TaxTMI 
TaxTMI 
2005 (11) TMI 238
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....r company was part and parcel of plant and not royalty." 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 ....
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....Rs. 41,70,248 to Uhde GmbH, Germany, for acquiring technical 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 engine....
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.... 1973 CTR (SC) 238 : (1973) 87 ITR 539 (SC). It was strongly contested that though at the time of 1st instalment, the TDS was deposited for obtaining '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....
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...., it can now hardly be disputed in view of the decision of the Supreme Court in Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386 : (1986) 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 f....
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....1992) 43 ITD 28 (Cal)(SB). 7.1 The learned CIT(A) has duly examined art. VIII-A of DTAT between two States and reproduced relevant portion pertaining to the definitions of "royalties" and "fees for technical services". He has 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....
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....ration for transfer of technical information pursuant to the art. 3.1 outside India. The rights and licenses granted pursuant to arts. 3.2 and 3.4. The consideration was also in respect of training of personnel as per art. 3.3. The 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 lea....
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....ical information and design documentation was to be passed on to the assessee in Germany. However, it is not in dispute that the aforesaid design and documentation were subject to use in India. With this background, the learned Departmental 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:....
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....her State. So, such royalty, etc. to be taxed in the Contracting State in which they arise and to be taxed according to the laws of that State. Relying upon art. VIII-A of DTAT, the learned Departmental Representative has stressed that the royalty is subject to tax in India in the 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 tim....
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....payment to a non-resident if the said sum is chargeable under the provisions of this Act. First of all it is to be determined whether the said sum is chargeable in the hands of the said non-resident under the Act and thereupon at the time of credit or payment the payee is responsible to deduct 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 ....
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....as a fully owned subsidiary company of "licensor", hence authorized to licence on behalf of the licensor, the technology for manufacture of PVC, etc. To remove any doubt, the corresponding letter from the licensor has also been enclosed along with this agreement. In respect of technical information 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 whic....
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....esign documentation outside India and supply to the owner i.e. the assessee for designing, engineering, construction, commission, operation and maintenance of the plant. At this juncture, Mr. Khare has stressed upon the point that the process design documentation was nothing but part and parcel of the 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 lear....
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....id foreign company had a PE in India. otherwise not. Reliance was placed on Calcutta Bench of Tribunal in the case of Graphite Vicarb India Ltd. vs. ITO. Further, extending his argument, he has mentioned that an interesting issue came up before Tribunal, Bench of Delhi in the case of DCM Ltd. vs. ITO (1989) 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 docum....
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....breach of the terms of agreement only, the assessee was made responsible to return back only the technical information and not the process design documentation. Supporting the view taken by the learned CIT(A), the learned Authorised Representative has concluded that necessary aspects have rightly been taken 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, o....
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....ow fees could not be said to be business profits in the hands of foreign company and thus the requirement of having a PE in India for it to be taxable in India was held not necessary and those receipts, as per the said decision, fell within the definition of "royalty" and held as exigible to tax in India under art. 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, ....
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....d amounts in Federal Republic of Germany net of taxes, cess and duty, etc. This clause is in dispute because in respect of consideration pertaining to process design documentation, the order under s. 195 was passed by the AO through which the assessee was held responsible to deduct tax at source @ 20 per cent on the remittable 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 ....
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....ndia even though the know-how is used in India. So, a clarification was made by this circular and the said section clearly specified the circumstances under which the royalty income was subject to tax. The definition appears to be wide enough to cover various kinds of royalties. But, one has to examine s. 9 as a whole because 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. ....
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....he payer's tax unless the recipient also resides in the same State or is taxable in that State. Otherwise, they forbid the deduction. The question whether the deduction should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, is dealt with in para 4 of art. 24." Whilst the 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 definiti....
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....and the rights involving consideration in the form of a substantial lump sum payment has duly been considered as is the case in hand. So, in view of this tax convention between OECD member countries, no ambiguity is left and by the application of s. 90 of the IT Act as well as the law laid down in the case of Davy Ashmore, the article of this convention has to 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, t....
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....id to a resident to the other Contracting State is subject to tax in that other State but an exception is prescribed in cl. 5 of this article, according to which, if beneficial owner of the royalty being a resident of a Contracting State carries on business in the other Contracting State in which the royalty arises through a PE situated therein and the right in respect of royalty 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 arti....
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.... held that the payment was in the nature of royalty covered by art. X(e), thus subject to tax as provided in art. III(6) of DTAA. So, the question before the Tribunal was whether such supplying of drawings and designs was an outright sale and consideration paid was whether a commercial profit of Japanese company within the meaning of art. ill of DTAA. The question was answered in affirmative, 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 th....
