appeals) also rejected the assessee's contention that even after the introduction of Section 9(1)(vi) with effect from 1-6-1976, the assessment had been completed up to and including the assessment year 1981-82 by treating only 20 per cent of the amounts paid under the technical service agreement as royalty and that the same procedure should be followed in the assessment year also. According to the CIT (Appeals), there was no res judicata in income-tax proceedings, and therefore the earlier procedure cannot be treated as sacrosanct and was not binding on the later years.
4. The assessee is in appeal before us. In support of the appeal, Dr. Pal, the Ld. Counsel for the assessee pointed out that two Agreements were entered into on 13-11-1973 between the assessee and U.C.I.L. One was styled as "Design Transfer Agreement" and other was styled as "Technical Service Agreement". We are concerned with the latter agreement. He submitted that the scope of each of the two agreements was wholly different and both dealt with different matters. He pointed out that the agreement with which we are concerned has used the expression "royalty" in the year 1973 and therefore the expression should be interpreted without being influenced by Explanation 2 to Section 9(1)(vi) of the Act which contained a definition of the word "royalty". He, thereafter took us through the various clauses of the technical service agreement. In sum and substance, the contention of Dr. Pal was that the Agreement provided for a continuous process of supplying information regarding the fruits of research carried out by the assessee in its laboratories abroad for the most efficient use of the information regarding the production of the licensed products, namely, carbamate pesticides. There was, according to him, a "fund of knowledge" available with U.C.C., the assessee herein, because of its experience in the field of manufacture of pesticides for long period of years, and this fund was utilised by the Indian company namely U.C.I.L. to which it was supplied continuously. According to Dr. Pal, any imparting of information regarding the process of manufacture of pesticides from the "fund of knowledge" obtained by the assessee as a result of constant research in the field of pesticides, on a continuous basis, to the U.C.I.L. would only amount to "technical service" or a "consultancy service" rendered by the assessee and the consideration received by it for such services would be "fees for Technical services" within the meaning of Explanation 2 to Section 9(1)(vii) of the Act and cannot be treated as royalty even within the statutory definition of the word contained in Explanation 2 to Section 9(1)(vi) of the Act. He further pointed out that the assessee did not grant to U.C.I.L. any exclusive licence or patent or trade mark or any copy right in the manufacturing process relating to the pesticides and therefore the various clauses in Explanation 2 to Section 9(1)(vi) defining the word "royalty" were not applicable. Adverting to the secrecy provisions contained in the Agreement, Dr. Pal submitted that such secrecy provisions only emphasised that the assessee did not obtain any exclusive or protected right in respect of any patent or trade mark or design or secret formulae or secret process or any copy right. He laid particular stress on Clause 2.6 of the Agreement which according to him indicated that whatever information or right which U.C.I.L. obtained under the Agreement was not exclusive information nor was it a patent or copy right, and therefore the payments made under the Agreement cannot be called "royalty". He pointed out that Clauses (i) to (iii) of Explanation 2 to Section 9(1)(vi) of the Act were not applicable to the payments, because there was no patent, invention, model etc. which was granted by U.C.C. to U.C.I.L. Clause (iv) was also not applicable, according to Dr. Pal, since that clause can apply only where there is a one-time imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill and was not applicable where, as in the present case, there was a rendering of continuous services by the assessee under the Agreement which involved updating of the information and incorporating the latest developments due to research etc., which would fall only under Explanation 2 to Section 9(1)(vii) of the Act, as "technical services".
5. In support of his contentions, Dr. Pal relied on the following judgments :
(i) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 43 Taxman 312. (SC)(the observations at page 390 of the report)
(ii) CIT v. Stanton & Stavely (Overseas) Ltd. [1984] 146 ITR 405 [1983] 13 Taxman 162. (Cal.) at page 423.
(iii) Citizen Watch Co. Ltd. v. MC [1984] 148 ITR 774 [1983] 15 Taxman 438. (Kar.) at page 787.
(iv) CIT v. Ahmedabad Mfg. & Calico Printing Co. [1983] 139 ITR 806 [1981] 7 Taxman 353. (Guj.) at pages 819-820.
