2014 (12) TMI 887 - AT - Income Tax

Remittances to foreign collaborator - Requirement to deduct TDS - Whether the assessee is liable to deduct tax at source u/s 195(1) of the Act in respect of the Design engineering fee, commercial services and other know-how contained in the Technology License agreement dated 30.06.1994 with Paltough Held that - The agreement envisages payment for providing design engineering services and technical know-how for erection of plant, providing of commercial services; and, providing of technical and process know-how to enable assessee to manufacture the products - as per the assessee, with respect to the fee paid as per Clause 1(v) towards design engineering vis- -vis plant know-how, no part of the income of the foreign company arises in India - since the payment relates to acquisition of plant know-how in the form of technical and engineering data, designs, etc. it cannot also be treated as Royalty also. Relying upon Commissioner of Income Tax Versus Maggronic Devices Pvt. Ltd. 2009 (10) TMI 38 - HIMACHAL PRADESH HIGH COURT wherein it has been held that the agreement whereby the know-how delivered to the assessee therein was to remain its property for its full and free use thereof - as per Clause 2(a) of the Agreement assessee is granted a permanent right to use and exploit the design engineering, which is qua the services provided in Clause 1(v) of the agreement - to the extent that the agreement envisages payment for obtaining plant know-how i.e. designing, characterization of plant and machinery, etc. the same cannot be considered as payments falling within the purview of Royalty thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh consideration, segregating the nature of remittances to the foreign collaborator. The amounts which are payable on account of acquisition of Plant know-how towards erection of plant and machinery to manufacture a licensed product, the same shall not be subject to tax at source - on the contrary, the payments made for technical Product know-how or Process know-how, the same are liable to be considered for deduction of tax at source; and, such services have been rightly considered by the CIT(A) to be in the nature of Royalty Decided in favour of assessee.

Summary

Issues Involved:
1. Liability to deduct tax at source under section 195(1) of the Income Tax Act, 1961.
2. Classification of payments as 'fees for technical services' or 'Royalty'.
3. Applicability of the judgment in CIT vs Maggronic Devices Pvt. Ltd.
4. Segregation of payments for Plant know-how and Product/Process know-how.

Detailed Analysis:

1. Liability to Deduct Tax at Source:

The primary issue in the appeals is whether the assessee is liable to deduct tax at source under section 195(1) of the Income Tax Act, 1961, in respect of payments made to its foreign collaborator, Paltough Ltd., Israel, under a Technology License Agreement dated 30.06.1994. The agreement involved the transfer of technology and technical know-how for manufacturing extruded PVC sheets. The Assessing Officer held that the payments were income accrued in India and thus required tax deduction at source, a stance contested by the assessee.

2. Classification of Payments as 'Fees for Technical Services' or 'Royalty':

The Assessing Officer and the CIT(A) classified the payments for design engineering services and commercial services as 'fees for technical services' and 'Royalty', respectively, under section 9(1)(vii) of the Act. The CIT(A) upheld the Assessing Officer's decision, asserting that the services provided under the agreement fell within the definition of 'Royalty', which warranted a tax deduction at source at the rate of 30%.

3. Applicability of the Judgment in CIT vs Maggronic Devices Pvt. Ltd.:

The assessee argued that the payments for design engineering services should not be classified as 'Royalty' based on the judgment in CIT vs Maggronic Devices Pvt. Ltd. The Himachal Pradesh High Court held that payments for technical and engineering design services for plant erection did not constitute 'Royalty' but were instead considered an outright purchase of plant know-how. The Tribunal found this judgment relevant for the current case, particularly for payments related to plant know-how.

4. Segregation of Payments for Plant Know-how and Product/Process Know-how:

The Tribunal emphasized the need to distinguish between payments for plant know-how and those for technical and process know-how. The former, as per the judgment in Maggronic Devices, should not be treated as 'Royalty' and thus not subject to tax deduction at source. However, payments for technical and process know-how clearly fall under the definition of 'Royalty' and are subject to tax deduction at source.

Conclusion:

The Tribunal set aside the CIT(A)'s order and remanded the case back to the Assessing Officer to segregate the nature of remittances. Payments for plant know-how related to the erection of plant and machinery should not be subject to tax deduction at source, aligning with the Maggronic Devices judgment. Conversely, payments for technical and process know-how should be treated as 'Royalty' and subjected to tax deduction at source. The Assessing Officer is directed to pass a fresh order after providing the assessee a reasonable opportunity of being heard.

Result:

The appeals of the assessee are partly allowed, with the Assessing Officer instructed to reassess the nature of the payments in accordance with the Tribunal's directives.