2004 (10) TMI 86 - AAR - Income Tax

Applicant owned the technology information pertaining to the manufacture of nutritional food supplement product manufactured & sold by Pfizer India, another group company, under the trademarks are registered in India no royalty paid by Indian company in view of provisions of the Income-tax Act, receipt by the applicant from the transfer of know-how and technical information in the form of a dossier under the sale and purchase of technology agreement, would not be chargeable to tax in India

Issues Involved:
1. Taxability of income derived from the transfer of know-how and technical information.
2. Classification of the receipt as capital gains or royalty.
3. Situs of the capital asset transferred.
4. Applicability of Section 5(2) and Section 9 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Income Derived from the Transfer of Know-how and Technical Information:
The applicant, a non-resident company, transferred technology information to EAC Nutrition Ltd., Denmark, and received a consideration of US $5 million. The applicant sought a ruling on whether this income is taxable in India under the Income-tax Act, 1961. The applicant argued that the transaction was an outright transfer of know-how, constituting a capital receipt. The transfer occurred outside India, and the dossier containing the technical information was handed over in Bangkok. The applicant contended that since the receipt was outside India, it should not be taxable in India.

2. Classification of the Receipt as Capital Gains or Royalty:
The applicant argued that the consideration for an outright transfer of know-how is a capital receipt unless the recipient is in the business of buying and selling know-how. Citing judgments from the Bombay High Court and the Supreme Court, the applicant maintained that the transfer of technology information constituted a capital asset. Therefore, any gains from its transfer should be considered capital gains and not royalty. The applicant also referenced the definition of 'Royalty' under Explanation 2 to Section 9(1)(vi) of the Act, which excludes income chargeable under the head capital gains.

3. Situs of the Capital Asset Transferred:
The applicant contended that the technology information was situated in Bangkok at the time of transfer. The Indian company, which had been using the technology under a license, terminated the license, and the technology reverted to the applicant. The applicant argued that the capital asset was not situated in India at the time of transfer, and thus, no gains accrued in India. The department, however, argued that the technology information was developed and used in India, making it taxable in India.

4. Applicability of Section 5(2) and Section 9 of the Income-tax Act, 1961:
The applicant argued that under Section 5(2), income of a non-resident is taxable in India if it is received or accrues in India. Since the payment was received outside India, it should not be taxable in India. Under Section 9(1)(i), income is deemed to accrue in India if it arises through the transfer of a capital asset situated in India. The applicant contended that since the technology information was situated outside India, the income should not be deemed to accrue in India. The department, however, argued that the payment for the transfer of technical information should be considered royalty under Section 9(1)(vi) and thus taxable in India.

Judgment:
The Authority for Advance Rulings concluded that the transfer of technical information in the form of a dossier was a transfer of a capital asset. The technical know-how, both in tangible and intangible form, reverted to the applicant upon termination of the license. Consequently, the situs of the capital asset was outside India at the time of transfer. Therefore, the receipt from the transfer was not chargeable to tax in India under Section 5(2)(ii) read with Section 9(1)(i) of the Act. The ruling stated that the receipt by the applicant from the transfer of know-how and technical information under the sale and purchase agreement dated November 30, 2002, would not be chargeable to tax in India.

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