6. Dr. Pal criticised the conclusions of the Income-tax Officer as well as the CIT (Appeals). According to him, the CIT (Appeals) has not kept in mind the true import or implication of the various clauses of the Technical Service Agreement, since he had not extracted the relevant clauses in full, but has preferred to rely on the tabulation furnished before him by the Income-tax Officer at the time of hearing. His contention was that the CIT (Appeals) should have himself examined the various clauses of the agreement fully before coming to any conclusion on the assessability of the amounts paid under the agreement.
7. An important contention was thereafter raised by the Ld. Counsel for the assessee. He submitted that the amplitude of Clause (iv) of Explanation 2 to Section 9(1)(vi) is cut down by the Explanation 2 to Section 9(1)(vii) and to interpret both the provisions as operating on the same field would amount to attributing tautology or redundancy to the Legislature, which is not permissible. According to him, both the provisions must be harmoniously construed and must be held to operate on different fields. It is his case that the former provisions applied to the supply or imparting of information from a "one-time funded knowledge" and the latter provision refers to the rendering of continuous services out of knowledge that is constantly being updated by active research. In this connection Dr. Pal has referred to the Supreme Court decisions in Raj Krushna Bose v. Binod Kanungo AIR 1954 SC 202, Vol. 41. C.N. 44 and in University of Allahabad v. Amrit Chand Tripathi AIR 1987 SC 57.
8. Countering these arguments, Mr. Bagchi, the Ld. Senior Standing Counsel for the Income-tax Department, contended that it is not open to the assessee to now contend that the payments under the agreement were not royalty payments since the assessee had agreed to pay tax on 20 per cent of such payments in the past on the footing that those were royalties. He contended that the nature of the payments under the agreements should be determined not on the basis of the nomenclature given by the parties to the agreement, but after examining their real character on an appraisal of the various clauses of the Agreement. If, all the clauses of the agreement were read together, having regard to the preamble of the agreement, it would be clear, according to Mr. Bagchi, that the payments under the agreement were clearly "royalty" within the meaning of Clauses (U), (iv) and (vi) of Explanation 2 to Section 9(1)(vi). It was also pointed out by him that in Circular No. 21 of 1969 dated 9-7-1969 (reported in 73 ITR Statute 19) at paragraph 10, the Board had expressed the view that "ordinarily, a payment expressed as a percentage of the sales in India is to be treated as payment of royalty and taxed in India". In the present case, the payment of royalty under Article 5.1 of the Technical Service Agreement was to be at the rate of 2.5% on the ex-factory selling price of the pesticides sold by U.C.I.L. and having regard to the view expressed by the C.B.D.T., the payments have to be treated as royalty and taxed in the assessee's hands as such. Mr Bagchi, in this connection pointed out that Clause 5.1 itself describes the payment as "royalty". He also drew our attention to the judgments of the Calcutta High Court in N.V. Philips v. CJT (No. 1) [1988] 172 ITR 521 and in Stanton & Stavely (Overseas) Ltd.'s case (supra) in support of his contention that the assessee had certain exclusive rights or specialised knowledge in the field of manufacture of carbamate pesticides and certain intermediate products useful in the manufacture of such pesticides and such knowledge, expertise or experience was equivalent to having a patent and any payment received by the assessee as consideration for the use or exploitation of the same by U.C.I.L. will have to be considered as royalty. He next referred to the judgment of the Gujarat High Court in Meteor Satellite Ltd.'s case [supra), and relying on the observations at page 311 thereof submitted that if a given case concerns the question of royalty one has to look only to the specific provisions of Section 9(1)(vi) of the Act and the provisions of Section 9(1)(vii) automatically stand excluded, being a more general provision.
