2014 (11) TMI 900 - HC - Income Tax

High Court affirms Tribunal decision, rejects appeals, rules for respondent vs. Revenue. Payments not royalties.

The High Court upheld the Tribunal's decision, dismissing the appeals and ruling in favor of the respondent against the Revenue. It was held that the ... Amount received by Non-resident to be treated as Royalty or not u/s 9(i)(vi) - Drawing and designs and technical know-how – Transaction to be treated as outright sale of plant and profits to be treated business profit or not – Held that:- A comparison of the definitions or descriptions of the word royalty under Explanation 2 of Section 9(1)(vi) of the Income Tax Act, on the one hand, and the one, under Clause 13(3) of the DTA Convention, on the other hand, discloses that the amount, even if called as royalty, paid by the respondent, to the foreign company gets attracted by the DTA Convention - the know-how is intellectual property and excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any information concerning the working thereof - the amount paid by the respondent to the foreign company is part of lump sum consideration for supply of technical know-how, machinery installation and erection and the same cannot be treated as royalty and even if the amount is to be treated as royalty, it stands covered by the DTA convention dated 16-04-1981 and thereby the amount is not liable to taxation in India – Decided against revenue. Liability to pay interest u/s 139(8) - Whether the Tribunal is justified in holding that the agent of non-resident is not responsible for discharge of statutory obligation anterior to grant of recognition of such agency – Held that:- It is only on 19.11.1990, that an order came to be passed under Section 163(2) of the Act treating the respondent as an agent of non- resident - The time for filing returns for assessment year 1988-89 was to expire by November, 1987 and for assessment year 1989-90, in November, 1989 - Since it is only after 19.11.1990, the respondent was treated as the agent of a non-resident, there was no obligation on the respondent to file a return for 1988-89 and 1989-90 for which the time for filing return had expired in November, 1987 and November, 1989 itself - there was no obligation on the part of the respondent to discharge the statutory obligation prior to 19.11.1990 - as there was no obligation on the part of the respondent to file a return prior to the date of its being treated as a representative of the foreign company, there was no obligation to file returns prior to that date - the liability to pay interest under Section 139(8) of the Act, cannot be fastened on the respondent - definition of tax does not include component of interest – Decided against revenue. Issues Involved:1. Whether the amount received by the non-resident for parting with drawing and designs and technical know-how constitutes royalty under Section 9(1)(vi) of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA).2. Whether the payment received by the non-resident for the grant of user rights of drawings and designs and technical know-how constitutes royalty under the DTAA.3. Whether the transaction in the hands of the non-resident should be treated as an outright sale of the plant and the profit arising therefrom should be treated as business profit.4. Whether the agent of the non-resident is responsible for the discharge of statutory obligations anterior to the grant of recognition of such agency.5. Whether the levy of interest under Section 139(8) of the Income Tax Act is justified.Issue-wise Detailed Analysis:1. Amount Constituting Royalty:The Tribunal held that the amounts paid to the foreign company cannot be treated as royalty and thereby cannot be taxed. The Revenue argued that the payments made for the transfer of know-how or patents should be treated as royalty under Section 9(1)(vi) of the Income Tax Act. The Tribunal's interpretation of the Double Tax Avoidance Agreement (DTAA) between India and the United Kingdom was deemed excessively liberal by the Revenue. However, the Tribunal found that the agreement was for a comprehensive contract involving supply of machinery, erection, and transfer of know-how for a limited purpose, and thus, the payments did not qualify as royalty.2. Payment for User Rights Constituting Royalty:The Tribunal concluded that the payments made by the respondent to the foreign company were part of a comprehensive contract and not for the use of patents or technical know-how in a manner that would constitute royalty. The Tribunal emphasized that the payments were made in lump sum and were not periodic, which is a characteristic feature of royalty payments. The Tribunal also noted that the transaction was covered under the DTAA, which provided relief against double taxation.3. Transaction as Outright Sale and Business Profit:The Tribunal held that the transaction should be treated as an outright sale of the plant, and the profit arising therefrom should be treated as business profit. The Tribunal reasoned that the payments were part of a comprehensive agreement for the supply and installation of machinery and transfer of know-how, rather than periodic payments for the use of patents or technical know-how.4. Agent's Responsibility for Statutory Obligations:The Tribunal found that the respondent was treated as an agent of the foreign company only after the order dated 19-11-1990 under Section 163(2) of the Act. Therefore, there was no obligation on the respondent to file returns for the assessment years 1988-89 and 1989-90 before this date. Consequently, the respondent was not responsible for the discharge of statutory obligations prior to being recognized as an agent of the foreign company.5. Levy of Interest under Section 139(8):The Tribunal held that the respondent was not liable to pay interest under Section 139(8) of the Act, as there was no obligation to file returns prior to being treated as an agent of the foreign company. Furthermore, the definition of 'tax' under Section 2(43) of the Act does not include the component of interest. Therefore, the levy of interest was not justified.Conclusion:The High Court upheld the Tribunal's decision, answering all questions in favor of the respondent and against the Revenue. The appeals were dismissed, and it was concluded that the amounts paid by the respondent to the foreign company were part of a comprehensive contract and not royalty, and the respondent was not liable for interest under Section 139(8) of the Act.