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2011 (3) TMI 24 - HC - Income TaxTDS - The assessee is a manufacture of sugar had entered into an agreement dated 12.10.1983 for transfer of comprehensive technical information, know-how and supply of equipment with Tate, London - The said agreement envisaged payment of a sum of ₹ 1,55,000 in four (4) instalments towards supply of TALO processes - IAC gives two noc for the remittance of the money after deducting tax @ 20% - 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 Since the definition of royalty in DTAA has a limited scope, the remittances in issue cannot be construed as royalties, therefore, as is correctly concluded by the Tribunal, against the remittances in issue, tax at source could not have been deducted. We are also in agreement with the Tribunal that these payments could only constitute business profits of Tate - Appeal by the revenue is dismissed
Issues Involved:
1. Whether tax was to be deducted at source on payments made under the Technical Collaboration Agreement. 2. Interpretation of the definition of 'royalty' under Article XIII(3) of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom. 3. Determination of whether the payments constituted business profits or royalties. 4. Applicability of the Income Tax Act in the context of DTAA provisions. Issue-wise Detailed Analysis: 1. Whether tax was to be deducted at source on payments made under the Technical Collaboration Agreement: The primary question of law was whether tax was to be deducted at source on payments made to M/s. Tate and Lyle Industries Ltd., London under the Technical Collaboration Agreement dated 12.10.1983. The assessee, a manufacturer of sugar, entered into this agreement for the transfer of comprehensive technical information and know-how from Tate. The IAC mandated the deduction of tax at source at the rate of 20% on the remittances made to Tate, which was contested by the assessee. 2. Interpretation of the definition of 'royalty' under Article XIII(3) of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom: The CIT(A) held that the remittances fell within the purview of "payments of any kind" under Article XIII(3) of the DTAA, thus constituting royalty. However, the Tribunal observed that the definition of royalty in the DTAA was narrower than that in the Income Tax Act. The Tribunal noted that the DTAA's definition did not include the transfer of all or any rights in respect of a patent, invention, model, design, secret formula, or process, which are included under the Income Tax Act. The Tribunal concluded that the payments did not constitute royalty as per the DTAA. 3. Determination of whether the payments constituted business profits or royalties: The Tribunal concluded that the consideration paid by the assessee for the transfer of drawings, designs, etc., did not constitute royalty under Article XIII of the DTAA. Instead, it constituted business profits of Tate, which could not be taxed in India as Tate did not have a permanent establishment in India. The Tribunal's decision was based on the agreement's terms, which indicated a complete transfer of technology and know-how on a non-exclusive basis. 4. Applicability of the Income Tax Act in the context of DTAA provisions: The Tribunal and the High Court both upheld that in case of a conflict between the provisions of the Income Tax Act and the DTAA, the provisions of the DTAA would override. The High Court agreed with the Tribunal's conclusion that the remittances did not fall within the definition of royalty under the DTAA. The High Court emphasized that the agreement provided for a complete transfer of technology and know-how, not merely a right to use it, thus taking it out of the ambit of the definition of royalty in the DTAA. Conclusion: The High Court concluded that the remittances made by the assessee to Tate did not constitute royalties under Article XIII(3) of the DTAA. Consequently, tax at source could not have been deducted on these remittances. The payments were considered business profits of Tate, which could not be taxed in India due to the absence of a permanent establishment. The question of law was answered in favor of the assessee and against the revenue, dismissing the references.
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