S.B Sinha, C.J:— The question which has been raised in this appeal under section 260A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), is the interpretation of “royalty” as envisaged under Explanation 2 appended to section 9(1) of the Act. By reason of this Explanation which provides that the income specified therein shall be deemed to accrue or arise in India specifies six items which would come within the scope thereof. The Commissioner of Income-tax (Appeals) as also the Income-tax Appellate Tribunal have arrived at a finding of fact that by reason of the agreement entered into by and between the assessee and the transferee, no royalty could become chargeable. Mr. Khanna, learned counsel for the appellant, has in support of this appeal, however, submitted that design is one of the components which has been transferred together, with engineering, manufacturing, shop testing, packing up to f.o.b port of embarkation for a consideration of Rs. 4,74,000 and thus the same could come within the purview of one or the other clauses contained in Explanation 2 to section 9(1). Having considered the submissions made at the Bar, we are of the opinion that it is not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing, packing up to f.o.b port of embarkation.
2. In that view of the matter, in our opinion, the transfer of design, if any, vis-a-vis other would not come within the purview of the said Explanation. This aspect of the matter is covered by a Division Bench judgment of the Madras High Court in the case of CIT v. Neyveli Lignite Corporation Ltd., [2000] 243 ITR 459, 463, where it was held as under:
“In a contract for the design, manufacture, supply, erection and commissioning of machinery which does not involve licence of the patent concerning the machinery, or copyright of its design, mere supply of drawings before the manufacture is commenced to ensure that the buyer's requirements are fully taken care of and the supply of diagram and other details to enable the buyer to operate the machines, and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply is only incidental to the performance of the total contract which includes design, manufacture and supply of the machinery.
The price paid by the assessee to the supplier is a total contract price which covers all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. The design supplied is not to enable the assessee to commence the manufacture of the machinery itself with the aid of such design. The limited purpose of the design and drawings is only to secure the consent of the assessee for the manner in which the machine is to be designed and manufactured, as it was meant to meet the special design requirements of the buyer.
The contract between the assessee and the manufacturer does not anywhere refer to any specific patent owned by the supplier which the buyer is permitted to exploit. All that the contract provides is an indemnity to the buyer, to protect the buyer against any action by a third party claiming patent, trade mark or other rights in the equipment supplied.
None of the sub-clauses in Explanation 2 under section 9(1)(vi) would, in the circumstances of this case, be capable of being regarded as covering the design and engineering carried out by the supplier of the machinery abroad. There is no transfer or licence of any patent, invention, model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of the machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. No licence of any patent is involved. Sub-clause (vi) and also (vii) of section 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected therewith. The other three subclauses also in the circumstances of the case are not attracted.”
3. In view of the aforementioned position, we are of the opinion that no substantial question of law arises for consideration in this appeal.
4. The appeal stands dismissed.
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