AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2001 (2) TMI 299
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....ch the lower authorities had interpreted the said agreement and the appreciation of the facts as it emerges from the orders of the lower authorities for easy comprehension of the issues is brought out in the following paragraphs. 3. AO had perused the collaboration agreement that the assessee entered into with RBL for supply of technical know-how for establishing an unit for manufacture of disc pads and brake linings. He observed that the appellant company had derived income by way of fees for supplying technical know-how of Rs. 2,02,237. The assessee had returned this income as fees for technical services and paid tax at the rate of twenty per cent and that the assessment was framed initially by accepting this returned income. AO felt that because questions were raised as regards applicability of rate of tax in certain cases before the Tribunal by splitting the technical know-how fees between royalty and fees for technical services, he issued a notice calling for rectification of the order as was passed initially for application of rate of forty per cent treating the income as royalty. The appellant company objected to the rectification by pointing out that the correctness of the....
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....ound of appeal claiming that DTAA is applicable and that the entire income is free from tax. The first appellate authority restored the issue back to AO for consideration of DTAA. AO once again passed the assessment order retaining his earlier order of treating two-third as royalty and one-third as fee for technical services. AO felt that the assessment as framed for the assessment year 1986-87 was reasonable and followed it for the present assessment year too. He accordingly split the amount of Rs. 2,02,237 between royalty and fees for technical services at two-third and one-third and applied the rate of 40 percent and 20 percent respectively. 4. The appellant company felt that its claim was not appreciated properly and sought the intervention of CIT(A) by filing its appeal before him. CIT(A) perused the collaboration agreement and noted that the assessee was to supply technical know-how for manufacture of disc pads also called frictional material parts used in automobiles for a consideration of 12 million yen that was payable in three instalments. One-third of the consideration converted into Indian Rupees was 2,02,237 was received by the assessee in the previous year relevant ....
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....and manufacture of disc pads and brake linings and that the Indian company had expressed its desire to acquire access to such information and use of technical services. He noted that clause I of the agreement defined 'territory' as India. He noted that clauses 3.1 and 3.1.1 permitted exclusive right of use of technical know-how and its technical documentation. He also noted that the assessee was to allow the services of two of its advisors for guidance. He noted that clause 10 of the agreement clearly provided that the payment is specifically and unambiguously for the licence granted, know-how supplied and services to be rendered in the territory of India. He reproduced the sanction accorded by the Reserve Bank of India [RBI for short] to the agreement. He referred to clause 10.1 (D) of the agreement and observed that it talked of commercial output. He therefore concluded that the assessment needed enhancement and hence issued his notice of enhancement. Assessee made its submission to this notice of enhancement by reiterating its submissions as above. CIT(A) was of the opinion that the payment was covered by the provisions of section 9(1)(vi) of the Act and Explanation 2 attached ....
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....ndian Company but none of these clauses are relevant at this stage that followed immediately to the signing of the agreement. He pleaded that 'territory' as contained in the agreement is for the reference of the location of the licensee namely RBL in India who is to use the technical know-how. He referred to DTAA and submitted that it contains broad provisions covering business connection, establishment in the Contracting State, the various kinds of income like rent, dividend, business or profession, royalty and so on and not all these provisions may be attracted in every case of agreement and activity between parties in India and Japan. He submitted that various clauses are invariably inserted because it involved transfer of technical know-how for installation of plant followed by manufacture of disc pads and brake linings on the design supplied by the assessee. These are safety clauses that are necessary in the interest of both the parties and invariably are carefully examined by the Government of India before according its sanction. He submitted that because DTAA overrides the provisions of the Act, even the fees for technical services was not liable to be taxed in India. He re....
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.... of the amount receivable in exchange. It is necessary to maintain here that the counsel for the appellant company had stated that though the appellant could have sought for the exemption of the income under the Act by raising an additional ground of appeal, he is only insisting for the receipt to be treated as in the nature of fees for technical services which was the foundation of returning the income at the initial stage and assessment completed on that basis. The submissions of the counsel for the appellant that receipt could be exempted from tax that was dealt within the earlier paragraphs. Because the issue revolves around the collaboration agreement, the various clauses as are touched upon are brought down hereunder. The provisions of sections 9(1)(vi)) and 9(1)(vii) that are applied by the Department are also brought after the clauses of the agreement. The articles X(e) and X(k) of DTAA are also reproduced. Preamble of the agreement dated 26-9-1984 reads- A. Licensor is a leading manufacturer and supplier of disc pads, brake linings and clutch facings to original equipment manufacturers in Japan and elsewhere and has, and may in the future acquire, valuable information co....
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....on process to be adopted for licensee's production requirements. 4.1.3 Assistance in selection of correct machineries, testing equipments, toolings, moulds, etc., for use in manufacturing the product. 4.1.4 Technical documentation relating to methods and skill to quality control in manufacturing/testing the products. 4.1.5 Technical documentation relating to the specification of finished products and details of method of testing/evaluation (test code) and assistance for testing finished products. 6.1 Licensor shall provide at reasonable notice from licensee an agreed number of experienced staff not exceeding two (2) at anyone time at licensee's plant for an agreed period to give advice and guidance on the layout and installation of machinery in licensee's plant and also to perform such other functions as covered in this agreement. In respect of the above visits of staff of licensor, licensee shall pay the cost of all air and other travel tickets, all travel to be full fare business class, and accommodation (including meals) in first class hotels. 7.1 Subject to the following sub-clauses, licensor shall give practical training to licensee's nominated employees in licensor's fac....
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.... respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; Explanation 2 For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration) but excluding any consideration which would be the income of the recipient chargeable under the head 'capital gains' for- (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. (vii) income by way of fees for technical services payable by (b) a person who is resident, except where the fees are payable in respect of services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any, income from any source outside India; Explanation 2 For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including provision of services of technical o....
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....touches upon the concept of royalty paid by a resident has so stated negatively, i.e., excluding the amount payable in respect of right, property or information used for the purposes of business out of India, would be deemed as accrued or arises in India. Rephrasing the said definition for easy appreciation, 'royalty payable by a resident in respect of right, property or information used or services utilized for purposes of business carried on India or for earning income in India, would be deemed to accrue or arise in India' The reading of the section makes it clear that the amount of royalty payable is related to two basic conditions, namely, 'used or services utilised'. The explanation touches upon imparting of any information that may be technical, industrial, etc., for which resident in India is payable any lump sum consideration. Likewise rephrasing of section 9(1)(vii) positively illustrates that the fee for technical services payable in respect of services utilised in a business carried on India, etc., and the explanation further illustrates to include lump sum consideration for rendering of managerial, technical or consultancy services. To our mind both the above sections ....
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....come through the resident in India. In the present case too the appellant company is deriving or earning income from resident in India by parting with the technical know-how for a lump sum consideration but the only difference is that the resident Indian is not in the same line of the business as the appellant company, i.e., owning or having developed information that it is in a position to impart or share with another for a consideration that could be used for manufacture of disc pads and brake linings. The Indian company is in the business of manufacture of brake linings as is indicative of from its name. The appellant company is carrying on manufacture of disc pads and brake linings for various original equipment manufacturers and has developed its own industrial knowledge that it is in a position to part with for a consideration. If the agreement results is the manufacture of the products in the plant of the resident company straight away, the conclusion has to be that the lump sum consideration covers both royalty and fee for technical services. This is based on the feature of business of the appellant and the resident in India, which is manufacture of disc pads and brake lin....