TaxTMI 
TaxTMI 
2005 (11) TMI 238
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....alty." Facts of the case and order of AO 2. The facts leading to these appeals were that an order under s. 195 was passed by the Dy. CIT dt. 5th Sept., 1990, wherein it was mentioned that the assessee has applied for a "No Objection Certificate" in connection with remittance of 2nd instalment of technical know-how and design engineering fees to its German collaborator, viz. Uhde GmbH, West Germany. The said instalment was in respect of remittable amount of DM 26,66,667. The contention of the assessee before the AO was that the said payment did not fall within the meaning of the term "royalty". It was stated that the payment of design engineering fees was not within the definition of "royalty" as contemplated in Double Taxation Avoidance Treaty (DTAT) with West Germany. The second contention of the assessee was that the said collaborator did not have any "PE" in India. So, the assessee has made the claim that there was no liability to deduct tax under s. 195 of the IT Act, 1961. An unreported decision of Tribunal, Delhi. in the case of DCM Ltd. vs. ITO, dt. 11th Oct., 1988, has also been cited. On inquiry in respect of PE, the German collaborator has furnished a certificate wherei....
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....ical information and process designing documentation. All these three appeals are admittedly in respect of a technical collaboration agreement dt. 21st April, 1989, entered into between the assessee and M/s Uhde, Germany. We have incorporated this short paragraph to clarify the nature of appeals now challenged by the Revenue and also the reason for consolidation of these three appeals. Observation of CIT(A) 4. The first appellate authority discussed at length the nature of payment, several remittances in question, relevant articles of DTAT and applicable provisions of the IT Act. When the appeal was filed, by that time, only two remittances Were in question. The 1st remittance was of DM 26,66,667 against which the assessee had deducted tax at source of Rs. 53,43,997. As against the 2nd remittance, the assessee had given a bank guarantee of Rs. 61,40,852 and at this juncture, it is worth mentioning that later on, the TDS was paid as certified by Bank of India and the amount was duly credited to the Government account. Before the first appellate authority, the details of payment of technical know-how fees and design engineering fees of 1st and 2nd remittances have been furnished an....
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....aining 'No Objection Certificate', but the assessee had no liability for deduction of tax at source. In support of this contention, the auditors' certificate has been furnished. As far as remittance in respect of technical know-how fees was concerned, it was specifically mentioned that the tax was to be borne by the said German company. In respect of remittance pertaining to design engineering fees, it was clarified that the tax was alleged to be borne by the assessee i.e. Finolex Pipes Ltd. The next was the applicability of s. 248 of the Act and in this regard, it was placed on record that the assessee has denied its liability for TDS as prescribed either under s. 195 or under s. 200 and the denial of liability is appealable before the CIT(A), and the first appellate authority is authorized under s. 248 to declare the assessee not liable to make such deduction. It was further contended that the assessee had fulfilled one of the conditions of s. 248 of deduction of tax at source and made payment thereof, hence entitled for filing of an appeal. In support of this claim, the assessee has cited Commentary of Sampat Iyengar, 7th Edn., Vol. 5, p. 4391. Next was the main issu....
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.... 157 ITR 86 (SC) that the process design documentation itself constitutes a plant. The price is, therefore, paid for acquisition of a plant and is in no way different from acquisition of any other plant and machinery. It will be seen from the agreement that it was signed in West Germany. It is accepted by the CBDT in para 3(2) r/w para 3(3) of their Circular No. 23, dt. 23rd July, 1969, that sale of plant to an Indian importer will not be liable to Indian tax provided three conditions are satisfied: (1) Contract to sell is made outside India-It will be seen from p. 44 of the agreement that it was signed in West Germany. (2) The payment is made outside India-Please refer to cl. 5.3 of the agreement under which payment is to be made outside India. (3) The delivery must be outside India-Please refer to cl. 3.7 of the agreement under which delivery is to be given outside India. Thus, all the conditions of the circular are satisfied arid, therefore, the price paid for acquisition of plant in the form of process design documentation cannot be made liable to Indian tax." 6. The next was the contention in respect of applicability of DTAT. It was argued that the said payment was ne....
