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Issues: (i) Whether the amounts paid to the foreign company for supply of machinery, transfer of know-how and related engineering services were taxable as royalty under the Act or under the India-United Kingdom treaty; (ii) Whether interest under section 139(8) could be levied and the assessee could be fastened with representative liability before the order treating it as agent of the non-resident.
Issue (i): Whether the amounts paid to the foreign company for supply of machinery, transfer of know-how and related engineering services were taxable as royalty under the Act or under the India-United Kingdom treaty.
Analysis: The agreements formed one composite transaction for supply and installation of machinery, engineering assistance and limited know-how. The consideration was a lump sum and was not shown to be a periodic payment for the mere use of a patent, design or process. On the facts, the transfer of know-how was ancillary to installation and erection and did not amount to an outright royalty-bearing arrangement. Even assuming the payment could be characterised as royalty under the Act, the definition of royalty in the applicable treaty was attracted and, by virtue of section 90, the treaty provisions being more beneficial would prevail.
Conclusion: The amount was not liable to be taxed as royalty in India; the finding was in favour of the assessee and against the Revenue.
Issue (ii): Whether interest under section 139(8) could be levied and the assessee could be fastened with representative liability before the order treating it as agent of the non-resident.
Analysis: The order treating the assessee as agent of the non-resident was passed after the due dates for filing returns for the relevant assessment years had already expired. Until that order was made, there was no obligation on the assessee to file the returns in the capacity of representative assessee. In those circumstances, liability to interest could not be imposed for default in filing returns when no such representative obligation had yet arisen.
Conclusion: The levy of interest was unsustainable and the issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The Revenue failed on the substantive taxability issue and on the ancillary interest issue, so the appeals did not succeed.
Ratio Decidendi: A composite lump-sum payment for supply, erection and limited know-how is not royalty where the arrangement is not a mere licence for use, and in any event a more beneficial treaty provision prevails under section 90; interest for return-filing default cannot be levied before the assessee is validly treated as a representative assessee.
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