R. Jayasimha Babu, J.
1. The assessee is engaged in the mining of lignite. For more efficient conduct of its business, it acquired steam generating plants with auxiliaries for the purchase of which equipment, it entered into an agreement on May 1, 1981, with a Hungarian company, Transelectro. The agreement was entered into after the assessee had invited tenders for the supply of the equipment and the assessee had found the tenders submitted by Transelectro to be the most satisfactory.
2. The contract with Transelectro described the supplier as the principal supplier/contractor. It contemplated the performance of part of the services required to be performed under the contract by two other companies. Nevertheless, the responsibility for the work done by them was also to be taken by the principal contractor.
3. The scope of the work, as set out in the contract reads as under : '1.0 Scope of work :
1.1 In connection with the manufacture, supply, erection, and commissioning of three (3) steam generating units and auxiliaries for the proposed 3 x 210 MV installation at Neyveli, Tamil Nadu, India, Neyveli Lignite Corporation Limited, Neyveli (hereinafter referred to 'NLC'), have agreed at the instance of the bidder, viz., Transelectro to enter into two contracts as described hereinunder, one with Transelectro, Budapest, Hungary (hereinafter referred to as Transelectro), and the other with Vinay Engineering, New Delhi (hereinafter referred to as 'Vinay').
1.2 Contract--I which Transelectro (who shall be named the principal contractor) covers broadly the design, manufacture and supply of all imported equipment and components as well as supervision of erection, testing and commissioning utilising his own personnel and providing a special engineer for the guarantee period. The design and engineering of Indian suppliers including inspection during their manufacture are also covered.
1.3 Contract--II with Vinay covers broadly the manufacture and supply of equipment and components of Indian origin, erection, testing and commissioning of the complete equipment under direction, control and supervision of Transelectro in addition to certain services indicated here-under.'
4. The work to be done by Transelectro was to cover the design, manufacture and supply of all imported equipment and components as also the supervision of erection, testing and commissioning.
5. The total responsibility for the contract as provided in Clause 1.6 of the agreement was to be with Transelectro from start to completion.
6. The contract price for the work to be done by Transelectro was set out in Clause 5. The break-up amounts given there specified the amounts payable for design, engineering abroad, for supply of equipment manufactured abroad, for setting up and essential spares and for special maintenance bills. Clause 7.8 sets out the term of payment for design and engineering. The dates by which the drawing for different components were to be supplied were also set out in the annexure to the contract. Clause 30.1 provided that the contract price was deemed to include royalties, fees and patent, covering materials, articles, apparatus, devices, equipment or processes used in the work. It also provided that the purchaser was to be kept indemnified by the contractor against all claims, suits, damages, losses, actions, costs, charges, etc., or for infringement of copyright or other right if any, in relation to the design, plans, machines, diagram, drawings or in respect of the materials supplied by the contractor.
7. The Income-tax Officer, when approached by the assessee under Section 195 of the Act, took the view that the amounts payable under the contracts for design and engineering was the income which had accrued to the foreign contractors, in India in the assessment year 1981-82, and was, therefore, an amount in respect of which the assessee was required to deduct the income-tax before crediting the amount to the account of the foreign supplier, or paying the same.
8. The assessee having appealed against that order to the Commissioner, the Commissioner allowed the appeal. The Tribunal to whom the matter was taken in further appeal, confirmed the view of the Commissioner and held that the amount paid by the assessee for design and engineering was not an amount which could be regarded as royalty and was not an amount which could be regarded as income accruing to the foreign supplier in India.
9. Section 9 of the Act deals with income deemed to accrue or arise in India. Section 9(1)(vi) deals with income by way of royalty. It, inter alia, provides that the income by way of royalty payable by a person who is a resident, excepting the payments referred to in Section 9(1)(vi)(b) shall be deemed to arise or accrue in India. For the purpose of Section 9(1)(vi) the term 'royalty' has been defined in Explanation 2 which reads as under :
'Explanation 2.--For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains'), for-
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial commercial or scientific knowledge, experience or skill ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or screntific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting) but not includingconsideration for the sale, distribution or exhibition of cinematographicfilms ; or
(vi) the rendering of any services in connection with the activitiesreferred to in Sub-clauses (i) to (v) ;
(vii) income by way of fees for technical services payable by-
(a) the Government; or
(b) a person who is a resident except where the fees are payable inrespect of services utilised in a business or profession carried on by suchperson outside India or for the purposes of making or earning any incomefrom any source outside India ; or
(c) a person who is a non-resident, where the fees are payable inrespect of services utilised in a business or profession carried On by suchperson in India or for the purposes of making or earning any income fromany source in India.'
10. The term 'royalty' normally connotes the payment made by a personwho has exclusive right over a thing for allowing another to make use ofthat thing which may be either physical or intellectual property or thing.The exclusivity of the right in relation to the thing for which royalty ispaid should be with the grantor of that right. Mere passing of informationconcerning the design of a machine which is tailor-made to meet therequirement of a buyer does not by itself amount to transfer of any rightof exclusive user, so as to render the payment made therefor beingregarded as 'royalty'.
11. 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 performances of the total contract which includes design, manufaptnre and supply of the machinery.
12. 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.
13. 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.
14. None of the sub-clauses in and 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 sub clauses also in the circumstances of the case are not attracted.
15. The Tribunal was therefore right in holding that the amount paid as part of the total contract price towards design and engineering of the steam generators supplied by the Hungarian company to the assessee-mining company, was not royalty for the purpose of Section 9(1)(vi) or 9(1)(vii) of the Act, and the amount paid did not result in the accrual of the income to the foreign supplier in India.
16. We, therefore, answer the questions referred to us, namely :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the payments made to the Hungarian concern Transelectro is not liable to deduction of tax at source
(2) Whether the Tribunal is justified in law and had valid materials to hold that the payments made by the assessee by way of design and drawings to the Transelectro cannot come within the meaning of the expression 'royalty' occurring in Section 9(1)(vi) or 9(1)(vii) of the Act and
(3) Whether having regard to Article 30 of the agreement specifically providing that royalty and fees for patent shall be deemed to have been included in the contract price, the Tribunal is justified in law and had valid materials to hold that the amount paid to design and engineering is only a component of the total payment agreed to be paid by the assessee for the purpose of three steam generators and is not in the nature of royalty ?'
in favour of the assessee and against the Revenue. The assessee shall be entitled to costs in the sum of Rs. 2,000 (rupees two thousand only).