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....aid down was that the decisions of Hon'ble Supreme Court has to be followed and the issue settled by the apex Court generally reaches to its finality. Undoubtedly, we have to follow the ratio laid down in this decision as well because all the subordinate Courts are duty-bound to adhere to the law of the land. Again, the decision cited by the Revenue was the case of CIT vs. Podar Cement (P) 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....
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....ment has to be read as a whole unless some part of which is illegal. Since this precedent is in favour of the assessee, therefore, while dealing with the cases cited by the learned Authorised Representative, Mr. Khare, we will refer it again. 19.2 An important decision of Bangalore Bench in the case of AEG Aktiengesselschaft vs. IAC was cited wherein the decision in the case of CIT vs. Davy Ashmore India 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....
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....royalty" and were exigible to tax in India under art. VIII-A of DTAA. In that case as well, the DTAA was between India and Germany, as in the present appeal. Whether this decision is in line with the facts in the present appeal, we have examined few important clauses of the agreement between the contracting parties. In that case, the AO has given a factual finding which was reproduced by the respected Co-ordinate 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 ....
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....year when the amount shall be paid and not in the year when the fixed deposit of the bank was made as a bank guarantee. Without much further elaboration, we want to mention that a particular case law has to be applied in the context it was rendered and not otherwise. About the admissibility of this appeal, one more argument as raised by Mr. Mishra, the learned Departmental Representative, that the said foreign company could have filed 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....
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...., that the provisions of s. 30(1A) which required that a person seeking to file an appeal thereunder, must have first deducted tax at source and paid the tax deducted to the Government, could not apply to the case of a person contending that the person to whom he made the payment was not a nonresident. No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly. The question 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 d....
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....t are few decisions of Tribunal, Pune Bench, namely, in the cases of Be-Delft Electronics and Toshniwal Instruments Ltd. Both these decisions were on the subject of "royalty" as well as on the subject of "PE". The issue dealt with by the Co-ordinate Benches appears to be identical with the present appeal because in one of the case, the agreement has made a distinction from the "licensed product" and "technical information". Insofar as the payment against transfer of "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 a....
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....ly of know-how as well as for supply of information necessary for setting a plant, so the Hon'ble Calcutta High Court has held that 50 per cent of the amount was to be held in the nature of royalty and 50 per cent to be fees for technical services. Coming back to the decision of Be Delft Electronics, the Tribunal, on construction of the agreement between the assessee and the Indian company and the meaning and connotation of the word "royalty", held, inter alia, as 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....
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....all fours in the context of present appeal. We have also examined the decision of Special Bench in the case of Graphite Vicarb India where an Indian company entered into a collaboration agreement with a French company. The French company was to transfer outside India the technical know-how for the manufacture of graphite equipment, Clauses of the said agreement provided for a transfer of know-how on payment of a lump sum consideration of Rs. 1 million in three equal instalments. 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 s....
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....n the meaning of art. III of the DTAA between India and France and since, admittedly, the foreign company had no PE in India, it was not liable to be taxed in India." "Permanent establishment" defined 22. The next question for our consideration is the conditions to determine the PE in India. In this regard, support was drawn from the case of Swadeshi Polytex Ltd. It was held that since the admitted position was that the said foreign company did not have any business connection in India 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....
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....comprehensive technical information, know-how and supply of equipment by the foreign enterprise to the assessee. One more provision was there that the assessee was entitled to sub-license its right to another party in India. The payment condition was in four instalments. The view of the Revenue was that the assessee has simply acted as an agent and the payment was in the nature of royalty. On the other hand, the claim of the assessee was that the payment constituted business profits of the 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 al....
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....er wholly or partly, therefore, it was held that the said business were neither under the main definition nor under the inclusive part thereof, so that it could be said that the said foreign collaborator had a PE in India. For both the reasons assigned therein, the issue was decided in favour of the assessee. 23. Though the discussion, as made elaborately hereinabove, it is amply clear that the consideration in question did not fall under the category "royalty". However, one cannot ignore a decision of Hon'ble apex 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 ....
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....ion cited as. Therein as well, the meaning of royalty was defined and held that the amount paid for supply of technical know-how for designing, construction and operation of plant in India was not in the nature of royalty as defined in DTAA with Italy. To resolve the dispute, firstly, a finding was given that the said Italian company did not have a FE in India. A certificate to that effect was furnished confirming the absence of any FE in India. Thereafter, the clauses of agreement between the contracting parties were examined. There 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 Lt....