1999 (1) TMI 529 - AT - Income Tax

Summary

Issues Involved:
1. Classification of payments as 'royalty' under Article 13(3) of the DTAA between India and Italy.
2. Taxability of the payments as 'Business Profits' under Article 7(1) of the DTAA in the absence of a permanent establishment.
3. Determination of whether the payments constitute an outright purchase of technical know-how.

Summary:

1. Classification of Payments as 'Royalty':
The assessee contested the CIT(A)'s classification of the lumpsum technical know-how fees of USD 250 lacs and basic process engineering documentation fees of USD 35 lacs as 'royalty' under Article 13(3) of the DTAA between India and Italy. The CIT(A) upheld the Assessing Officer's decision, which was based on the provisions of Explanation-2 to section 9(1)(vi) of the Income-tax Act, asserting that these payments were indeed in the nature of royalty and thus taxable in India. The Tribunal, however, concluded that the DTAA's definition of 'royalty' should prevail over the domestic law, as per section 90 of the Income-tax Act. The Tribunal emphasized that the DTAA's definition of royalty did not encompass the payments made for the outright transfer of technical know-how and documentation, distinguishing it from mere usage rights.

2. Taxability as 'Business Profits':
The assessee argued that the payments should be classified as 'Business Profits' under Article 7(1) of the DTAA, given that the Italian company, Technimont, S.P.A., did not have a permanent establishment in India. The Tribunal agreed, noting that the payments were for the acquisition of technical know-how and basic process engineering documentation, which constituted business profits for the Italian company. Consequently, these payments were not taxable in India under the DTAA provisions.

3. Outright Purchase of Technical Know-How:
The Tribunal examined the nature of the payments and the terms of the agreement between the assessee and the Italian company. It was determined that the payments were for the outright purchase of technical know-how and documentation, rather than for the use or right to use such know-how. The Tribunal noted that the agreement included provisions for the transfer of comprehensive technical information and documentation, which supported the assessee's claim of an outright purchase. The Tribunal also highlighted that the agreement allowed the assessee to use the technical know-how without any further payments after a specified period, further supporting the characterization of the payments as business profits rather than royalty.

Conclusion:
The Tribunal concluded that the payments made by the assessee to the Italian company did not constitute 'royalty' under the DTAA and were instead classified as 'Business Profits,' which were not taxable in India due to the absence of a permanent establishment of the Italian company. The appeal of the assessee was allowed, and the order of the CIT(A) was overturned.