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....as also examined art. II of the said agreement wherein the definition of PE is prescribed. He has also examined art. III in respect of taxability of profits of an enterprise. Thereafter, a finding was given that M/s Uhde GmbH of West Germany had a registered office at Dortmund, having no PE in India though they had an affiliated company. He has also given a finding that M/s Uhde had no day-to-day control over the said affiliated company and the management as well as other control was totally independent, being looked after by the said Indian company and had been managed by its own board of directors. He has also given a finding that the documentation of process designing was handed over to the assessee outside India at their office in West Germany. The delivery of process designing documentation has taken place outside India as also been certified by both the parties. The agreement in question was also stated to be signed in West Germany and this fact was held to be accepted by the CBDT as per the CIT(A). The learned CIT(A) has thereafter examined several clauses of the agreement and finally arrived at the conclusion that the terms and conditions of the agreement had been thus bifu....
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....total sum was DM 1,19,95,000 as per the terms of the payment prescribed in art. 5.1. 9.1 In pursuance of this agreement, the assessee has remitted DM 26,66,667 as "design and engineering fees". TDS of Rs. 53,46,997 was stated to be deducted by the assessee and paid on its own to the credit of the Government. Thereafter, the assessee was to remit 2nd instalment of DM 26,66,667 for technical know-how. On this remittance no tax was deducted by the assessee but a bank guarantee equivalent to Indian Rs. 61,40,852 was furnished to the AO. For the remittance of the next instalment, the assessee has moved an application for obtaining a "No Objection Certificate" on 23rd Aug., 1990, before the AO; the AO has examined the matter and thereafter arrived at the conclusion that the definition of royalty under the IT Act and the definition as prescribed under DTAT are pari materia, so the assessee was directed to deduct tax at 20 per cent on such remittance. The learned Departmental Representative has argued that when the issue was carried before the first appellate authority, he proceeded on wrong assumption that the appeals lied under s. 246(1)(c) or under s. 248 of the Act. Shri Mishra has ex....
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....al Representative has referred to s. 5(2) of the IT Act and argued that the total income of any previous year of a person who is a non-resident includes all the income from whatever sources derived which is received or deemed to be received in India, thus taxable under the IT Act. The learned Departmental Representative has further argued that s. 9 of the Act defines income deemed to accrue or arise in India and s. 9(1)(vi) and s. 9(1)(vii) deals with taxation of royalty and fees for technical services received by a non-resident and this section makes such sums liable to, tax in India by deeming them to accrue or arise in India. So, the payments made by the assessee come within the ambit of these two sub-sections though might have been paid outside India and such payments made outside India were simply a procedure adopted having no consideration on the taxability in India. In support of this argument, reliance was placed on the following decisions: (1) Hemalatha Gargya vs. CIT (2003) 182 CTR (SC) 107 : (2003) 259 ITR 1 (SC); (2) Gursahai Saigal vs. CIT (1963) 48 ITR 1 (SC); (3) ITO vs. T.S. Devinatha Nadar & Ors. (1968) 68 ITR 252 (SC); (4) CIT vs. Podar Cement (P) Ltd., Et....
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....hands of M/s Uhde, Germany. In support he has cited Bangalore Bench decision in the case of AEG Aktiengesselschaft vs. IAC (1993) 47 TTJ (Bang) 648 : (1994) 48 ITD 359 (Bang) and another decision of Delhi Bench in the case of Asstt. CIT vs. Hewlett Packard Ltd. (2002) 75 TTJ (Del) 786. 9.4 The learned Departmental Representative has concluded that, firstly, the appeal should not have been entertained by the learned CIT(A) in view of s. 248 of the Act because the assessee has not paid the TDS and simply made a provision by furnishing a bank guarantee. Furnishing of a bank guarantee did not tantamount to payment to Government department and in support, he has cited the decision of Ahmedabad Bench in the case of Asstt. CIT vs. Mugat Dyeing & Printing Mills (2003) 77 TTJ (Ahd)(TM) 696 : (2003) 87 ITD 215 (Ahd)(TM). In concluding remarks, the learned Departmental Representative has mentioned that at the time when the first instalment was paid the assessee has suo motu deducted the tax and paid the same. So, it was very well aware about its liability under the IT Act though subsequently, changed its stand and challenged the applicability of s.195 of the Act. There is no ambiguity in s. ....
