2010 (10) TMI 480 - AT - Income Tax

DTAA Supply of technical know how - The foreign company has no permanent establishment in the territory of India - Refund - whether the payment made by the assessee is for purchase of technical know-how or it is a payment for technical services provided by the assessee - Article 5.3.1, there is no restriction to transfer or assign the agreement to any association or organization or a company - . Article 5.9 of the agreement specifically says that after expiry of the agreement or its termination, the Indian company shall continue to use the very same technical know-how for its business and other information supplied by the foreign company - In view of this specific clauses in Articles 2.7 and 5.3 of the agreement with regard 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 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) - there was a transfer of technical know how in favour of Indian Company, therefore what was received by the Italy-company is a business receipt - Since admittedly there is no permanent establishment in India, the same is not liable to be taxed in India - In the result, appeal of the assessee stands allowed

Issues Involved:
1. Taxability of US $ 7.50 lakhs paid by the assessee to M/s Vesil SPA, Italy.
2. Determination of whether the payment was for the purchase of technical know-how or for technical services.
3. Application of Double Taxation Avoidance Agreement (DTAA) between India and Italy.
4. Entitlement of the assessee to a refund of Rs. 13,11,189 deducted at source.

Detailed Analysis:

1. Taxability of US $ 7.50 lakhs:
The primary issue is whether the lump sum payment of US $ 7.50 lakhs made by the assessee to M/s Vesil SPA, Italy, is taxable in India. The assessee argued that the payment was for the outright purchase of technical know-how, which is a business receipt for the foreign company and not taxable in India under the DTAA between India and Italy. The foreign company had no permanent establishment in India, which is a critical factor in determining taxability under the DTAA.

2. Purchase of Technical Know-How vs. Technical Services:
The assessee contended that the payment was for the outright purchase of technical know-how, citing Article 2 and Article 3 of the agreement, which detailed the transfer of technical documents and materials. The agreement also provided for royalty payments based on sales, which were separate from the lump sum payment. The department argued that the payment was for the right to use technical know-how, thus constituting royalty and technical services taxable in India. The tribunal examined the agreement's clauses, including the right to transfer and assign the agreement, the right to register patents, and the continuation of technical know-how use after the agreement's termination, concluding that the payment was indeed for an outright purchase.

3. Application of DTAA:
The tribunal referenced the DTAA between India and Italy, which stipulates that business receipts of a foreign company without a permanent establishment in India are not taxable in India. The tribunal also considered various judgments, including the Apex Court's decision in Union of India v. Azadi Bachao Andolan, which emphasized that benefits under the DTAA must be provided even if they contradict the Income-tax Act. The tribunal concluded that the lump sum payment for the outright purchase of technical know-how falls under business receipts and is not taxable in India due to the absence of a permanent establishment.

4. Refund of Rs. 13,11,189 Deducted at Source:
The assessee had deducted tax at source on the first installment payment and sought a refund. The department's reliance on cases related to non-deduction of tax at source was deemed irrelevant since the tax was deducted. The tribunal found that since the payment was for the outright purchase of technical know-how and not taxable in India, the assessee was entitled to a refund of the deducted amount.

Conclusion:
The tribunal concluded that the lump sum payment made by the assessee to M/s Vesil SPA, Italy, was for the outright purchase of technical know-how, constituting a business receipt. As the foreign company had no permanent establishment in India, the receipt was not taxable under the DTAA between India and Italy. Consequently, the assessee was entitled to a refund of Rs. 13,11,189 deducted at source. The appeal of the assessee was allowed, and the order of the lower authorities was set aside.

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