COMMISSIONER OF INCOME TAX Vs. KLAYMAN PORCELAINS LIMITED

JUDGEMENT

(1.) In this reference under section 256(2) of the Income-tax Act, at the instance of the Revenue, the following question is referred to this court for opinion :

(2.) In the assessment year 1980-81, Klayman Porcelains Ltd., Hyderabad, hereinafter referred to as the Indian company, which has been treated as statutory agents for Keramische Industries of Berlin, West Germany, hereinafter referred to as the non-resident company (NRC), entered into a memorandum of understanding on 20/12/1979, which, inter alia, provided for three types of works. We are concerned only with the second type of works, which is numbered as "Kerabedarf's order No. 32911". The amount paid under that memorandum by the Indian company to the non-resident company as payment for technical drawings towards engineering for the kiln was treated by the Income-tax Officer as royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Income-tax Act. Treating it as taxable remuneration in the hands of the non-resident company, he assessed the entire amount paid, i.e., Rs. 8,56,920 at the rate of 20 per cent. The assessee filed an appeal against the order of assessment. But the appellate authority dismissed the appeal on 6/07/1983. That order was questioned before the Income-tax Appellate Tribunal. The Tribunal came to the conclusion that the amount paid by the Indian company to the non-resident company for supply of engineering data was a capital asset supplied from abroad for a price and that part of it accrues or arises in India or could be deemed to arise or accrue in India; it also recorded the finding that the said amount could not be regarded as royalty within the meaning of Explanation 2 to clause (vi) of sub-section (1) of section 9 of the Income-tax Act, and allowed the appeal of the assessee by its order dated 19/01/1984. On these facts, the above question arises for our opinion.

(3.) Sri S. R. Ashok learned standing counsel for the Revenue, contends that payment made by the resident company to the non-resident company under the memorandum is nothing but royalty and, therefore, the same is taxable under section 9(1)(vi) of the Act. The submission of Sri Y. Ratnakar, learned counsel appearing for the assessee, is that the amount paid by the Indian company to the non-resident company amounts to a capital asset.