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....duct income-tax thereon at the rates in force. In his opinion, to facilitate the tax deductor, sub-s. (2) to s. 195 has been incorporated, according to which where a person responsible for paying any such sum chargeable under this Act may make an application to the AO to determine the chargeability as also the TDS thereon. These fundamental rules have to be applied in each and every such type of cases, he has pleaded. 10.1 Coming to the first plank of Revenue's argument about the maintainability of appeal, Mr. Khare has mentioned that the right of appeal of an aggrieved taxpayer should not be denied. Sec. 248 is meant for this purpose, according to which, if any person is aggrieved by an order under s. 195 and denies his liability to make such deduction, then has a right to appeal before the CIT(A). In the present case, the learned CIT(A) has rightly exercised his jurisdiction and declared the assessee not liable for any deduction of tax at source. The other provision of the IT Act is s. 246 which predominantly provides a right of appeal against an order where the assessee denies his liability. The cumulative effect of both these sections leaves no doubt that a resident of Ind....
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....ation and process design, documentation of the preamble to the impugned agreement describes as follows: "Owner desires to receive from contractor a licence, technical information, process design documentation and technical assistance by delegating, expatriate personnel and by training owner's personnel, necessary to design, engineer, construct, erect, operate and maintain the abovementioned plants and contractor is authorized by licensor and willing to grant and supply to owner such licence, process, design documentation and technical assistance, and to allow the use of such technology by owner in said plants under the terms and conditions hereinafter setforth." 10.3 Article 1 of tills agreement defines "patent rights", "process design documentation" and "technical information", etc. Article 2 of this agreement provides scope of the complex. The important article is art. 3 which defines contractor's obligations. Tills article states that the contractor agreed to make available the technical information to the owner i.e. the assessee, outside India. The owner was held responsible to make the agreed payments. Mr. Khare has mentioned that para 3.2 of the art. 3 has also bee....
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....plant and the learned Departmental Representative has wrongly argued that such information was in the nature of "royalty". In support of this argument, he has further mentioned some of the clauses of art. 6 through which the responsibility was fixed upon the German company i.e. contractor to commission the plant, perform the test run and only on completion of guarantee-test-run it shall prepare a certificate of providing commissioning of plant and present the certificate to the owner i.e. the assessee. The relevant clause referred in the agreement is 6.47. The purpose of mentioning this clause of the agreement was that the entire collection of information and documentation was inextricably linked with the commissioning of plant. Article 10 of this agreement has a clause of secrecy in respect of technical assistance provided by the said company. One more thing was clarified by the learned Authorised Representative that the assessee was under obligation to return to contractor the "technical information" upon the termination of the agreement, but the same was not in respect of "process design documentation". To support this argument, he has heavily relied upon the decision of the Cal....
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....89) 29 ITD 123 (Del), wherein the company had entered into an agreement with a foreign enterprise for transfer of comprehensive technical information, know-how along with the supply of equipment. The assessee in that case was entitled to sub-licence its right and in turn agreed to pay certain amount in instalments to the said foreign enterprise. Even then, though the payment was made in instalments in respect of right of use of know-how but a view is taken that since the foreign party had no PE in India, hence such payment was not in the nature of royalty to be taxed in India. 10.5 Next coming to his another argument that the payment was in the nature of acquisition of "plant", the learned Authorised Representative has relied upon decision of the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT. In that case, the Hon'ble Court has held that the documents though could not by themselves perform any mechanical operation or process, that cannot militate against there being a plant, since they were in a sense, the basic tools of the assessee's trade having a fairly enduring utility. So, the Hon'ble Court has held that the assessee was entitled for ....
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....into account and duly considered by the learned CIT(A) and thereafter carefully arrived at the conclusion that there was no justification for requiring the assessee to deduct the tax at source @ 20 per cent hence prayed for confirmation of the same. Rejoinder by Revenue 11. In rejoinder, the learned CIT Departmental Representative, Mr. Satya Prakash, has briefly mentioned that the place of payment or handing over of documentation is of no relevance as far as the treaty is concerned, hence in this regard, the argument of the learned Authorised Representative has no consequence or force. He has cited the decision of Bombay High Court in the case of Goa Carbon Ltd. vs. V.M. Muthuramalingam & Anr. (2001) 171 CTR (Bom) 55 . (2001) 251 ITR 348 (Bom). The learned CIT-Departmental Representative has also argued that the issue of royalty is always a subject of controversy and if, on one hand, the learned Authorised Representative has cited so many decisions wherein it was held that such types of payments were not in the nature of royalty but, on the other hand, there are several decisions in favour of Revenue where the Hon'ble Courts have held that the payments made for acquiring pate....
