2013 (9) TMI 610 - AT - Income Tax

Royalty u/s 9(1(vi) - non resident assessee - lump sum payment - Whether the payment received is to be considered as capital gain or royalty income for the transfer of technology, know-how and trademark etc. - Taxability of the amounts received by the assessee in terms of the agreement for transfer of technology, know how and trademark to German Remedies/Cadila Health care Ltd. - Held that - The agreement had originally been entered into with German Remedies on 17.2.2003 but later on merger of German Remedies with Cadila Healthcare Ltd., a fresh agreement on the same terms and conditions was entered into with Cadila Healthcare Ltd. on 2.12.2003 - True nature of transaction cannot be determined only on the basis of the words transfer , assignor , assignee used in the agreement but on careful consideration of the real nature of transaction after taking into account the effect of all the clauses in the agreement. Clauses of the agreement shows that the assessee has not been given ownership right over the technical information and trademark and there are limitations placed on exercise of such rights by the assignee Assignee cannot use or utilize the technical information or the trademark for sale of products either directly or indirectly outside the territory without prior approval of the assessee, which would be at its absolute discretion - Further the assignee cannot license or assign or transfer the technical information and trademark to any person other than the Cadila affiliates - There are also several restrictions on the assignee in the matter of use of technology, know how and trademark which makes it quite clear that the assignee has not been given ownership rights and only right to use - Such payment for use of technical information and know how has to be considered as royalty both under the provisions of Income Tax Act and under the provisions of DTAA between India and Germany even if the payment is lump sump and not recurring - The royalty is taxable in India under section 9(1)(vi) as well as under the provisions of DTAA Decided against the Assessee.

Issues Involved:
1. Taxability of sums received by the assessee from M/s German Remedies Ltd/Cadila Healthcare Ltd for transfer of technology, know-how, and trademark as royalty or capital gain.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Germany.
3. Definition and interpretation of "royalty" under the Income Tax Act and DTAA.
4. Examination of the nature of the agreement and its terms.

Detailed Analysis:

1. Taxability of Sums Received:
The assessee, a German pharmaceutical company, received payments from M/s German Remedies Ltd (later merged with Cadila Healthcare Ltd) for transferring technology, know-how, and trademark. The assessee claimed these payments as exempt, treating them as capital gains under the DTAA between India and Germany. However, the AO contended that the payments were taxable as royalty under section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA.

2. Applicability of DTAA:
The assessee argued that under Article 13(5) of the DTAA, capital gains from the alienation of such property are taxable only in the country of residence (Germany). The AO, however, noted that the payments were for the use of technology and trademarks, thus qualifying as royalty under Article 12 of the DTAA, which is taxable in India.

3. Definition and Interpretation of "Royalty":
The AO referred to the definition of "royalty" under Explanation 2 to section 9(1)(vi) of the Income Tax Act, which includes payments for the transfer of rights in patents, inventions, models, designs, secret formulas, processes, or trademarks. The term "royalty" in the DTAA also includes payments for the use of or the right to use any trademark, design, model, secret formula, or process. Therefore, the AO concluded that the payments received by the assessee were for the use of technology and trademarks, thus taxable as royalty.

4. Examination of the Nature of the Agreement:
The CIT(A) examined the agreement's clauses, noting that the assignee could not use the technology or trademarks outside the defined territory without the assignor's approval. The agreement also included confidentiality clauses and restrictions on transferring the technology and trademarks to third parties. These factors indicated that the assessee retained ownership rights, and the payments were for the use of the technology and trademarks, not for their transfer. The CIT(A) upheld the AO's decision, considering the payments as royalty.

The Tribunal considered the arguments and judgments cited by both parties. The assessee's reliance on the terms "assign" and "transfer" in the agreement and the definition of "transfer" under section 2(47) of the Income Tax Act was noted. However, the Tribunal emphasized that the true nature of the transaction should be determined by considering all clauses of the agreement. The restrictions on the assignee's use of the technology and trademarks indicated that the payments were for their use, not for their transfer.

The Tribunal also referred to previous decisions where similar payments were held as royalty. The Tribunal concluded that the payments received by the assessee were for the use of technology and trademarks, thus taxable as royalty under both the Income Tax Act and the DTAA.

Conclusion:
The Tribunal upheld the orders of the CIT(A), taxing the payments as royalty in both assessment years. The appeals of the assessee were dismissed. The payments were considered taxable as royalty under section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and Germany. The Tribunal emphasized that the nature of the agreement indicated that the payments were for the use of technology and trademarks, not for their transfer, thus taxable in India.

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