9. Dr. Pal for the assessee in his reply sought to point out that the Gujarat High Court in the decision relied on by the Learned Senior Standing Counsel was not concerned with Section 9(1)(vii) but was concerned only with the relationship inter se between Section 9(1)(i) and Section 9(1)(vi of the Act. He, therefore contended that the decision was not applicable to the present case. Referring to the Circular of the C.B.D.T. relied upon by Mr. Bagchi, Dr. Pal submitted that the measure of payment can never be conclusive of the nature of the payment as held by the Supreme Court in P.H. Divecha v. CIT [1963] 48 ITR 222. Referring to the judgment of the Calcutta High Court in Stanton & Stavely (Overseas) Ltd. 's case (supra), on which some reliance was placed by the Senior Standing Counsel, he submitted that the real basis of the judgment was that the payment, in order to be characterised as "royalty", should be for a legally protected right, as will be clear from the observations of the Court at pages 417, 421 and 422 of the report. Adverting to the judgment of the Calcutta High Court in N.V. Philips' case (supra) cited by the Senior Standing Counsel, Dr. Pal submitted that the judgment was concerned with the position prior to the amendment of the Act in 1976 by which Section 9(1)(in) and Section 9(1)(vii) were brought into the Act. He further pointed out, relying on the observations of the High Court at pages 528 and 539, that the payment in consideration for the supply of general information would not be royalty and that in order to be characterised as royalty, the payment should be for supply of some exclusive or specialised information. According to him, there was no exclusive or specialised information supplied by U.C.C. to U.C.I.L. in the present case. It was further submitted that even if, it is considered that there is some exclusiveness or speciality in respect of the information supplied by U.C.C., applying the following observations of the Supreme Court in Alembic Chemical Works Co. Ltd. 's case (supra) at page 390 :
It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanance to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition.
It can only be held that U.C.I.L. had only the use of the know-how or knowledge of U.C.C., the consideration for which does not amount to royalty under any of the clauses of Explanation 2 to Section 9(1)(vi). Referring to the argument of the Senior Standing Counsel that the assessee itself had described the payment as "royalty" in Article 5.1 of the Agreement, Dr. Pal submitted that the nomenclature given to the parties to the payment is not conclusive. In this connection, he referred to the following judgments of the Supreme Court :
(1) CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422,
(ii) Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261, and
(iii) CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692.
10. We have considered the rival contentions. We have carefully gone through the orders of the departmental authorities. We have also studied the authorities cited by both the sides. In our opinion, the fate of this appeal must depend upon the construction of the "technical service agreement" dated 13-11-1973. The agreement relates to the manufacture of carba-mate pesticides by the reactions of methyl isocyanate with hydroxy compound. The preamble of the Agreement states that the assessee is engaged in the U.S.A. in the manufacture of the pesticides and also certain intermediate products, and therefore possesses "considerable knowledge, expertise and experience" with regard to such products. It further states that the assessee is continuously engaged in scientific research on a large scale in U.S.A. in connection with carbamate pesticides and formulation of carbamate insecticides. It employs a large research staff and maintains extensive research laboratories and other facilities for research in U.S.A. It has trained and experienced personnel available with it for imparting training and instruction with regard to the manufacture of the pesticides. The object of the Agreement as stated in the preamble is to confer the benefit of the knowledge, expertise and experience of the assessee in this line upon U.C.I.L. with this object in view, provisions have been made in Article II of the Agreement under the head 'Technical Service". We have not extracted the Agreement in full, because the same has been extracted fully in the assessment order. We may however briefly refer to the technical services which are to be rendered by the assessee to U.C.I.L. under Article II. In our view, there are six broad parts to Article II. The first is that the assessee has to make available to U.C.I.L. technical services which are general or specifically connected to the production and use of the pesticides and which may be required by the U.C.I.L. for the most efficient use of the production techniques developed by the assessee. The assessee has to make available to U.C.I.L. such technical data and findings of its laboratories which are actually adopted or required by it in the commercial production and use of the pesticides. This information or data includes information regarding operating instruction, raw-materials, production process, formulae, and related technical information and such other information or data as the assessee's present or future experience may indicate as being necessary or useful for the production and use of the pesticides in India. The second type of service to be rendered by the assessee to U.C.I.L. is also contained in the same article. Under this, U.C.I.L. has the right to refer specific problems relating to the production of the pesticides to the assessee for the assessee's "consideration and advice". U.C.I.L. may also send to the assessee samples of the pesticides manufactured by it for examination, testing and evaluation by the assessee. The third type of service rendered by the assessee is that it should convey to U.C.I.L. its current production experience in respect of the pesticides by keeping U.C.I.L. informed of all its production processes and working methods in so far as they are relevant and applicable to the pesticides manufactured by U.C.I.L. These services, namely, the first three types of services, which are described in Clause 2.1 of Article II of the agreement may be rendered by the assessee also by way of documentation by means of written instruction, advice, reports, procedures, formulae, training, etc.
