2024 (6) TMI 218 - HC - Income Tax

Russian technical documentation payments not royalty under tax law as information stayed outside assessee control

The Commissioner of Income Tax-I, Chandigarh Versus Bhakra Beas Management Board

The Punjab and Haryana HC upheld ITAT's decision that payments made for technical documentation, working drawings, and testing models prepared in Russia ... Royalty payment - ITAT partly allowed the appeal preferred by the assessee holding that the assessee was not required to deduct tax at the rate of 20% for the payments and further directed the AO to grant refund to the assessee on the tax recovered from the assessee @ 20% - whether expenditure incurred in Russia for preparation of technical documentation, working drawings testing models of equipments and other technical purposes, has been wrongfully assesssed by the assessing officer as well as CIT (A) to be as a Royalty and 20 per cent tax deductable on the same has been wrongly imposed - HELD THAT:- The contention of learned counsel for the appellant that as the Royalty means consideration to be paid for imparting of any information concerning technical industrial commercial or scientific knowledge, experience or skill, we have to understand that the said imparting of any information has to be conveyed to the assessee. Since, the information which was gathered by the TPE at Russia was to be handed over to Russia alone and was not to be handed over to the assessee, we do not find the said consideration to come within the ambit of ‘Royalty’. Even as per explanation 5, it is clarified that royalty includes the possession and control of such rights, property or information with the payer. We find that factually the same is not available in the present facts because the documentation conducted by the said TPE was to be handed over to Russia and would, therefore, not remain in its possessoin and control. In fact there is no knowledge available to the assessee with regard to the second part of the preparation of technical documentation in Russia. In these circumstances, we are unable to accede to the submission of learned counsel for the appellant that the consideration would fall within the ambit of Royalty. It is the final product which the assessee received, therefore, the said product would only come within the four corners of the capital assets. In view thereof, the order passed by ITAT does not suffer from any illegality or misinterpretation of law. Issues involved: Interpretation of the term 'Royalty' under Section 9 of the Income Tax Act, 1961 in relation to payments made for technical documentation and equipment preparation.The High Court examined the appeal by the revenue against the ITAT's decision overturning the Assessing Officer's order regarding tax deduction on payments made to Technoprom export (TPE). The revenue argued that the payments should be considered as 'Royalty' as per Section 9 of the Income Tax Act. On the other hand, the respondent contended that the payments were for specific technical purposes and should not be classified as 'Royalty' under the law. The court analyzed the definitions and explanations provided under Section 9 to determine the nature of the payments (paragraphs 1-8).The court specifically referred to Section 9 Explanation 2, 4, 5, and 6 to understand the concept of 'Royalty.' It considered the detailed project report prepared by TPE and the purpose of the payments made by the respondent. The court disagreed with the CIT (A)'s interpretation and supported the ITAT's decision. It concluded that the payments made were not for imparting information to the respondent but for specific use in Russia, therefore not falling under the definition of 'Royalty' as per the law (paragraphs 9-13).In the final judgment, the court dismissed the appeal, affirming the ITAT's decision and stating that the payments in question did not qualify as 'Royalty' under Section 9 of the Income Tax Act, 1961 (paragraph 14).