1990 (10) TMI 121 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the receipt under Clause 12 of the agreement.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Federal Republic of Germany.
3. Taxability of the receipt under Indian Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of the Receipt under Clause 12 of the Agreement:
The assessee, a non-resident company incorporated in Germany, received an instalment of Rs. 39 lakhs under Clause 12 of the agreement with Telco. The assessee claimed this receipt to be exempt, arguing it was industrial and commercial profit. The Assessing Officer (AO) disagreed, stating that the receipt was royalty in nature. The CIT(A) observed that under Article 5 and Article 6 of the agreement, the assessee provided technical assistance and made available technical personnel, which could not be considered as commercial and industrial profits. The CIT(A) apportioned 50% of the payment as attributable to operations carried out in India and thus taxable. However, the Tribunal concluded that the entire receipt was royalty in nature, as it was in consideration of the technical information and assistance provided by Daimler-Benz, and thus taxable in India.

2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Federal Republic of Germany:
The assessee argued that the receipt should be exempt under Article III of the DTAA, which excludes industrial or commercial profits from taxation. The Tribunal found that royalty is explicitly excluded from the term "industrial or commercial profits" under Clause 3 of Article III of the DTAA. The Tribunal referred to the Special Bench decision in Siemens Aktiengesellschaft v. ITO, which clarified that the general meaning of 'royalty' includes lump sum payments for know-how. The Tribunal concluded that the receipts fall within the definition of royalty and are not exempt under Article III of the DTAA.

3. Taxability of the Receipt under Indian Income-tax Act, 1961:
Since the receipt was not exempt under the DTAA, the Tribunal referred to the provisions of the Income-tax Act. Section 9(1)(vi) of the Act provides for the taxation of royalty if paid by a resident in India and used in a business in India. The payment was made by Telco, a resident company, and the technical know-how was used in its business in India. Therefore, the entire receipt was fully taxable in India. The Tribunal emphasized that there is no requirement to bifurcate the receipts based on operations within or outside India under Section 9(1)(vi). The Tribunal reversed the order of the CIT(A) and restored that of the AO, concluding that the receipt was royalty and fully taxable in India.

Conclusion:
The Tribunal allowed the departmental appeal and rejected the cross objections, concluding that the receipt under Clause 12 was royalty in nature and fully taxable in India under the Income-tax Act, 1961, and not exempt under the DTAA.