11. The fourth type of technical service contemplated by the Agreement is contained in Clauses 2.2 and 2.3 of Article II. Under these two clauses, at the request of U.C.I.L. in writing, the assessee is bound to provide training and instruction for technical personnel of U.C.I.L. in U.S.A. at no extra cost. Similarly, at the request of U.C.I.L. in writing, the assessee is bound to provide one or more of its technical specialists to visit U.C.I.L. factory in India for project implementation, training and instruction of technical personnel, etc.
12. Clause 2.4 of Article II contemplates a separate service. Under this clause, again at the request of U.C.I.L. in writing, the assessee is bound to perform in its research laboratories in U.S.A., such specific research, development or engineering assignments pertaining to the pesticides, their production, use and sale, as are specifically agreed upon. However, this service is to be rendered by the assessee only at a price and subject to other terms mutually agreeable.
13. Clause 2.5 of Article II provides for another type of service. Under this clause, during the term of the Agreement, the assessee will supply U.C.I.L. full details of significant improvements relating to the production of pesticides which it may acquire through its operations or development work in U. S. A. and will furnish U. C. I. L. such information as may be needed by U.C.I.L. for adopting them in connection with the manufacture of pesticides in India.
14. Clause 2.6 of Article II states that nothing in the Agreement shall be interpreted as granting to U.C.I.L. any right or licence under any patent owned or to be acquired by the assessee.
15. Article III provides for secrecy of the technical information and data provided by the assessee to U.C.I.L. under the Agreement. Under this Article, U.C.I.L. has to keep the information confidential and refrain from disclosing them to its employees except to the extent necessary. If necessary, U.C.I.L. is to obtain secrecy agreements from any person to whom some work is entrusted. However, the secrecy provisions do not apply to any such information or data which are generally available to the public or which U.C.I.L. itself knows from other sources or any information received by U.C.I.L. from any other third party. This Article, however, gives the right to U.C.I.L. to disclose information or data received from the assessee to any other Indian party, if it is necessary to do so. One condition is that the third party shall use the information only in India. The other condition is that the disclosure would be made subject to the conditions imposed by the assessee, and shall also be subject to the approval of the Government of India.
16. Article V provides for payment of "royalty" of 2.5% on the factory selling price of the pesticides sold by U.C.I.L. as consideration for the "technical services" rendered by the assessee under the Agreement.
17. Under Article XI, U.C.I.L. is under an obligation to disclose to the assessee any invention or improvement relating to the manufacture of carbamate pesticides which are discovered by it during the currency of the Agreement. Such information regarding improvements should be given to the assessee free of charge.
18. Under Article XII, it is provided that the Agreement shall remain in force for a period ending five years from the date on which U.C.I.L. manufactures 1,000 M.T. of saleable carbamate pesticides or for a period ending eight years from the date on which the Agreement has become effective, whichever is earlier.
19. The other clauses of the Agreement are not very relevant for the purpose of the present appeal.
20. The enquiry which is to be necessarily embarked upon by us is to ascertain as to whether any of the services contemplated by the Agreement would fall within the types of services specified in the definition of the "royalty" in Explanation 2 to Section 9(1)(vi) of the Act. The Explanation reads as under:
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 of 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 of 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).
It has been held by the Gujarat High Court in Meteor Satellite Ltd.'s case [supra] cited by the Learned Senior Standing Counsel that the provisions Of Section 9(1)(vi) are specific provisions relating to "royalty" and the provision,-, of Section 9(1)(vii) are mere general in nature and that whenever the question of royalty crops up, one has to look only at Clause (vi) and not to the more general provisions of Clause (vii). Contrary to what Dr. Pal on behalf of the assessee has contended, the Gujarat High Court has held so at page 322 of the report. The first clause of Explanation 2 to Section 9(1)(vi) is not applicable to the facts of the present case as also Clause (v). These two clauses refer to the transfer of any right in respect of a patent, invention etc. The Agreement in the present case does not contain any provision for the transfer of any such rights. This is made clear by Clause 2.6 of Article II. As noticed earlier, this clause sets at rest any doubts that may crop up in the minds of the person who reads the Agreement as to whether there has been a transfer of any right under any patent acquired or owned by the assessee. The clause clearly states that the Agreement shall not be so interpreted as conferring any such right on U.C.I.L. Therefore, the applicability of these two clauses is ruled out.
