TaxTMI 
TaxTMI 
2004 (9) TMI 301
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....ment in consideration of supply of technical documentation, on the facts of this case, is to be treated as 'royalty' or not. 3. The aforesaid neatly identified legal issue is set out in a narrow compass of undisputed material facts. The assessee, a Russian company, possessing knowledge and experience in the field of manufacturing technique of a product termed as "UR 9168 Polyurethane Wire Enamel", entered into agreement dated 8th March, 1994, with an Indian company, by the name of Intec Polymer Ltd. (IPL, in short). Under this agreement, the assessee-company was to provide to IPL a "non-exclusive right to use the 'know-how' for the purpose of realisation of the process and the technical process and the special process in the territory and sell the licensed product and the special product in the territory and zone of non-exclusive right". Under this arrangement, the assessee was, upon a request from the IPL, to render "technical assistance". The terms of rendering the technical assistance were set out in article 3 of the agreement which is reproduced below for ready reference: "The technical documentation shall be drawn up in conformity with the norms and standards of the lice....
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....sp; commissioning protocol by the parties, but within 12 months from the date of second instalment, if delay in successful commissioning is not attributable to the assessee. Current fees (royalty) : 4 per cent of the selling price of the  ....
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.... by the assessee-company cannot be treated as 'royalty' exigible to tax under article 12 of the India Russia DTAA. The CIT(A) thus reversed the order of the Assessing Officer and upheld the contentions of the assessee. 4. Revenue is aggrieved and in appeal before us. 5. We have heard Shri Mohit Kapoor, learned departmental representative, and Shri Divyesh Shah, learned counsel for the assessee. We have also carefully perused the material before us and duly considered factual matrix of the case as also the applicable legal position. 6. We consider it desirable to reproduce article 12 of the DTAA, dated 4th September, 1989, entered into by India with the Union of Soviet Socialist Republic and which was extended to the Russain Federation vide Government Notification dated 30th December, 1992, for ready reference: "Article 12 Royalties and fees for technical services: 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to....
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....ties or fees for technical services are borne by such permanent establishment, then such royalties or fees for technical services shall be demeed to arise in the State in which the permanent establishment is situated. 7. Where, by a reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount or royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In such case the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this agreement." 7. Learned counsel for the assessee fairly does not dispute that the aforesaid provisions of the India Russia DTAA would apply even to the payments of lump sum consideration for the technical assistance, but he contends that the same shall not apply to the facts of this case because it is a case of outright sale of technical drawings and in view of the Hon'ble Calcutta High Court's judgment in the case of Davy Ashmore India Ltd. That ....
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....uch an outright sale and transfer cannot be regarded as in the nature of payment for use of, or right to use of, such patents, designs or models, plans, secret formulae or process, etc. Accordingly, it cannot be treated as 'royalty', as are the normal connotations of this expression in DTAAs including India Russia DTAA. However, this decision does not lay down the general proposition that consideration for transfer of designs and drawings in all cases is to be treated as consideration for outright sale of such designs and drawings. Let us now go back to the facts of the case before us. 9. An outright sale of designs and drawings essentially implies unfettered rights of the assessee to use the same. However, a plain reading of the agreement would establish that it is not so in the present case. Under clause 2.1 of the agreement, the assessee had granted the IPL nonexclusive right to use the 'know-how' for a specific purpose and this 'know-how' included the technical designs and drawings set out in clause 3 of the agreement. Under clause 12.2 IPL could not assign any rights under the said agreement, including thus the right to use the designs and drawings, to anyone else. In any e....