1982 (3) TMI 7 - HC - Income Tax

Collaboration Agreement, Double Taxation Avoidance Agreement, Income Deemed To Accrue Or Arise In India, Royalty

Summary

Issues:
Interpretation of tax liability on remittances to a foreign company for technical services and professional activities under the Agreement for Avoidance of Double Taxation (ADT) between India and France.

Analysis:
The petitioner, a limited company engaged in manufacturing graphite electrodes, entered into an agreement with a French company for improved techniques and know-how. The French company demanded payment for supervision costs and detailed engineering work for modifying the furnaces, necessary for enhancing product quality. The Ministry granted approval subject to Indian tax payment. The petitioner sought clarification, which confirmed that the payment was for supervision charges, not designs. The French company also agreed to conduct furnace trials for a fee, approved by the Ministry. However, the Income Tax Department directed deduction of income tax from the remittances, considering them as royalty payments, leading to the petitioner seeking a writ of certiorari and mandamus to challenge the orders.

Respondents contended that the payments were royalty for improved designs, not falling under ADT clauses exempting tax. The key question was whether the remittances constituted royalties taxable under the Income Tax Act. The ADT between India and France aimed to avoid double taxation, with specific provisions for different types of income. Respondents argued that the payments were royalties under ADT Article VII, while the petitioner claimed they fell under Article XI or XVI.

The Court analyzed the relevant ADT articles, specifically Article VII on royalties, Article XV on professional services, and Article XVI on technical services. It noted that the payments were not for the use of patents or know-how but for technical services enabling the petitioner to adopt modified designs, falling under Article XVI. Similarly, the payment for furnace trials was for technical services, not royalty, as per Article XV or XVI. Therefore, the payments were not taxable in India, and the respondents were not authorized to withhold the NOC for tax deduction.

Consequently, the Court allowed the petition, quashing the orders to deduct income tax from the remittances and directing the issuance of the NOC without tax deduction. The respondents were instructed to facilitate the remittances to the French company without insisting on tax payments. The respondents were also directed to bear the costs of the petition.