21. We may now examine whether Clauses (ii), (iii) and (iv) of Explanation 2 are applicable in respect of any of the services contemplated by the agreement. These clauses do not contemplate the transfer of any right in the patent, invention, etc. They state that consideration for imparting of any information relating to the working or use of the patent, etc., or for the use itself of the patent, etc. and the imparting of information relating to technical, industrial, commercial or scientific knowledge, experience or skill is to be treated as royalty. It is with reference to the applicability of these clauses that the contention of Dr. Pal for the assessee that the assessee has no patent or trade mark or secret formulae, etc. and therefore these clauses are not applicable, gains importance. We may first deal with Clauses (ii) and (iii). It is in these clauses that the words patent, invention, model, design, secret formulae or process or trade mark are used. It is no doubt true that the assessee in the present case may not have any such assets relating to the manufacture of carbamate pesticides. However, the words "similar property" are also used in the aforesaid clauses. Such words closely follow the other words indicating the existence of some kind of right or asset in the assessee with respect to the information in its possession. The words "similar property" in the context in which they are used, have to be interpreted in the same manner in which the earlier words denoting some kind of right or asset in the assessee are interpreted. The assessee cannot have any patent or any other legally protected right with respect to the information in its possession. But it possesses specialised knowledge or information, which is equivalent to holding a patent, invention, etc. In the context in which the words "similar property" are used, such specialised knowledge would fall within the words "similar property".
22. We may briefly refer to a few judgments on this issue to show that specialised knowledge derived out of experience can also be treated equivalent to a patent, invention, etc. and can be taken to fall within the sweep of the words "similar property". The first is the judgment of the Gujarat High Court in Ahmedabad Mfg. & Calico Printing Co. 's case (supra) which was cited by Dr. Pal. After referring to the various clauses of the agreement, the meaning ascribed to the word "royalty" in the various dictionaries including Corpus Juris Secundum as also the meaning of the word under the Australian and Canadian Income-tax Law, the Gujarat High Court held that even knowledge derived from experience and technical know-how for the most efficient and economical user of the patent, invention, etc. is parted with by the licensor to the licensee for a consideration which is called "royalty". It is clear from the observations of the court at pages 820 and 821 of the report that in modern international usage in the commercial field "royalty" is understood as consideration paid from time to time for the exploitation of the right, inter alia, to the knowledge regarding secret process, patent, registered trade mark etc. In fact, in that judgment, the Gujarat High Court, though it was concerned with an agreement entered into prior to 1-4-1976 and which was applicable in respect of a period prior to the introduction of the definition of the word "royalty" in Explanation 2 to Section 9(1)(vi) of the Act, still referred to Clause (iii) of the Explanation and held that the definition enacted by the Legislature lent support to its conclusion that in the field of international commercial usage the word "royalty" had come to acquire the particular meaning which they have attributed to it.
23. The contention that unless there is a legally protected right or a patent, the consideration for the use of the knowledge in the particular field cannot be treated as being in the nature of "royalty" has not found favour in England. We may refer to a few decisions in this connection. In Handley Page v. Butterworth 19 TC 328, it was held that the owner of a secret process stood in the same position as that of a patentee who had a monopoly because the owner of such secret process has a monopoly not at law, but he has a monopoly in fact. The monopoly arises from the possession by him of the secret knowledge regarding the process that he was carrying on. The knowledge was equated by the Court of appeal to the knowledge arising out of a capital asset such as patent. It was emphasised that whether it is a knowledge regarding a secret process which has not become a legally protected right or whether it is a legally protected right such as patent, the asset in question can be used either by the person who is the owner of the patent or the special knowledge or he may grant a licence to another person to carry on the process, securing himself against the process being divulged by that person to others. In both the cases, it was held, the consideration would amount to royalty.
24. In Musker v. English Electric Co. 41 TC 556, the House of Lords in England held that special knowledge or skill can ripen into a form of property in the fields of commerce and industry, such as in copyright, trade mark, design, patent, etc.
