1999 (7) TMI 30 - HC - Income Tax

Court upholds validity of agreement exempting royalty payment from taxation. Assessee not liable under specified sections.

The court held that the agreement dated December 16, 1975, was valid and fell under the proviso to section 9(1)(vi), exempting the royalty payment from ... Royalty, Law Applicable Issues Involved:1. Applicability of section 9(1) of the Income-tax Act, 1961, to the lump sum payment made by the assessee.2. Validity of the agreement dated September 20, 1976, as a modified form of the agreement dated December 16, 1975.3. Taxability of Trade McNair under section 9(1)(vi) read with the proviso and Explanation.4. Applicability of section 9(1)(i) to royalty payments.Detailed Analysis:1. Applicability of Section 9(1):The court examined whether section 9(1) applied to the lump sum payment made by the assessee to Trade McNair. The Tribunal had held that section 9(1) was not applicable, as the payment did not constitute income accruing or arising in India. The court agreed with the Tribunal's finding that the agreement, being dated December 16, 1975, fell under the proviso to section 9(1)(vi), which exempts such payments from being taxed as income in India if the agreement was made before April 1, 1976, and later approved by the Central Government.2. Validity of the Agreement:The court considered whether the agreement dated September 20, 1976, was a new agreement or merely a modified version of the agreement dated December 16, 1975. The Tribunal and the Commissioner of Income-tax (Appeals) had found that the latter agreement was simply a modified form incorporating suggestions from the Central Government, particularly concerning the quantum of royalty. The court upheld this finding, noting that the essential terms of the original agreement remained unchanged, and thus, it was valid as a pre-April 1, 1976, agreement.3. Taxability under Section 9(1)(vi):The court evaluated whether Trade McNair was taxable under section 9(1)(vi) read with the proviso and Explanation. The Tribunal had determined that since the agreement was dated December 16, 1975, the proviso to section 9(1)(vi) applied, exempting the royalty payment from being deemed as income accruing in India. The court concurred, emphasizing that the date of the agreement's approval by the Central Government (August 24, 1976) was irrelevant as long as the agreement itself was pre-April 1, 1976.4. Applicability of Section 9(1)(i):The court addressed whether section 9(1)(i) could apply to royalty payments, given that section 9(1)(vi) specifically addresses such payments. The Tribunal had held that section 9(1)(vi) exclusively governs royalty payments, thereby excluding the applicability of section 9(1)(i). The court affirmed this interpretation, noting that the specific provision (section 9(1)(vi)) takes precedence over the general provision (section 9(1)(i)) in matters of royalty payments.Conclusion:The court concluded that the agreement dated December 16, 1975, was valid and fell under the proviso to section 9(1)(vi), exempting the royalty payment from being taxed as income in India. Consequently, the assessee was not liable under section 9(1)(i) or section 9(1)(vi), and the reference was answered in favor of the assessee on all counts.