1990 (11) TMI 186 - AT - Income Tax

Non-resident company's lump sum payment taxable as royalty under India-Sweden DTA

Atlas Copco AB Of Sweden. Versus Inspecting Assistant Commissioner.

Atlas Copco AB Of Sweden. Versus Inspecting Assistant Commissioner. - ITD 037, 276, Issues Involved:1. Taxability of lump sum consideration received by the assessee.2. Basis of taxation - accrual vs. receipt basis.3. Nature of the income - royalty vs. industrial or commercial profits.4. Jurisdiction of the CIT under section 263.5. Applicability of the DTA agreement between India and Sweden.Issue-wise Detailed Analysis:1. Taxability of Lump Sum Consideration Received by the Assessee:The assessee, a non-resident Swedish company, entered into an agreement with an Indian company for the supply of know-how and technical assistance for the manufacture of screw-type compressors. The consideration was US $75,000 in three equal instalments. The CIT concluded that these amounts were taxable on an accrual basis and directed the Assessing Officer to include the amount in the total income for the assessment year 1982-83, stating that the lump sum consideration constituted royalty as defined in Article VII of the DTA agreement between India and Sweden.2. Basis of Taxation - Accrual vs. Receipt Basis:The Assessing Officer initially accepted the assessee's contention that the first two instalments were received in the subsequent year and should be taxed on a receipt basis. However, the CIT held that the amounts should be taxed on an accrual basis, as the lump sum consideration was deemed to have accrued or arisen during the relevant assessment year. The Tribunal upheld the CIT's decision, referencing the Madras High Court's ruling in Standard Triumph Motor Co. Ltd.'s case, which established that royalty income due to a non-resident must be taxed on an accrual basis.3. Nature of the Income - Royalty vs. Industrial or Commercial Profits:The assessee argued that the amount received was for the transfer of technical know-how outside India and should be considered industrial or commercial profits, not taxable in India due to the absence of a permanent establishment. The CIT(A) initially held the amount as taxable royalty, later modifying the order to tax the consideration at 20% due to the transfer occurring outside India. The Tribunal supported the CIT's view, stating that the payment for technical know-how, whether for transfer or user, falls under the definition of royalty as per Article VII of the DTA agreement.4. Jurisdiction of the CIT under Section 263:The assessee contended that the CIT's order under section 263 was unjustified as the income had already been taxed in the subsequent year on a receipt basis. The Tribunal dismissed this argument, emphasizing that the CIT's jurisdiction under section 263 aims to rectify errors prejudicial to the revenue, irrespective of immediate financial impact. The Tribunal found that the CIT's action was within jurisdiction, as the Assessing Officer's initial order was erroneous and prejudicial to the revenue.5. Applicability of the DTA Agreement Between India and Sweden:The Tribunal examined the DTA agreement, particularly Article VII, which defines royalty. The assessee's argument that the payment was for the outright transfer of technical know-how and not for user was rejected. The Tribunal concluded that the agreement indicated a continuous relationship involving the supply of technical know-how and subsequent advice, thus qualifying the payments as royalty. The Tribunal referenced the Bombay High Court's decision in CIT v. American Consulting Corpn., which blurred the distinction between transfer and user of technical know-how, further supporting the CIT's stance.Conclusion:The Tribunal upheld the CIT's order, affirming that the lump sum consideration received by the assessee was taxable on an accrual basis as royalty under the DTA agreement between India and Sweden. The appeal was dismissed.