25. The aforesaid two decisions of the Courts in England were referred to by the Calcutta High Court in N.V. Philips' case (supra). In that case, the Tribunal had held that the general information with regard to the properties of the products to be manufactured by the Indian Co. would amount only to rendering of a technical service the payment for which cannot be considered as royalty. That part of the matter was not referred to the High Court. The question which was referred to the High Court was whether the payment made under a particular clause of the agreement between the foreign company and the Indian company was to be regarded as royalty. The decision related to the assessment years 1973-74 and 1974-75, prior to the introduction of the statutory definition of the word "royalty". Nevertheless, the decision is to be referred to for the purpose of ascertaining whether only a legally protected right such as patent or a copy right can give rise to income by way of royalty for the use thereof. It should be remembered that in the present case, the main plank of the argument of Dr. Pal was that there was no legally protected right that was allowed by the assessee to be used by U.C.I.L. nor was there a transfer of such legally protected right in favour of U.C.I.L. The Calcutta High Court did not accept a similar contention advanced on behalf of the assessee in the decision referred to above. In that case also, the agreement between the foreign company and the Indian company contained provisions requiring the Indian company not to treat the information furnished by the foreign company as its own property. The Court considered this clause as indicative of the fact that the foreign company had intended and treated the information to be supplied by it to the Indian company as its own property. This position is clear from the observations of the High Court at page 538 of the report. The argument that only payments for a legally protected can be called royalty was rejected by the High Court. The following portions of the judgment extracted from pages 538 and 539 of the report will make this position amply clear :
It is possible that a person who invents may not take out a patent for his invention but unless some other inventor independently and by his own efforts comes to duplicate the inventions, the original invention remains exclusive to the inventor and it is conceivable that such an inventor might exploit his invention permitting some other person to have the user thereof against payment. Similarly, it is possible for a person carrying out operations of manufacture and production of a particular produce to acquire specialised knowledge in respect of such manufacture and production which is not generally available. A person having such specialised knowledge can claim exclusive right to the same as long as he chooses not to make such specialised knowledge public. It is also conceivable that such a person can exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited user of such specialised knowledge to others in confidence against payment.
There is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as royalty or in the nature of royalty.
After so holding, the Court expressly agreed with the observations of the Court of Appeal in Handley Page's case (supra) which we have referred to earlier.
26. The above decision of the Calcutta High Court is authority for the proposition that payment for the user of a specialised knowledge, though not protected legally by a patent or copyright, can be treated as royalty or in the nature of royalty.
27. In the light of the aforesaid decisions, our understanding of the ambit and extent of the words "similar property" appearing in Clauses (ii), (iii) and (iv) of Explanation 2 to Section 9(1)(vi) is that those words also include cases where there is no legally protected right vested in the person who possessed specialised information, experience or knowledge regarding a particular process or product or subject. We have to assume that when the Legislature has used the words "similar property" they have used them to denote specialised information or knowledge which has not ripened into a legally protected right such as patent, design etc. So interpreted, there is, in our opinion, no escape from the conclusion that these words include the specialised information or knowledge, though not legally protected, that enures in the assessee in the present case regarding the manufacture of carbamate pesticides. It is therefore not possible for us to accept the argument of Dr. Pal that in the absence of a patent or copyright, the payment made by U.C.I.L. under the agreement cannot be termed as "royalty".
