2018 (10) TMI 1607 - HC - Income Tax

Royalty V/S fee for technical service - Payments liable to Income tax Act - scope of the work was for design of a new 3-valve cylinder head with AVL CCBR combustion system - DTAA India and Austria - Treatment to sum as royalty and bringing it to tax - claim of the assessee that the payment represent fee for technical services - revenue's plea is that clause 7 of the general terms and conditions would clearly show that the know-how and patents and the ideas introduced into the project shall remain the exclusive property of the Austrian company and therefore, what has been given to the assessee is only a right to use and therefore, the payment is royalty. Held that - We are unable to accept the submission made by the Revenue for treatment to sum as royalty for the reason that the engine has already been developed by the assessee and scope of the technical services agreement was only to design a new 3-valve cylinder head with a specified combustion system for considerable improvement of fuel efficiency, performance and meeting the Indian emission standards. All products, design of the engines and vehicles are supplied by the assessee. On completion all the drawings are also delivered by the Austrian company to the assessee. The entire project was carried out in Austria and no part of the project was performed in India. Thus, in our considered view the CIT(A) rightly held that the payment does not constitute royalty. In the assessee's own case for the assessment years 1991-92, 1992-03 1994-05 1999 (5) TMI 69 - ITAT MADRAS-A a similar agreement came up for interpretation. In the said agreement, the Austrian company was to render technical assistance for consideration to be paid in four installments for improvement of fuel efficiency of carburetters manufactured by the assessee for two wheeler engines. The Tribunal after considering the admitted facts, pointed out that the Austrian Company was not a manufacturer of two wheelers and was only a consultant and according to the terms of the agreement between the two companies the entire technical know-how was absolutely to be passed on to the assessee and there was no grant of any right to use any property of the Austrian company and the payment could only be termed as 'fees for technical services' and could not be considered in the nature of royalty, since it was not payment for the right to use any property of the Austrian company. We find the terms and conditions of the agreement are similar to that of the agreement, which is subject matter of consideration in this appeal and the decision in the assessee's own case - Decided against revenue.

Summary

Issues Involved:
1. Whether the sum of ?2,14,72,290/- paid by the assessee to the Austrian company constitutes 'royalty' or 'fee for technical services' under the Double Taxation Avoidance Agreement (DTAA) between India and Austria.

Issue-wise Detailed Analysis:

1. Nature of Payment: 'Royalty' vs. 'Fee for Technical Services'

The primary issue in this case is whether the payment of ?2,14,72,290/- made by the assessee to the Austrian company should be classified as 'royalty' or 'fee for technical services' under the DTAA between India and Austria.

a. Revenue's Argument:
The Revenue argued that the payment should be classified as 'royalty' based on the technical assistance agreement dated 13.11.2000. They contended that the Austrian company provided the design of a newly developed engine for the assessee's use, which falls under the definition of 'royalty' as per Article 6 of the DTAA. The Revenue emphasized that the general terms and conditions of the agreement, particularly clause 7, indicated that the know-how and patents remained the exclusive property of the Austrian company. Therefore, the payment was for the right to use this intellectual property, making it 'royalty'. The Revenue supported their argument by citing various judicial precedents.

b. Assessee's Argument:
The assessee contended that the payment was for 'fee for technical services' and not 'royalty'. They argued that the agreement was for the modification of an engine developed by the assessee to make it more fuel-efficient, and the entire work was carried out in Austria. The assessee provided all necessary materials, and the improved design was exclusively for the assessee's use. They relied on a previous decision in their own case (TVS Suzuki Ltd. vs. Income Tax Officer) where similar payments were classified as 'fee for technical services'. The assessee also argued that the general terms and conditions were generic clauses intended to protect the Austrian company's intellectual property and did not change the nature of the agreement.

2. Tribunal and CIT(A) Findings:

a. CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] examined the technical assistance agreement and found that the payment did not constitute 'royalty'. The CIT(A) noted that the agreement was for specific technical services to improve an engine developed by the assessee, and the Austrian company was not providing a ready-made patented technology. The CIT(A) relied on the previous decision in the assessee's own case and concluded that the payment was for 'fee for technical services'.

b. Tribunal Decision:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision. The Tribunal found that the Revenue could not provide any counter material to controvert the CIT(A)'s findings. The Tribunal noted that the technical assistance agreement was similar to the one previously considered in the assessee's case, where the payment was classified as 'fee for technical services'.

3. Court's Analysis and Conclusion:

a. Examination of Agreement:
The Court examined the technical assistance agreement and the general terms and conditions. It found that the scope of work was for designing a new 3-valve cylinder head to improve fuel efficiency and performance. The Court noted that the general terms and conditions were standard clauses intended to protect the Austrian company's intellectual property and did not change the nature of the agreement.

b. Distinguishing Precedents:
The Court distinguished the precedents cited by the Revenue. It found that the facts in the cases of CGI Information Systems and Voest Alpine A.G. were different from the present case. In those cases, the agreements involved the right to use intellectual property, whereas in the present case, the agreement was for specific technical services to improve an engine developed by the assessee.

c. Conclusion:
The Court concluded that the payment made by the assessee did not constitute 'royalty' but was for 'fee for technical services'. The Court upheld the findings of the CIT(A) and the Tribunal and dismissed the Revenue's appeal.

Judgment:
The appeal was dismissed, and the substantial question of law was answered against the Revenue. The payment of ?2,14,72,290/- made by the assessee to the Austrian company was held to be 'fee for technical services' and not 'royalty'.