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....rt. VIII-A of DTAA. So, he has concluded that since the DTAA between India and Germany was duly considered along with s. 9 of the IT Act by the Hon'ble Courts, therefore, this decision has to be followed by reversing the finding of the learned CIT(A). ORDER 12. We have conscientiously heard at length the arguments of both the sides. We have thoroughly perused the impugned orders of the authorities below in the light of plethora of judgments cited from both sides. Though the issue in hand is not a new one as we have seen after examining several case law that the same has already been dealt exhaustively by several Co-ordinate Benches as well as by Hon'ble High Courts, still we consider it necessary to deal with all the points and arguments raised by both the sides so as to arrive at the right conclusion. Since, the arguments were carried for two days, therefore, we cannot afford to be brief in deciding these appeals. First of all, we can consider the nature of agreement now in question through which the assessee, M/s Uhde, has entered into a collaboration to appraise ourselves the correct factual implications and thereafter we will proceed to discuss the legal aspects of th....
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....ittable amounts. The learned CIT(A) has also precisely made a distinction of these two components by reproducing the details of instalments, incorporated. The terms of payment have also been defined in art. 5 of this agreement through which the total amount of DM 1,99,95,000 was required to be paid in three instalments of DM 66,65,000. The assessee was under obligation to open irrevocable letter of credit and payment was required to be made not later than 45 days prior to the date of departure of each delegation sufficient in advance to cover the cost. On the other hand, the contractor was responsible for commissioning, guarantee-test and completion of plant. Articles 6 and 7 have imposed several obligations on the said German company. In this regard, the learned Authorised Representative has explained in detail the several clauses to appraise us about the nature of agreement as also the nature of consideration. The assessee has acted upon accordingly and obtained "No Objection Certificate" at the time of payment of first instalment. This is an admitted position as discussed above. The dispute has arisen when the assessee had applied for another "No Objection Certificate" at the ti....
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....se first limb of cl. (1) of s. 9 is a mere general provision. But, cl. (vi) of s. 9(1) deals with specific type of income viz., royalty. While we were hearing the arguments of learned Departmental Representative it was noticed that sometimes s. 9(1)(i) was stressed upon and pleaded as applicable in the present case and sometimes s. 9(1)(vi) was relied upon. In this regard, it is worth mentioning that income by way of royalty is a species or one of the categories of a larger class mentioned in the first limb of cl. (i) and when one comes across the question of royalty, one has to look only at cl. (vi) and not to the general provisions of the section. Similarly, the income by way of fees for technical services, which is covered by cl. (vii) is a more general category as compared to the royalty. On the principles that the particular excludes the general, so the cl. (vii) naturally cannot be applied to royalty income which is covered only under cl. (vi). The word "royalty" has also been described in Black's Law Dictionary to mean "compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or....
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.... definition of term "royalties" in Model Convention, 1977, included payments "for the use of or the right to use industrial, commercial, or scientific equipment", the reference to these payments was subsequently deleted from the definition. Given nature of income from the leasing of industrial, commercial or scientific equipment, the committee on fiscal affairs decided to exclude such income from the definition of royalties. Commentary as per art. 12, para ii, has further classified "royalties" as follows: "11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, para 2 alludes to the concept of 'know-how'. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the 'association des Bureaux pour la Protection de la Propriete Industrielle' (ANBPI), states that 'know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is deriv....
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....o apply in all those cases wherein the contracting parties are governed by the DTAA. 16. We have also laid hand on an authority on this subject, namely, Klaus Vogel on Double Taxation Convention, as per IIIrd Edition, art. 12 pertaining to the royalties having elaborated consideration and comparing certain model convention. The first aspect which was clarified was that art. 12 of OECD prescribes that royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if such resident is the beneficial owner of the royalties. The term royalties as used in this article means, "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." The renowned author has discussed several articles on model convention, defines the term' know-how and made a clear-cut distinction between royalty and quoted that a distinction must be made between letting the licence....