28. Having thus concluded that the assessee's case would fall under Clauses (a), (Hi) & (iv) of Explanation 2 to Section 9(1)(vi) of the Act, our next task is to examine the agreement with reference to the various services rendered by the assessee to U.C.I.L. and endeavour to find out which of the services can be fitted into those clauses. From a perusal of Clause 2.1 of Article II of the agreement, we find that the assessee has to make available to U.C.I.L. all technical information which is generally or specially connected to the production and use of carbamate pesticides. This not only includes the general information, but also includes specific information relating to the production and use of carbamate pesticides. This service clearly falls within the Clauses (ii) and (iv) of Explanation 2. The information to be supplied is also to be in respect of raw-materials, production processes, formuale etc. The second type of service which is also found in the same clause of the agreement is that the assessee has to deal with the specific problems pertaining to the production of pesticides and offer its advice to U.C.I.L. This process also involves testing of samples sent by U.C.I.L. This service pertains more to the technical or consultancy services contemplated by Explanation 2 to Section 9(1)(vii) of the Act. This service is not covered by any of the clauses of Explanation 2 to Section 9(1)(vi) of the Act. The third type of service is that the assessee should keep U.C.I.L. informed of its production process and working methods relating to the carbamate pesticides. This also falls within the Clauses (ii), (iii) and (iv) of Explanation 2 of Section 9(1)(vii) of the Act. The payment for this service has to be taken as "royalty". Clause 2.2 of the agreement refers to the training and instruction of technical personnel of U.C.I.L. at the facilities available with the assessee in U.S.A. This service is to be rendered only upon the express request by U.C.I.L. This is, therefore more in the nature of a technical or consultancy service falling within Explanation 2 of Section 9(1)(vii) of the Act. The payment for this service cannot be treated as royalty, but has to be considered as fees for technical services. Under Clause 2.4, the assessee has to undertake specific research or development programmes relating to the pesticides. This service has to be rendered only upon the express request made by U.C.I.L. A separate price is payable for this service. Therefore, this cannot be treated as falling within the definition of royalty but must be taken as a consultancy service the payment for which must be treated as fees for technical services. Under Clause 2.5, significant improvements relating to the pesticides which the assessee may acquire will have to be passed on to the assessee. This partly falls within Clause (ii) and partly Clause (iv) of Explanation 2 to Section 9(1)(vi). The payment therefore must be considered to be royalty.
29. At this juncture, we have to deal with one contention raised by Dr. Pal. He relied heavily on the observations of the Supreme Court at page 390 of the decision in Alembic Chemical Works Co. Ltd. 's case (supra). Relying on these observations, he pointed out that Clause 2.6 of the agreement, which we have referred to earlier, shows that there was no protected or exclusive right or copyright, and therefore the payment made under the agreement cannot be treated as royalty. In our opinion, the observations of the Supreme Court have to be understood in the context in which they were made. The question before the Supreme Court was whether the payment made under an agreement was capital expenditure or revenue expenditure. In that case, the assessee was engaged in the manufacture of antibiotics. Under the agreement, it acquired from" the Japanese company know-how to produce higher yield of sub-culture of high yielding strains of pennicilin. The question was whether by making the payment the assessee acquired an asset of enduring advantage or benefit. It was in this context that the Supreme Court made the observations at page 390 of the report which are as under :
It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition.
The Supreme Court pointed out that the secrecy provisions and the limitations placed on the right of the assessee (in the case before them) in dealing with the know-how acquired by it only pointed out that what the assessee obtained under the agreement was only the use of know-how and not the know-how itself [Emphasis supplied]. These observations, according to our understanding, only emphasise that there was no transfer of any right in favour of the assessee and that the agreement was limited to the use of the know-how or knowledge. If applied to the facts of the present case, these observations can only show, in our view, that what U.C.I.L. obtained under the agreement with the assessee was only a right to use the knowledge or information in the possession of the assessee and there was no outright transfer of such knowledge or information to U.C.I.L. Even otherwise, that position is made clear by Clause 2.6 and beyond that there is no special meaning to be attached to that clause. We are unable to understand Clause 2.6 the way in which Dr. Pal wants us to. The significance of Clause 2.6 is clear in the sense that it puts its beyond doubt that no transfer of any right is involved under the agreement. It is precisely for this reason that we have, in the earlier part of our order, held that Clauses (i) and (iv) of Explanation 2 to Section 9(1)(vi) of the Act are not applicable, since they speak of transfer of right. Therefore, Clause 2.6 of Article II of the agreement cannot be understood as advancing the case of the assessee.
30. Dr. Pal contended that the amplitude of Clause (iv) of Explanation 2 to Section 9(1)(vi) should be cut down by Explanation 2 to Section 9(1)(vii) of the Act, since otherwise the latter provision would become otiose or redundant. In our opinion, the two provisions operate on different fields. While Clause (iv) of Explanation 2 to Section 9(1)(vi) would apply where the payment is in respect of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill, Explanation 2 to Section 9(1)(vii) would apply where no such information is involved. In the present case itself, we have seen on a perusal of the different types of services rendered by the assessee, that it is possible to bifuracate them into services involving imparting of such information regarding the production of carbamate pesticides and those which do not involve imparting of any such information. The two provisions have no doubt to be harmoniously construed and as far as possible we should avoid a "head-on clash" between the two as held by the Supreme Court in Raj Krushna Bose's case (supra). We are also aware that whenever it is possible to do so, we should construe provisions of the same Act, which appear to conflict, in such a manner that they harmonise. We are under a duty to construe the provisions of the Act in such manner as to avoid redundancy or tautology on the part of the Legislature.
