2015 (2) TMI 458 - HC - Income Tax

Court deems lump sum payments royalties under India-Germany DTAA, taxable under Income Tax Act.

HCL LIMITED Versus THE COMMISSIONER OF INCOME TAX NEW DELHI

HCL LIMITED Versus THE COMMISSIONER OF INCOME TAX NEW DELHI - [2015] 372 ITR 441 (Del) Issues Involved:1. Whether the lump sum payments made by HCL Infosystems Limited to Apollo Domain Computers, GmbH Germany under the agreement dated 11th May 1987 were liable to tax under the Income Tax Act, 1961.2. Whether these payments constituted 'royalty' under Article VIIIA of the Double Taxation Avoidance Agreement (DTAA) between India and the Federal Republic of Germany.Detailed Analysis:1. Taxability of Lump Sum Payments:The primary issue was whether the lump sum payments of Rs. 1,11,38,650 and Rs. 50,51,050 made by HCL to ADC under the agreement dated 11th May 1987 were liable to tax under the Income Tax Act, 1961. The court noted that HCL Infosystems Limited, formerly known as HCL Limited, was a representative assessee of Apollo Domain Computers, GmbH Germany. The court examined the relevant clauses of the agreement to determine the nature of the payments and whether they fell within the definition of 'royalty' under the DTAA.2. Definition and Scope of 'Royalty' under Article VIIIA of DTAA:The court analyzed Article VIIIA of the DTAA, which defines 'royalties' as payments for the use of, or the right to use, any copyright, patent, trademark, design, model, secret formula, process, or for information concerning industrial, commercial, or scientific experience. The court emphasized that the term 'royalty' includes payments for the right to use industrial, commercial, or scientific equipment, expanding the scope of what constitutes royalty.The court referred to the OECD commentary and other international tax law principles to distinguish between payments for the use of intellectual property and payments for the transfer of ownership. Payments for the use or right to use intellectual property are considered royalties, whereas payments for the transfer of full ownership are not.Examination of the Agreement:The court examined the 'Technology Transfer and Technical Assistance Agreement' between HCL and ADC. Key clauses were analyzed to determine whether the agreement constituted a full transfer of ownership or merely a right to use the intellectual property:- Clause 2.1: Granted HCL a non-exclusive right to manufacture, maintain, use, and sell the licensed products in India using ADC's technology, indicating a right to use rather than a transfer of ownership.- Clause 2.3: Allowed HCL to sublicense or subcontract the production of licensed products, but the disclosure of technology to sub-licensees was restricted and subject to confidentiality provisions.- Clause 4: Emphasized confidentiality, stating that the technology and information conveyed by ADC to HCL would remain confidential and proprietary even after the agreement's termination.- Clause 5: Addressed industrial property rights, stipulating that HCL would not question ADC's rights and would assist in defending against infringement claims.- Clause 14: Provided for the agreement's duration and termination, with confidentiality obligations continuing even after termination.Conclusion:The court concluded that the agreement did not constitute a full transfer of ownership of the technology. Instead, it granted HCL a right to use ADC's intellectual property, subject to various restrictions and confidentiality obligations. Therefore, the lump sum payments made by HCL to ADC were considered royalties under Article VIIIA of the DTAA and were liable to tax in India.Judgment:The court answered the substantial questions of law against the appellant (HCL Infosystems Limited) and in favor of the respondent (Revenue). The appeal was disposed of with no order as to costs.