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....oyalty paid is effectively connected with such PE then in such cases art. III of DTAA shall apply which means that art. III prescribes the profits of enterprise of Contracting State shall be taxable only in that State, unless the enterprise carries on business in the other Contracting State through a PE situated therein. The cumulative effect of these two articles is that first of all the nature of payments should fall within the term "royalty". If the foreign collaborator had no PE in India then the royalty is subject to tax in the Contracting State in which it arises and the tax so charged shall not exceed 20 per cent. However, in case it is established that the foreign collaborator has a PE then in such a situation the profits thereon shall be taxable only in that State. Due to the exceptions of these two articles in DTAA between India and West Germany, the arguments raised from the side of the assessee were two-fold, firstly, the nature of payment did not fall within the definition of "royalty" as defined in the agreement and, secondly, if it be so, the same was not subject to tax in India because there was no PE of the said collaborator viz., M/s Uhde. Provisions of IT Act vi....
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....ative, hence it was held that since the Japanese company had no PE in India, therefore, the payment made was exempt from tax in India. This precedent thus also supports the stand taken by the assessee. 18.1 A well known case of Hon'ble Calcutta High Court in the case of CIT vs. Davy Ashmore India on the question of applicability of s. 90 vis-a-vis Expln. 2 to s. 9(1)(vi) has also been strongly relied upon. This case has decided both the issues i.e. the beneficial applicability of DTAA clauses in supersession of the provisions of IT Act as well as the conditions under which "royalty" falls within the ambit of s. 9. The Court has clearly held that as "royalty" has been defined in the DTAA between India and UK, therefore, Expln. 2 to s. 9(1)(vi) of the IT Act shall not have any application and the DTAA shall be applicable. In respect of the term "royalty", the Hon'ble Court has held that "the non-resident did not retain the property in the designs and drawings. The designs and drawings were imported under the import policy with the approval of the RBI on the basis of the letter of intent. The import of the designs and drawings postulated an out and out transfer or sale of suc....
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....) Ltd. which is, firstly, in respect of interpretation of taxing statute. In this case, the term "owner" has also been defined in respect of transfer of property and held that having regard to the ground realities, "owner" is a person who is entitled to receive income from the property in his own right. Need not to mention we are going to follow the ratio laid down in this judgment. Next is the decision of Allied Motors (P) Ltd. which is also in respect of interpretation of statutes and the Court has held that it should be a reasonable construction and a rule of reasonable construction must be applied while construing a statute. Undoubtedly, the rule so laid down by the apex Court has to be followed while interpreting provision of a statute. As far as the decision of Kedarnath Jute Mfg. Co. Ltd. vs. CIT, is concerned, the same is wrongly cited by the learned Departmental Representative because the issue discussed therein has no connection with the present appeal. 18.1 The decision in the case of CIT vs. Neyveli Lignite Corporation (supra), has discussed the meaning "royalty". The Court has defined the said term as follows: "The term 'royalty' normally connotes the paymen....
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....ia was duly considered and it was held that if there was any conflict between the tax law and DTAA, the provisions of DTAA would prevail over the provisions of tax laws. One more issue was considered by the respected Co-ordinate Bench that whether the non-resident. company was providing technical services to Indian company and, therefore, engineering fees were not in the nature of supplemental payments towards cost of plant and machinery supplied by the assessee but were in nature of fees for technical services within the meaning of article of DTAA, it was held "yes". Further, whether in view of the fact that the payments were made by non-resident bank outside India, it could be said that there was no accrual of income in India, therefore, deeming provisions regarding taxability of amount in India contained in the clauses of DTAA were inapplicable, it was held "no". So, the said Coordinate Bench has held that the AO was justified in treating the engineering fees as fees for technical services and charging it to the tax @ 20 per cent. We have carefully examined this decision and have found that as far as the first limb of this judgment is concerned, there is no dispute that the clau....
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....dinate Bench vide para 24 of this decision, reproduced below: "24. The AO held as under: 'On a proper interpretation of the collaboration agreement, it can be inferred that limited interest in the know-how was transferred and on reading of all the clauses together, there was no independent and outright sale of know-how. Reliance is made on the Special Bench. judgment of the Bombay Tribunal reported in (1986) 26 TTJ (Bom)(SB) 566 : (1987) 22 ITD 87 (Bom)(SB) which lays down the proposition that even if the fee paid is for transfer of technology, the same will have the character of 'royalty'. It held that if the fee paid is of the nature of royalty the extent of legal or other protection available in relation to the subject-matter or contract will not help in coming to a different conclusion." On the other hand, the case of the assessee before the Revenue authorities was that according to the terms and condition of the agreement, there was segregation of payment and there were separate clauses in respect of each type of payment, hence the same should not be clubbed together and held as royalty. After detailed discussion and on examination of plethora of judgments, th....
