TaxTMI 
TaxTMI 
2011 (3) TMI 24
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent dated 12.10.1983 (in short 'agreement') for transfer of comprehensive technical information, know-how and supply of equipment with one Tate & Lyle Process Technology; a division of Tate & Lyle Industries Limited, London (hereinafter referred to as 'Tate'). 2.2 The said agreement envisaged payment of a sum of Rs.1,55,000 in four (4) instalments towards supply of documents concerning, what was known as "TALO processes". 2.3 It appears that Tate being a pioneer in sugar technology; was not only engaged in the manufacture of specialized equipment but was also in possession of know-how required for installation and operation of specialized equipment, processes and use of essential specialty chemical products, which assisted in elimination of use of lime stone and hard coke while, greatly conserving energy bringing about reduction in pollution as well as loss of sugar during manufacture of plantation white sugar. 2.4 The assessee wanting to adopt the "TALO processes" for its factory at Daurala, in India entered into the aforementioned agreement. 2.5 The first, of the four (4) instalments, was to be remitted to Tate on the execution of the aforementioned agreement. Accordi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to hold that for a payment to be construed as royalty under the provisions of Article XIII(3) of the DTAA, it made little difference whether the payments made were lump-sum or, were made periodically or, even on a recurring basis. For these reasons, the CIT(A) concluded by holding that "in the present case, it is clear that technical know how was provided by the foreign enterprise including lending of services of foreign technicians. The payment was clearly in the nature of royalty and it could not be said that payment had to be treated as commercial or industrial profits." 2.10 Consequently, the CIT (A) sustained the order of the IAC even while noting that there was no reasoning contained in the certificate issued by the IAC mandating the deduction of tax at source at the rate of 20% in respect of the remittances in issue. The CIT(A) was of the view that a reading of the order would show that the impugned certificate issued by the IAC was otherwise in accordance with law. 3. Aggrieved by the order of the CIT (A), the assessee carried the matter in appeal to the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal'). The Tribunal, in the impugned judgment, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ectual property and excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any information concerning the working thereof. The assessee, in our view, is right in submitting that the things for the transfer of which DCM agreed to pay to TL 81,55,000 as such squarely fell within these two exclusionary clauses which do not form part of the definition of the term 'royalty' under Article XIII(3) of the double taxation avoidance agreement. The Income Tax authorities in our view, were not right in being influenced by the term 'payments of any kind' preceding the definition of this term under the double taxation avoidance agreement." 3.1 In view of the aforesaid observations, the Tribunal came to the conclusion that the consideration paid by the assessee for transfer of drawings, designs, etc., outside India by Tate to the assessee did not constitute royalty "as contemplated under Article XIII of the DTAA". It went on to observe that the consideration received by Tate constituted business profits of Tate, which could not be taxed through assessee in India as Tate did not have a permanent establishment in India. 4. Being aggrieve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tain the intent of the parties based on the language employed in the agreement. For this purpose, the agreement in issue will have to be read as a whole and not in a piecemeal fashion. The first recital i.e., recital 'A' suggests that Tate was in possession of the necessary expertise i.e., the technical know-how, which is, broadly referred to as the 'TALO' processes used in the sugar industry. Recital 'B' indicates that the assessee was 'desirous of acquiring' technical know-how offered by Tate for its existing sugar factories in India. 7.1 Clause 1 specifies that the agreement envisages transfer of 'comprehensive technical know-how and also supply of equipment' by Tate to the assessee in order to enable it to adopt the 'TALO' processes. The said clause clearly provides that the term 'know-how' used in the clause (1) shall include the following:- ".... all trade secrets and technical information, tangible and intangible, including documents, process description, process flow diagrams, specification of speciality chemicals and TL's standards of purity and performance for these chemicals, equipment specifications, equipment layout, design, drawings, piping drawings, laboratory ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reement are conditional upon commissioning of the 'TALO' processes before 01.01.1987. 8. As is noticed above, we have only referred to what according to us, were the essential clauses of the agreement. A reading of the aforementioned clauses would show that what was intended by the parties was as follows :- (i) Tate would transfer to the assessee technical know-how for a lumpsum consideration of Rs.1,55,000 to be paid in the manner provided in clause 6 of the agreement. The agreement provided for transfer of "comprehensive technical information" and know-how, which included all trade secrets and technical information, designs and drawings, etc.; (ii) The transfer of technical know-how was on a non-exclusive basis, in order to enable the assessee to adopt 'TALO' processes, in respect of its existing factories in India, (iii) In addition to the above, the assessee had also the right to sub-licence the technology and/or the know-how transferred to it, to another Indian party, subject to the terms and conditions of sub-licence being agreed to by both 'Tate' and the assessee. 8.1 In our view, it is quite clear by virtue of the aforementioned agreement wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or model, plan, secret formula or process; (b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience; (c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting; But does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources." 9. A bare perusal of Article XIII(3) would show that the expression 'payments of any kind' is circumscribed by the latter part of the definition which speaks of consideration received (including in the form of rentals) for "use of or "right to use" intellectual properties. The Tribunal, in our view, rightly observed that the CIT(A) had erred in coming to the conclusion that the expression 'payments of any kind' was broad enough to include even an outright sale. To drive home this point the Tribunal, once again, has correctly drawn a distinction between the definition of royalty as appearing in the DTAA and that which finds mention in explanation 2 to section 9(1)(vi) of the IT. Act. A perusal of the pro....