1991 (5) TMI 114 - AT - Income Tax

Tribunal rules technical know-how payment not taxable under India-Germany DTAA

The Tribunal ruled in favor of the appellant company, determining that the payment made for technical know-how to the German company was not taxable in ... Foreign Company, Permanent Establishment, Technical Know-how Issues Involved:1. Whether the payment made by the appellant company to the German company for technical know-how is taxable in India.2. Whether the payment qualifies as 'royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and Germany.3. The applicability of the DTAA over the provisions of the Income-tax Act, 1961.Summary:Issue 1: Taxability of Payment in IndiaThe appellant, a private limited company, established a polyester staple fibre manufacturing plant in Ghaziabad with the collaboration of a German company, M/s. Zimmer. An agreement was executed on 23rd January 1987 for the supply of improved and modified technical know-how and related services outside India. The appellant applied u/s 195(2) of the Income-tax Act, 1961, for permission to remit DM 4150000 to the German company without tax deduction at source, claiming that the payment was not assessable in India due to the DTAA with West Germany. The Assessing Officer rejected this application, leading the appellant to deposit Rs. 29,06,545 as tax deducted at source and file an appeal u/s 248 to the CIT(A)-VIII, New Delhi. The CIT(A) confirmed the taxability but limited the liability to 20% of the gross payments.Issue 2: Qualification as 'Royalty'The appellant contended that the agreement was for the outright purchase of technical know-how, not for its mere use, and thus the payment should not be considered as royalty. The appellant's counsel argued that the DTAA has an overriding effect over the Income-tax Act, 1961, and cited Supreme Court decisions to support the claim that the payment was not assessable in India. The revenue, however, argued that the payment was for the use of technical know-how and thus constituted royalty, relying on the Tribunal's decision in Siemens Aktiengesellschaft v. ITO and other cases.Issue 3: Applicability of DTAAThe Tribunal examined the provisions of sections 4, 5, and 9 of the Income-tax Act, 1961, and the DTAA between India and Germany. It was noted that the DTAA has an overriding effect over the Income-tax Act, 1961, as per section 90 and CBDT Circular No. 333 dated 2-4-1982. Article V of the DTAA stipulates that profits of an enterprise of a contracting State are taxable only in that State unless the enterprise has a permanent establishment in the other contracting State. Since the German company did not have a permanent establishment in India, the payment did not fall within Article V of the DTAA.Conclusion:The Tribunal concluded that the payment made by the appellant to the German company was for the outright sale of technical know-how and not for its mere use. Thus, it did not qualify as 'royalty' under Article IX of the DTAA. Consequently, the payment was taxable only in Germany, not in India. The Tribunal allowed the appeal, directing the Assessing Officer to refund the tax collected from the appellant.Result:The appeal of the assessee is allowed.