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....the appeal and the assessee should not have any grievance as far as the TDS matter is concerned. For this proposition, he relied upon the decision in the case of Transmission Corporation Ltd. The context before the Hon'ble Court was scope of s. 195 wherein it was held that a person making payment may file an application before the AO for determination of sum chargeable to tax. In case, where no such application is filed, then the tax must be deducted on gross sum. Though the Court has observed that the said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected, but still, the Hon'ble Court has further held that the only thing which is required to be done is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of recipient and for determination of the appropriate proportion of such sum so chargeable or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax or deduction of income-tax at any lower rate. On such determination, the tax at the ....
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....whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. It is incomprehensible that a quasi-judicial authority like the ITO can erroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen." So, the Court has laid down that it is incomprehensible that a quasi-judicial authority like ITO may decide a jurisdictional fact and on its own proceed to impose a levy on a citizen. So, the verdict clearly supports the view that the fact whether a non-resident is subject to tax is definitely a question of law to be decided in appeal if the AO has conferred jurisdiction on itself by wrongly deciding such jurisdictional fact. In simple words, a right of appeal very much lies in such matter and the arguments of learned Departmental Representative are ill-founded and against the accepted principle of law as laid down by several authorities. 20.1 After duly considering the series of decisions cited from the side of the Revenue and have also examined their applicability on the issue in hand, now we proceed to examine the case law cited from the other ....
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....technical information" is concerned, in that appeal too, the assessee had itself deducted the tax at source; the controversy was only in respect of payment against supply of initial data package defines as "licensed product". Identical was the situation that the said product was transferred outrightly in favour of the assessee by a non-resident company. While deciding the issue in favour of assessee, the Co-ordinate Bench has taken the support from the case of Swadeshi Polytex Ltd. In Swadeshi Polytex, assessee was establishing a polyster staple fibre plant in India with collaboration of a German company. Assessee entered into an agreement for supply of technical know-how. Foreign company did not have any PE in India as in the present case. Assessee was to pay consideration for use of technology transfer. So, the question was whether receipts in the hands of German company would be taxable and in this regard the Co-ordinate Bench has held that the German company would be taxable in Germany and not in India. There was also a secrecy clause in the agreement but the Co-ordinate Bench has held that the said clause would not militate against the assessee because there was an outright sa....
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.... follows: (a) The payments had been made by the Indian company to the assessee under an agreement for the use of rights in the nature of a patent. (b) Even though no patent had been obtained by the assessee in respect of the know-how, information and technical assistance supplied by the assessee to the Indian company, payments in respect thereof would still be payments in the nature of royalty. (c) Some of the information to be furnished by the assessee including data, instructions and directions for the setting up of a plant as also general information in respect of the product to be manufactured would, however, amount to rendering of technical service and payment received in respect thereof would not be "royalty". So, an important distinction has been made that once the entire amount was in the nature of a fees for technical services rendered, assessee did not segregate which part of the payment should be allocated against the technical services rendered by it and which part should be allocated towards supply of technical know-how; the secret process to be in the nature of royalty, then a fair estimation of 50 per cent could be made. Both these decisions definitely laid down the ....
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....talments. The said agreement was approved by the Government of India. At the time of the first remittance, the assessee deducted tax at source under s. 195(2) @ 20 per cent and sought a NOC from the ITO. It was claimed that the lump sum fees was not chargeable under the terms of DTAA between India and France. The issue before the Special Bench was in respect of the second instalment payment which was two-fold, firstly, applicability under s. 248 r/w s. 195(2) as well as taxability of lump sum consideration whether under art. VIII of the DTAA as royalty. Both these issues have been decided in favour of the assessee as per following two paras reproduced below from the headnotes: "Held, (i) that the issue had since been decided by the Supreme Court in the case of CIT vs. Wesman Engg. Co. (P) Ltd. (1991) 92 CTR (SC) 62 : (1991) 188 ITR 327 (SC). It was held that s. 195(2) is a special provision for determining the chargeability of any sum remitted to a non-resident and consequently the AAC was competent to entertain an appeal under s. 248. It was further observed that the right to appeal under s. 248 was not restricted to total denial but covers even a partial denial with reference t....
