1989 (2) TMI 136 - AT - Income Tax

Tribunal: Technical service fees, not royalty for tax exemption under section 9(1)(vii) proviso

The Tribunal upheld the decision of the CIT (Appeals) that payments received by the assessee were technical service fees, not royalty, exempt from ... Assessment Year, Previous Year, Technical Services Issues Involved:1. Taxability of payments received by the assessee-company under different contracts as technical service fees or royalty.2. Applicability of section 9(1)(vii) and the proviso to section 9(1)(vii) of the Income-tax Act.3. Exemption under proviso to section 9(1)(vi) for payments considered as royalty.4. Levy of interest under section 217.Detailed Analysis:Issue 1: Taxability of Payments as Technical Service Fees or RoyaltyThe primary issue in the departmental appeals was whether the payments received by the assessee-company from various entities were in the nature of technical service fees or royalty. The Income-tax Officer (ITO) had classified the payments as royalty under Explanation 2 to clause (vi) of sub-section (1) of section 9 of the Income-tax Act, allowing deductions of expenses limited to 20% under section 44D.The Commissioner of Income-tax (Appeals) [CIT (Appeals)] held that the payments were technical service fees, not royalty, and were covered under section 9(1)(vii). The CIT (Appeals) concluded that the payments were for technical assistance provided by the assessee's personnel and were not for the transfer of know-how or grant of a license.Issue 2: Applicability of Section 9(1)(vii) and ProvisoThe CIT (Appeals) accepted the assessee's argument that the payments were related to contracts entered into before 1-4-76, thus falling under the proviso to section 9(1)(vii), which exempts such payments from taxation. The CIT (Appeals) examined the agreements and concluded that the payments were for supervision during the erection, start-up, and performance test runs of the plants, which were optional and requested by the Indian companies.Issue 3: Exemption under Proviso to Section 9(1)(vi)The Tribunal examined the agreements in detail, particularly the Sindri Modernisation Project Agreement, and found that the payments for technical services were separate from those for the grant of a license. The Tribunal agreed with the CIT (Appeals) that the payments received under clause 8.1.2 were for technical services and not royalty. However, for the Nangal Expansion Project, a portion of the payments was considered royalty but was exempt under the proviso to section 9(1)(vi) as the agreement was made before 1-4-76 and approved by the Central Government.Issue 4: Levy of Interest under Section 217The cross objections raised by the assessee regarding the levy of interest under section 217 were not addressed by the CIT (Appeals). Since the Tribunal confirmed the CIT (Appeals) order on the main issue, the cross objections were dismissed as they did not survive for consideration.Conclusion:The Tribunal upheld the CIT (Appeals) decision that the payments received by the assessee were in the nature of technical service fees and not royalty, thus not taxable under section 9(1)(vii) due to the proviso. For the Nangal Expansion Project, while a portion of the payments was considered royalty, it was exempt under the proviso to section 9(1)(vi). The departmental appeals were dismissed, and the cross objections by the assessee were also dismissed.