TaxTMI 
TaxTMI 
2010 (10) TMI 480
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....e learned representative submitted that the assessee has purchased the know-how and paid a lump sum of US $ 7.50 lakhs. The foreign company namely M/s Vesil SPA, Italy has to transfer the entire document and material in relation to technical know-how for manufacturing of lenses. The learned counsel submitted that this agreement is not a contract for providing technical services. According to the learned counsel, this is a outright purchase of know-how for manufacturing activity. Therefore the payment made by the assessee was a business receipt of the foreign company and hence it is not taxable in India. According to the learned representative, the foreign company has no permanent establishment in the territory of India. Therefore both under the Income-tax Act and under the Double Taxation Avoidance Agreement between the Government of India and Govt. of Italy, the business receipt of a foreign company which has no permanent establishment in India are excluded from the taxation. 3. Further, the learned representative submitted that Article 3 of the Agreement provides for payment of fees and consideration. As per this article, the assessee has to pay the cost of know-how on 3 instalm....
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....ive, it is not a case of non-deduction of tax at source. The cases relied upon by the Assessing Officer as well as the CIT(A) are in respect of non-deduction of tax at source while making the payment. In this case, the learned representative submitted that the tax was deducted and the assessee also filed return of income in representative capacity and the issue is only the refund of the amount paid to the Government after deduction of tax at source. Therefore, the case laws relied upon by the CIT(A) is not applicable to the facts of this case. On a query from the Bench, regarding the 2nd and 3rd instalments, the learned representative for the assessee clarified that the assessee had not paid the 2nd & 3rd instalments in pursuance to the agreement. According to the learned representative for the assessee, only first instalment was paid by the assessee. 5. The learned representative again placed reliance on the decision of the Pune 'A' Bench of this Tribunal in the case of Dy. CIT v. Finolex Pipes Ltd. [2008] 26 SOT 5 (Pune)(URO) and submitted that when the payment was made for transfer of design, document to German Company, it was held by the Pune Bench that payment was by way of o....
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....fore, according to the learned representative the judgment of the House of Lords in Rolls Royce Ltd. (supra) also supports the case of the assessee. Once it is treated as a trade receipt in the hands of the foreign company and in the absence of permanent establishment in India, the same is not liable for taxation in India. Therefore, according to the learned representative the assessee is entitled for refund of Rs. 13,11,189. 9. On the contrary Smt. Vasundhara Sinha, the learned departmental representative submitted that there was no outright sale of technical know-how as claimed by the assessee. According to the learned representative the assessee was given a right to use the technical know-how therefore what was paid by the assessee is only a Royalty and not a purchase price. Therefore, the payment made by the assessee cannot form part of trading receipt of the foreign company. The learned departmental representative referred to section 90(2) of the Income-tax Act and submitted that whenever the Government of India entered into an agreement with Government of any other country, in order to avoid double taxation the assessee to whom such agreement applies, the provisions of the I....
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....erefore, the definition given in the Income-tax Act can be safely adopted to find out whether it is a technical service or not. Learned Representative also placed reliance on the judgment of the Madras High Court in CIT v. Retter Ingolsteadt Spinnerimaschinenbau AG [2006] 285 ITR 199. 11. Referring to Article 18 of the agreement between the parties learned representative submitted that capital goods means all the goods purchased by the assessee from the foreign company to produce the products. Referring to article 2 of the agreement the learned Representative submitted that what was given to the assessee is only a right to use the technical know how. Therefore, there was no out right sale of the technical know how by the foreign company. If it is a right to use what was paid by the assessee is only a royalty. If there was a outright sale and transfer of technical know how then the payment made by the assessee to the foreign company may be a business receipt in the hands of the foreign company. Since the agreement clearly provides for right to use the technical know how according to the learned DR what was paid by the assessee is a 'royalty' therefore, it is taxable in India. 12. ....
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....early shows that the payment made for right to use technical know how would fall within the term 'royalty', therefore, it is taxable in India. Therefore, according to the learned Representative, claim of the assessee that they have purchased the technical know how on outright sale is not justified. Therefore, assessee is not entitled for refund of Rs. 13,11,189. On a query from the Bench, whether the assessee had paid the 2nd and 3rd instalments as per the agreement, the learned representative, very fairly submitted that nothing on records to suggest that the assessee had paid the 2nd and 3rd instalments. Therefore, the learned departmental representative submitted that the assessee would not have paid the 2nd and 3rd instalments as clarified by the learned representative for the assessee. The learned departmental representative placed reliance on the following judgments: 1. Judgment of the Apex Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 3774. 2. Authority for Advance Ruling in Dun & Bradstreet Espana S.A., In re [2005] 272 ITR 995 (AAR - New Delhi). 3. The judgment ....
