Clarification 1
Circular No. 360 was issued by the Central Board of Direct Taxes on 16 May 1983. Its subject is Clarification 1.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Carries the Board's clarifications on approving agreements for the concession under section 80MM, the provision introduced by the Finance Act, 1969 with effect from 1 April 1970 for the concessional taxation of royalties and technical service fees received by an Indian company from a business concern in India for providing technical know-how or connected services. The first clarification softens an earlier position: under paragraph 1(xiii) of the Board's circular of 6 July 1974, where a composite agreement fixed a consolidated consideration covering matters outside section 80MM and the qualifying part could not properly be ascertained, the Board might refuse approval altogether, so the whole of the royalty or fee lost the benefit. On reconsideration, approval is now to be granted subject to a suitable disallowance for the non-qualifying items, taking the agreement as a whole, so that the balance referable to technical know-how or connected services gets the benefit. The second clarification sets out the revised guidelines for approval, replacing those in the Board's circular of 13 November 1973: an agreement that is not bona fide and genuine or is a collusive arrangement to abuse the concession will not be approved; nor one expressed in general and broad terms, vague as to the nature and scope of the know-how or services and the consideration; nor one where approval would not further the object of the concession, which is to minimise repetitive import of technical know-how from abroad and encourage its indigenous development; nor one not genuinely entered into on or after 1 April 1969, including one made after that date but really pursuant to an earlier written or oral arrangement; nor an agreement with a person who is not carrying on a business in India when the income is received from him, a profession or vocation not being a business for this purpose. The know-how must also fall within a clause of section 80MM(2) and be likely to assist directly in an operation mentioned in section 80MM(1)(i).
The Board had occasion to reconsider its earlier position on composite agreements, and separately to review and modify the guidelines by which it approves agreements for the section 80MM concession.
| Under the 1961 Act | Now |
|---|---|
| s.80MM | no counterpart recorded |
CLARIFICATION 1
Attention is invited to the Board's Circular No. 140 [F. No. 167/231/74-IT (A-I)], dated 6-7-1974 [Clarification 2],
para 1(xiii), wherein it was stated that in the case of a composite agreement which specified a consolidated
amount as consideration for purposes which included matters outside the scope of section 80MM, the Board may
not approve such an agreement for purposes of section 80MM if, in the opinion of the Board, it was not possible
to properly ascertain and determine the amount of the consideration relatable to the provision of technical knowhow or services in connection with provision of such technical know-how qualifying for section 80MM. Thus, the
benefit of section 80MM could be denied to the entire amount of royalty, commission, fees, etc., receivable under
such an agreement. The Board has had occasion to reconsider it. It has been decided that in such cases approval
would be granted by the Board subject to a suitable disallowance for the non-qualifying items, after taking into
consideration the totality of the agreement, so that the balance, royalty, commission, fees, etc., which is for
provision of technical know-how or services in connection with provision of such technical know-how covered by
section 80MM, can be exempted.
Circular : No. 332 [F. No. 167/231/74-IT(A-I)], dated 25-3-1982.
CLARIFICATION 2
1. Reference is invited to the Board's Circular No. 124 [F. No. 167/231/72-IT(A-I)], dated 13-11-1973 [Annex II].
Paragraph 2 of the said circular contains the guidelines which had then been evolved by the Board for the grant of
its approval to agreements for the purpose of section 80MM. These guidelines have since been reviewed and
modified. The revised guidelines are as follows :
(i) An agreement which, in the opinion of the Board, is not bona fide and genuine and is a collusive arrangement
for abuse of the tax concession admissible under section 80MM will not be approved.
(ii) An agreement which does not clearly specify the technical know-how to be. provided thereunder or the
services in connection with the provision of the technical know-how to be rendered thereunder, which is
expressed in very general and broad terms and which is vague as to the nature and scope of the technical knowhow to be provided or the services to be rendered and the consideration therefor will not qualify for approval.
(iii) In cases, where grant of the tax concession envisaged, under section 80MM, will not, in the opinion of the
Board, further the objectives underlying the grant of the tax concession, viz., minimising repetitive import of
technical know-how from abroad and encouraging indigenous development of the technical know-how in India,
the agreements will not be approved in such cases.
(iv) An agreement which has not been genuinely entered into on or after April 1, 1969 will not be eligible for
approval. In cases where the provision of a technical know-how or rendering of services in connection with the
provision of the technical know-how is really pursuant to an agreement, whether written or oral, made before April
1, 1969, agreements entered into on or after April 1, 1969 for the provision of such technical know-how or for
rendering of services in connection therewith will not be approved.
(v) Agreement with a person who is not carrying on a business in India will not be eligible for approval. The
person must be carrying on a business in India at the time the income which is to be the subject-matter of tax
relief, under section 80MM, is received from him. Carrying on a profession or vocation in India is not equivalent to
carrying on a business in India for the purpose of Income-tax Act, and therefore, an agreement with a person
carrying on a profession or vocation will not qualify for approval.
(vi) The technical know-how provided under the agreement must be such as, by its nature and the manner of its
provision, is covered by any of the clauses of sub-section (2) of section 80MM and is likely to assist directly in any
of the operations mentioned in clause (i) of sub-section (1) of the said section.
1
[(vii) (a) Where the agreement is for provision of a technical know-how which is likely to assist in the manufacture
of goods or the processing of materials or in the installation or erection of plant or machinery for such
manufacture or processing, the technical know-how provided should be manufacturing/processing techno-logy
and/or plant/machinery design and/or installation/erection technology of plant or machinery.ANNEX II - 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.
In an old assessment where a section 80MM claim turned on whether the agreement had been approved by the Board and, if so, for how much of the consideration.
Forms it names. Form No. 3C
Rules it names. Rule 6AB of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.