1995 (1) TMI 110 - AT - Income Tax

Capital Receipt Double Taxation Avoidance Agreement Income Deemed To Accrue Or Arise In India Indian Company

Summary

Issues Involved:
1. Taxability of the amount received as royalty under the Double Taxation Avoidance Agreement (DTA).
2. Nature of the receipt (capital vs. revenue).
3. Taxability of the sum received under clause 6(b) of the agreement.

Issue-wise Detailed Analysis:

1. Taxability of the Amount Received as Royalty under the DTA:

The assessee, a non-resident Swedish company, entered into an agreement with an Indian company for the supply of technical know-how and technical assistance. The assessee received two instalments of USD 60,000 each from the Indian company, which it did not declare as income, arguing that it was not taxable in India under the DTA between India and Sweden. The assessee contended that the amount was not royalty as defined in Article VII of the DTA but was industrial or commercial profits, and since the assessee did not have a permanent establishment in India, it was not taxable under Article III of the DTA. The AO and CIT(A) both rejected this contention, holding that the amount was royalty and taxable in India under Explanation 2 to section 9(1)(vi) of the IT Act.

2. Nature of the Receipt (Capital vs. Revenue):

The assessee argued that the receipt was a capital receipt not liable to tax, claiming an outright transfer of know-how to the Indian company. The Tribunal examined the agreement and found that there was no outright transfer of know-how. The Indian company was merely granted the right to use the know-how, while the assessee retained all proprietary rights and could impart the know-how to other parties. The Tribunal concluded that the amount was not a capital receipt but a payment for the right to use the know-how, thus falling under the definition of royalty in both the DTA and the IT Act.

3. Taxability of the Sum Received under Clause 6(b) of the Agreement:

The third issue concerned the taxability of USD 9,480 received under clause 6(b) of the agreement. The Tribunal referenced its earlier decision in ITA No. 6539/Bom/88 for the assessment year 1985-86, where it held that such amounts were commercial profits and not taxable under the DTA since the assessee did not have a permanent establishment in India. Clause 6(b) covered payments for services such as advising on plans, designs, procurement of machinery, and marketing assistance. The Tribunal reiterated that these payments did not constitute royalty under the DTA but were industrial and commercial profits, not taxable in India without a permanent establishment.

Conclusion:

The Tribunal dismissed the first two grounds of the assessee, holding that the lump sum consideration received was royalty and taxable in India. However, it allowed the third ground, ruling that the amount received under clause 6(b) was commercial profit and not taxable in India due to the absence of a permanent establishment. The appeal was partly allowed.