The Legislature cannot be deemed to have wasted its words or to have said something in vain. In our understanding, therefore the provisions of Explanation 2 to Section 9(1)(vi) of the Act which define the word "royalty" come into play either when there is a transfer of some right in respect of patent etc. or where there is an imparting of information regarding the working or the use of a patent etc. or the imparting of information relating to the technical, industrial, or commercial knowledge, experience or skill. The provisions of Explanation 2 to Section 9(1)(vi) will include specific services which have no connection whatsoever with the information or use of any patent or with the transfer of any right under the agreement. We are unable to persuade ourselves to hold, as contended by Dr. Pal, that Clause (iv) of Explanation 2 to Section 9(1)(vii) would apply only to a "one-time parting of information" and that the rendering of services on a continuous basis from funded knowledge, such as those rendered by the assessee, would fall for consideration as technical or managerial services within the meaning of Explanation 2 to Section 9(1)(vii) of the Act. There appears to be no warrant for making any such distinction. No words indicating any justification for drawing such distinction are found in the relevant statutory provisions. The supply or imparting of information of the type covered by Clause (iv) of Explanation 2 to Section 9(1)(vi), whether it is on a one-time basis or on a continuous basis from a funded knowledge, is covered by the said clause. A funded knowledge regarding a particular product or a production process pr in a particular field or subject acquired out of familiarity in dealing with it for long period of years, including the fruits of research, would constitute the source for the information parted with. It matters nothing that such imparting of information is done on a one-time basis or on a continuous basis. It is free to the parties concerned to agree to the modalities by which the information is to be passed on including the frequency of such parting of information. In our opinion, nothing turns on this aspect. So long as the source is the same, viz., the fund of knowledge, Clause (id) would apply and the payment for the information would be "royalty".
31. Reverting to our conclusion that a part of the payment under the agreement dated 13-11-1973 is in respect of technical services and a part is in respect of services the payment for which can be properly described as royalty within the meaning of the statutory definition, it is now our duty to allocate or apportion the payments under the agreement between the two. We are aware of the difficulties in making an accurate allocation or apportionment. However, there can be no dispute regarding the fact that the assessee had rendered all the types of services contemplated by the agreement during the relevant year. Presumably because of the polarisation of the views of the assessee on the one side and the Income-tax Department on the other there has been no attempt by either side to make an apportionment. The assessee's case is that nothing was taxable as royalty whereas the department's case is that the entire payment should be assessed as royalty. We have already held that these extreme views cannot be accepted. The only question would be as to what would be the reasonable estimate to be made on the material available on record. It is stated that in the earlier years 20% of the payment was allowed to suffer tax on the ground that it represented royalty. We do not however, have the details showing the basis upon which such estimate was arrived at. In N.V. Philips' Gloeilempenfabriken v. CIT (No. 2) [1988] 172 ITR 541, the Calcutta High Court has held that in such cases, it is permissible to make an estimate and such an estimate need not be mathematically accurate, the only condition laid down by the Court being that there should be some material to form the basis of the estimate. In the present case, we have the Technical Service Agreement on record as well as the views of the departmental authorities. The estimate cannot be below 20% in view of the fact that in the earlier years, it appears to have been an agreed and accepted position. We cannot also ignore the fact that in all such cases the foreign company is generally required to render both the types of services on more or less an equal basis. Having regard to this consideration and having regard to the various clauses of the agreement, we are inclined to estimate that 50% of the entire payment under the agreement can be treated as royalty and 50% can be treated as fees for technical services. Since the agreement was entered into and approved prior to 1-4-1976, the case of the assessee is covered by the proviso to Section 9(1)(vii) of the Act, and therefore the fees for technical services cannot be taxed. The royalty payments can however be taxed, since such payments do not consist of lumpsum consideration, and therefore the proviso to Section 9(1)(vi) does not come into play.
32. We direct the Income-tax Officer to modify assessment by treating 50% of Rs. 43,57,233 as royalty.
The appeal is partly allowed.