SECTION 80MM – ROYALTIES, ETC., RECEIVED FROM ANY CONCERN IN INDIA
Approval of agreement under which assessee-company receives royalty, etc., from any concern in India which is eligible for deduction under the section – Guidelines therefor
CIRCULAR NO. 124, DATED 13-11-1973 REFERRED TO IN CLARIFICATION
1. The Finance Act, 1969 introduced, with effect from April 1, 1970, a new provision in section 80MM for the concessional taxation of income received by an Indian company by way of royalties, technical service fees, etc., from any business concern in India in consideration of providing technical know-how or rendering services in connection with the provision of such technical know-how. Under the provision, a company was entitled to a deduction of 40 per cent of such income in the computation of its taxable income. The section has been amended by the Finance Act, 1970 and the Finance (No. 2) Act, 1971. With effect from April 1, 1972, the tax concession has been extended to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers, such as individuals, Hindu undivided families, partnership firms, etc. The requirements of the section are as under :
(a) The deduction is allowable only it the technical know-how (whether patented or not) provided by the assessee is likely to assist in the manufacture or processing of goods or materials or in the installation or erection of machinery or plant for such manufacture or processing, or in the working of a mine, oil well or other source of mineral deposits, or in prospecting for and testing of mineral deposits or winning access to them, or in carrying out any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing.
Royalties, commission, fees, etc., received in consideration of provision of technical know-how relating to production of electricity or construction of ships will also qualify for deduction.
(b) The term “provision of technical know-how” has been defined in sub-section (2) to mean—
(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 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 similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or similar property;
(iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill.
The agreement for the provision of technical know-how need not provide for all the matters listed in clauses (i) to (iv). This is because clauses (i) to (iv) of sub-section (2) of section 80MM have to be read disjunctively and an agreement which provides for any matter referred to in any one of these clauses would fall within the ambit of section 80MM. It is, however, important to note that the provision of technical know-how must directly assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture or processing or in any one or more of the other operations or activities specified in sub-section (1) of section 80MM.
(c) The technical know-how or services should be provided under an agreement entered into by the assessee on or after April 1, 1969.
(d) Deduction under the section will be allowable only if the agreement in question has been approved by the Board. Approval of the Board will, however, not be necessary in cases where the agreement was approved by the Central Government for the purposes of this section before April 1, 1972. All applications for approval made to the Central Government, which had not been disposed of before April 1, 1972 have been transferred to the Board for disposal.
(e) In order to be eligible for this deduction, the technical know-how and services should be provided under an agreement entered into by the assessee on or after April 1, 1969 and the approval of the Board to such agreement should have been applied for before 1st October of the relevant assessment year. Once a valid approval has been granted, it would hold good for the life of the agreement provided the conditions laid down in the law continued to be satisfied.
(f) In the case of non-corporate taxpayers other than co-operative societies, the deduction under the section will be allowed in respect of the agreements which have been approved only if the accounts of the relevant previous years have been audited as provided in sub-section (2A) and the assessee furnishes along with his return of income the report of such audit in Form No. 3C prescribed under rule 6AB duly signed and verified by the auditor.
(g) No deduction is allowable under this section in respect of any income which is chargeable under the head “Capital gains”.
(h) No deduction under the section will be allowed in relation to any income if the assessee is entitled to a deduction under section 80-O in respect of the same income.
2. The incentive has been provided with the twin objectives of minimising repetitive import of technology and of encouraging development of local know-how by providing tax relief as explained above in respect of income arising from the transfer and servicing of technical know-how. Keeping in view the purpose behind the incentive and the requirements of the statutory provisions, the Board have evolved the following guidelines for grant of such approval :
(i) The agreement should have been entered into bona fide and not collusively for the purpose of tax avoidance.
(ii) An agreement which is in very broad terms or is vague may not be approved.
(iii) The agreement should have been genuinely entered into on or after April 1, 1969. An old agreement in a new garb will not qualify for approval.
(iv) In the case of resident non-corporate taxpayers, agreements genuinely entered into on or after April 1, 1969 will be considered for approval, but the benefit under section 80MM will be available to them only for and from the assessment year 1972-73.
(v) The know-how provided must be such as will minimise repetitive import of technology or will contribute to the development of local technology.
(vi) Agreements for rendering services will qualify for approval under section 80MM only if such services are rendered in connection with the provision of technical know-how by the person providing the know-how. Services rendered as a consultant or in any other capacity otherwise than in connection with the provision of technical know-how will not qualify under the section.
(vii) Agreements for preparation of project reports dealing with the feasibility of the project from the point of view of the availability of raw materials, the market, the nature of the equipment, size of the plant, etc., for making a techno-economic decision will normally qualify for approval under the section. Agreements for provision of commercial information in the fields of management, accounting, sales, etc., or for rendering of services in connection therewith, will, however, not qualify for approval unless the provision of such information will directly assist in the manufacture of goods, etc.
(viii) Agreements for provision of technical know-how relating to civil construction, or for rendering services in connection therewith, will not qualify for approval unless the civil construction is directly and intricately connected with the process or the plant.
(ix) “Turnkey contracts” for the erection and supply at site of a ready-built plant will not qualify for approval. Where, however, they involve transfer of a right in a patent or design or imparting any know-how relating to any formula or operation or the supply of designs and drawings relating to manufacture or operation, or the provision of manuals concerning manufacturing operations, the fees attributable to such provision of technical know-how will qualify for deduction.
(x) The agreement should be with a person carrying on business in India. For this purpose the expression “person” will include “Govermnent”. It is necessary that there should be a nexus between the technical know-how provided and the business. The test to be applied will be whether or not the provision of know-how is likely to assist in manufacture or processing of goods or materials or other specified operations. Conveyance of know-how to a person who merely trades in know-how will not qualify for approval. Know-how conveyed or services rendered in connection therewith to promoters of industrial undertakings will, however, qualify notwithstanding that the promoters and the undertakings are distinct legal entities.
(xi) It is necessary that the industry in which the technical know-how will be utilised should be located in India. Know-how provided, which is meant to be exported and utilised in setting up an industry outside India, will not qualify for the purpose of approval under the section.
(xii) The payment under the agreement should be reasonable both in relation to its quantum and its tenure. Where the payments appear to be excessive or motivated by other than commercial considerations, the application is liable to be rejected.
(xiii) In the case of composite agreements specifying a consolidated amount as consideration for purposes which, inter alia, include matters outside the scope of section 80MM, such as use of trade marks, supply of equipment, imparting of information which cannot be considered as technical know-how, imparting of technical know-how which is not likely to assist in the manufacture or processing of goods or materials or other operations specified in the section, or services not rendered in connection with the provision of technical know-how, the amount of the consideration relating to the provision of technical know-how or rendering services in connection therewith will have to be determined separately on an investigation of all the relevant facts. Where, however, such an ascertainment is not possible, the Board reserves the right to refuse the grant of approval to such a composite agreement.
JUDICIAL ANALYSIS
EXPLAINED IN – In Dey Paper Consultants (P.) Ltd. v. CBDT [1991] 197 ITR 624 (Bom.) the abovesaid circular was referred to with the following observations :
“The result is that, even according to the guidelines, if the agreement is in connection with technical know-how and the services are rendered by a person providing such technical know-how and there is an inter-connection and inter-relationship between the services rendered and the provision of such technical know-how, the agreement will qualify for approval under section 80MM.” (p. 628).
