C I T vs. M/S B B M B

Facts

The Revenue (Commissioner of Income Tax-I, Chandigarh) appealed against an order dated 31.08.2006 passed by the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench 'A'. The ITAT had overturned the orders of the Assessing Officer (AO) and CIT (Appeals), partly allowing the assessee's (Bhakra Beas Management Board - BBMB) appeal. The dispute concerned the taxability of payments totaling Rs. 8,58,75,000/- made by the assessee to Technopromexport (TPE). The ITAT held that this amount was not royalty, and directed the AO to grant a refund of tax deducted at 20% from these payments.

Held

The High Court held that the ITAT's order did not suffer from any illegality or misinterpretation of law. The Court agreed with the ITAT's reasoning that for the consideration to be considered royalty under Section 9, the imparting of information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill must be conveyed to the assessee. In this case, the information gathered by TPE in Russia was intended for Russia's use in manufacturing and was not to be handed over to the assessee. Furthermore, Explanation 5 of Section 9 clarifies that royalty includes consideration in respect of any right, property, or information, whether or not the payer has possession or control. However, the Court found that factually, the documentation prepared by TPE was to be handed over to Russia and would not remain in the assessee's possession and control. There was no knowledge available to the assessee regarding the technical documentation prepared in Russia. Therefore, the consideration did not fall within the ambit of royalty. The final product received by the assessee was considered a capital asset. The appeal was accordingly dismissed.

Key Issues

1. Whether the consideration paid for the preparation of technical documentation, working designs, testing models of equipment, and other technical purposes to TPE, amounting to Rs. 8,58,75,000/-, falls within the definition of 'Royalty' under Section 9 of the Income Tax Act, 1961. Assessee's arguments: - The payments were for TPE's expenditure in Russia for preparing technical documentation, working drawings, and testing models of equipment for TPE's own use in manufacturing, not for providing information to the assessee. - The expenditure was incurred in Russia and was not to be handed over to the assessee (State Trading Corporation). - The expenditure could be treated as capital assets purchased by the assessee, as supported by the Customs department's treatment and duty payment. - The ITAT's interpretation was correct. Revenue's arguments: - The ITAT erred in holding that the consideration paid for technical documentation, working designs, testing models, and other technical purposes would not fall within the definition of 'Royalty'. - The imparting of information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill, and payments made for it, fall under Section 9. - The use or right to use any industrial, commercial, or scientific equipment or any right, property, or information is also included in 'Royalty'. - The amount of Rs. 8,58,75,000/- was rightly assessed as 'Royalty' by the AO and CIT (A), and the assessee's deduction was erroneous.