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High Court Of Calcutta
Dipak Kumar Sen, Shyamal Kumar Sen
N.V.PHILIPS - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 129 Of 1983
Decided On : 05/06/1987
INCOME TAX - Agreement between non-resident assessee and Indian company for technical assistance and information - Whether payments received by assessee from Indian company are in the nature of royalty or technical service fees - Held, payments received by assessee from Indian company are in the nature of royalty.
Fact of the Case:
The assessee, a non-resident company, entered into an agreement with an Indian company under which the assessee agreed to furnish to the Indian company technical information relating to vitamin D and its manufacture, use and sale. The Indian company agreed to pay to the assessee 5% of the net selling price of vitamin D manufactured and sold by the Indian company.
Finding of the Court:
The Income-tax Officer held that the payments received by the assessee from the Indian company were in the nature of royalty. The Commissioner set aside the assessment and held that the payments received by the assessee from the Indian company were more in the nature of royalty than technical assistance fees. The Tribunal held that 50% of the payments received by the assessee from the Indian company was in the nature of fees for technical assistance and information and should be taxed as such and the balance 50% should be treated as royalty and taxed in the hands of the assessee accordingly.
Issues: Whether the payments received by the assessee from the Indian company are in the nature of royalty or technical service fees.
Ratio Decidendi: The agreement between the assessee and the Indian company provided that the information disclosed by the assessee to the Indian company would be solely for the use of the Indian company, would be considered as having been disclosed in confidence and would not become the property of the Indian company until such time and to the extent that such information would become public by application and user. The Indian company agreed to take all reasonable care to keep such information confidential and not disclose the same to third parties except as may be necessary in the actual and normal course of use thereof. The agreement further provided that the Indian company would not copy the equipment, tools and instruments supplied by the assessee to the Indian company nor cause or permit the same to be copied and not to prepare or permit the drawings thereof.
Final Decision: The court held that the payments received by the assessee from the Indian company were in the nature of royalty. The court held that the information agreed to be supplied by the assessee in respect of working methods and manufacturing processes of the product under Clause 2 (ii)/ (iii) are exclusive information and knowledge available to the assessee and not generally disseminated and payment in respect thereof would bear the character of royalty.
( 1 ) N. V. Philips Gloeilempenfabrieken Bindhhoven, Holland, the assessee, is a non-resident company incorporated in the Netherlands. On July 8, 1964, the assessee entered into an agreement with one Crookes Interfran Ltd;, an Indian company, under which the assessee agreed to furnish to the Indian company technical information relating to vitamin D and its manufacture, use and sale, inter alia, on the following terms and conditions ; (a) The assessee would render to the Indian company all assistance and furnish information from time to time in respect of the working methods, manufacturing processes and methods of application relating to vitamin D. (b) The assessee would provide the Indian company with the following data, assistance and information : (i) Drawings with detailed instructions and directions for a plant to be set up in the territory specified in the agreement of a capacity of 1,000 kg. per annum producing vitamin D. (ii) Data regarding working methods and manufacturing processes (including indications, instructions, specifications, standards and formulae), methods of analysis and quality control and other particulars to enable the Indian company to start and carry on the manufacture of vitamin D. (iii) Medical and other information relating to the pharmacological and pharmaceutical properties of vitamin D. (iv) The training of one or more technicians of the Indian company in the factory of the assessee in the Netherlands for setting up the plant as aforesaid and/or the placing at the disposal of the Indian company of a technical expert for the erection and initial working of the plant as also the training of an agreed number of qualified staff of the Indian company in the factory of the assessee in the Netherlands. (v) Assistance to the Indian company in the initial costing of production and advice on problems in respect of establishment, installation, running and administration of the said plant. (vi) Analysing in the laboratory of the assessee in the Netherlands samples produced by the Indian company free of charge of each batch of vitamin D manufactured by the Indian company. (c) Any information disclosed by the assessee to the Indian company under the agreement would be solely for the use of the Indian company, would be considered as having been disclosed in confidence and would not become the property of the Indian company until such time and to the extent that such information would become public by application and user. (d) The Indian company would take all reasonable care to keep such information confidential and not disclose the same to third parties except as may be necessary in the actual and normal course of use thereof. The Indian company would obtain corresponding undertakings of secrecy from its employees in suitable form. (e) The Indian company would undertake during the continuance of the agreement and thereafter not to copy the equipment, tools and instruments supplied by the assessee to the Indian company nor to cause or permit the same to be copied and not to prepare or permit the drawings thereof. (f) The Indian company would pay to the assessee in consideration of the technical assistance and information supplied 5% of the net selling price of vitamin D manufactured and sold by the Indian company subject to Indian income-tax. (g) The agreement would take effect from the start of the manufacture of vitamin D by the Indian company and would remain in force for ten consecutive years and would continue thereafter for a period of one year, unless terminated by either party giving to the other six months' previous notice in writing before the end of the original or the extended period.
( 2 ) IN the assessment year 1973-74, the corresponding accounting year ending on December 31, 1972, the assessee received a sum of Rs. 31,080 from Dupher Interfran Ltd. , the successor-in-interest of Crooks Inter-fran Ltd. , under the said agreement dated July 8, 1964. In its assessment to inco
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