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.....1.1 of the agreement between the foreign company and the Indian company. "4.1.1 The information shall be transferred to LICENSEE either through appropriate technical documents or other equally effective means, which shall be prepared by LICENSOR in the light of experience possessed by LICENSOR in respect of the products at the time of delivery of such documents." 16. Article 5.2 provides for exclusive use of the technical know- how by the Indian company. No doubt, this Article 5.2 says that the Indian company shall not sub-lease the agreement to other party without consent of the foreign company. However, Article 5.3 enables the Indian Company to transfer and assign the agreement in favour of any company or an association or organization. The only obligation of the Indian company is to inform the foreign company about the transfer or the assignment. For the purpose of convenience, Article 5.3 is reproduced hereunder : Article 5.3 "5.3.1 Transfer and assignment.-Licensee shall be at liberty to transfer, entrust or assign this agreement to any existing association, organization or company or to any association, organization or company which may be formed for the purpose of the w....
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....our opinion, the Indian company purchased the technical know-how outright sale. 18.One more important clause in the agreement which was not taken into consideration by the lower authorities is Article 2.7 of the agreement. Under Article 2.7 of the agreement, the foreign company clearly given the patent right to the Indian company. Article 2.7.3 of the agreement enables the Indian company to get the patent right registered in the name of the Indian company during the period of the agreement. If the intention of the parties is not to sale the technical know-how to the Indian company then the foreign company would not have allowed the Indian company to register the patent right in the name of the Indian company. More over, besides the lump sum payment of three instalments the Indian company has to pay royalty to the foreign company at US $ 0.10 per pair of lenses on the sales in India and US $ 0.16 per pair of lenses on sales outside India. Therefore, a clear distinction was made between the lump sum payment for sale of technical know-how and the royalty for usage of the patent right during the period of agreement. In view of the above, the lump sum payment made by the Indian company....
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....al by the assessee before the Apex Court it was found that the assessee-company was in the business of manufacturing of antibiotics and penicillin. Even after the agreement with the Japan Company the assessee continued to manufacture penicillin. The Apex Court further observed that mere improvement or updating the fermentation process would not necessarily amount to an enduring benefit. The Apex Court further found that the outlay under the agreement was for the better conduct and improvement of the existing business. Therefore, the expenditure incurred by the assessee is of revenue expenditure. 20.The CIT (A) after referring the observations of the Apex Court in the case of Alembic Chemical Works Co. Ltd. (supra), more particularly at page No. 390 of the ITR found that the case of the assessee is similar to one in the case of Alembic Chemical Works Co. Ltd. (supra). For the purpose of convenience we are reproducing the observations of the Apex Court at page 390 of ITR 177. "It would, in our opinion, to unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any p....
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.... to patent right and transfer and assign the agreement itself, in our opinion, what was transferred to the assessee is exclusively technical know-how on outright sale. 22. We have also carefully gone through the decision of the Authority for Advanced Rulings in IMT Labs (India) (P.) Ltd.'s case (supra). In the case before the Authority for Advanced Rulings the applicant-company entered into an agreement with USA Company for securing license for a particular software which the applicant-company was entitled to use. The applicant-company has to pay license-fee for the software. The issue before the Authority for Advanced Rulings was whether the periodical payments made by the applicant-company to the non-resident USA company having no office/permanent establishment in India in connection with use of software are subject to tax deduction at source ? While examining this question, the Authority for Advanced Rulings found that the periodical payments made by the applicant-company are in the nature of royalties and fees for technical service, therefore, taxable under Article 12 of the Double Taxation Avoidance Agreement (DTAA). The Authority for Advanced Rulings distinguished its earlie....
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....Calcutta High Court found that what was received by the foreign company is a 'royalty'. In the case before the Calcutta High Court there was no separate payment for purchase of technical know how. The Indian company has to pay 5 per cent on net selling of the Vitamin-D. 24. However, in the case before us, apart from a fixed percentage on sale on lenses in the domestic market as well as in the foreign market the Indian company has to pay a lump sum payment for purchase of technical know how. The foreign company has also permitted the Indian company to register the patent right in the name of the Indian company in India. The Indian company cannot register the patent in its name, unless, the Indian company became the owner of the product in India. Therefore, the right given to the Indian Company to register the patent in its name is nothing but transfer of technical know how. Moreover, an option was given to the Indian company to transfer/assign the agreement in favour of other company/organization. The Indian company was also given the right to continue to use the technical know how even after expiry of the agreement or its termination. In those facts and circumstances, in our opini....