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....ndia as well as did not have any property in India, hence the payment made to such company would not fall within s. 9(1) of the IT Act. In that case also, one of the contracting parties was a resident of Germany, as in the present appeal. The German company has transferred technical know-how to the assessee company in consideration of DM and that transfer was not merely a right to its use. In that context, it was held that the said payment did not fall within the definition of term "royalty" under DTAA between India and Federal Republic of Germany. Further, it was clarified that once the receipt was not a royalty, then it would be taxable in the hands of German company under art. V of DTAA but since the admitted position was that the said German company had no PE in India, so the amount was held as taxable not in India but in Germany. The assessee was exempted from deduction of tax at source in respect of payment for transfer of technical know-how. So, it is pertinent to mention that the series of decisions directly stand in favour of the assessee. Almost on identical situation, in the case of Graphite Vicarb India Ltd., it was held that the parties to collaboration agreement had c....
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.... said foreign concern. Since the foreign party had no PE in India, the payment was held not taxable and it was also held that the payment was not in the nature of royalty. Para 7 wherein the term "royalty" was duly considered is as follows: "7. Therefore, we have to examine the definition of 'royalty' under the DTAA rather than under the IT Act, 1961. It would, therefore, not be necessary to look at the dictionary meaning of the said term or even to refer to the Circular dt. 9th Aug., 1969, of the Board dealing with the nature and meaning of this term. A perusal of the technical collaboration agreement shows that the amount of Franc 1,55,000 was to be paid by DCM to TL once for all as consideration for the grant of licence and the disclosure of the know-how. Para 2 of the said agreement provided that TL was to grant DCM the right and full but nontransferable licence to practise the TALO processes at its existing factories. The DCM could sub-licence its rights to another Indian party with the consent of TL and with the approval of the Government of India. Para 3 of the said agreement provides for the disclosure of the know-how of which the details appear from paras 3.1 to ....
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....x Court in the case of Scientific Engineering House, which was heavily relied upon by the assessee in support of his argument that the nature of payment in terms of collaboration agreement had fallen in the category of "plant". The Hon'ble Court has observed that the tenure of the agreement showed that the various documents such as drawings, designs, charts, processing data and other literature included in the certificates, the supply whereof was undertaken by the foreign collaborator, more or less, formed the tools by user by which the business of manufacturing the instruments was to be done by the assessee and for acquiring such technical know-how, a lump sum payment was made. The Court has held that the said lump sum payment was the expenditure of capital in nature, as a result, a capital asset of technical know-how in the shape of drawings, designs, etc., was acquired by the assessee. In that respect, it was held that such designs, etc. were a tool of his trade and a conclusion was drawn that such documents being necessary for carrying out the mechanical operation or process, hence, would fall within the definition "plant". A portion from the head notes is reproduced below:....
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....re was a clause of secrecy as well as there was a clause that after the expiry of 15 years, the assessee was entitled for free use of the documents. In that context, it was inferred that the assessee has become the owner of the rights which he got through agreement. Since there was a gap of time in conferring of certain rights, hence the Revenue was agitating that the assessee was not the absolute owner of the rights at that point of time. The Hon'ble Third Member has discussed at length several case law, few of them are worth reproduction, namely, Graphite Vicarb India, DCM Ltd., Citizen Watch Co. vs. IAC (1984) 148 ITR 774 (Kar), Swadeshi Polytex Ltd., CIT vs. Gilbert & Barkar Manufacturing Co. 1977 CTR (Bom) 347 : (1978) 111 ITR 529 (Bom), CIT vs. Kayo Seico Co. (1998) 148 CTR (AP) 201 : (1998) 233 ITR 421 (AP). The respected Bench has also examined the term "royalty" as defined in K.J. Aiyer's Judicial Dictionary and has described in Black's Law Dictionary. The concluding para is worth reproduction: "It would be seen from the facts and the ratio of the rulings given in the cases cited on behalf of the assessee and discussed above that the payment made for supply o....