1989 (4) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of the amount received by the assessee-company from M/s. Mahindra & Mahindra Ltd. under the head 'royalty'.
2. Determination of the source of income and its taxability in India.
3. Classification of the payment as fees for technical services or royalty.
4. Direction to exclude the sum from the total income by the CIT(A).

Detailed Analysis:

1. Taxability of the Amount Received as 'Royalty':
The primary issue revolves around whether the amount of Rs. 94,77,784 received by the assessee-company from M/s. Mahindra & Mahindra Ltd. under agreements dated 6-11-1979 and 6-3-1980 for the supply of technical know-how for the manufacture of 'PEUG-EOT' engine XDP 4.90 can be taxed as 'royalty'. The Income-tax Officer (ITO) argued that the payment was for the mere use of technology, thus classifying it as royalty under Article III(5) of the Treaty for Avoidance of Double Taxation between France and India, which excludes royalties from the concept of industrial or commercial profits. The CIT(A), however, held that the payment did not constitute royalty and thus could not be taxed under this head.

2. Determination of the Source of Income:
The CIT(A) determined that even if the payment were considered royalty, the source of the income could not be said to be in India, making it non-taxable in India. This conclusion was drawn by comparing provisions in similar treaties with Belgium and Japan, which explicitly state that royalties would be deemed income in India. The absence of such a clause in the French Treaty led the CIT(A) to conclude that the source was outside India.

3. Classification of the Payment:
The CIT(A) classified the payment as fees for technical services, asserting that the services were rendered outside India, causing the income to accrue outside India. The CIT(A) directed the ITO to exclude the sum from the total income. However, the ITO and the Departmental Representative argued that the agreement involved continuous dialogue and updates to the technology, indicating that the payment was for the use of technology, thus fitting the definition of 'royalty' under Article VII(2) of the Treaty.

4. Exclusion of the Sum from Total Income:
The CIT(A) directed the ITO to exclude the sum of Rs. 94,77,784 from the total income, based on the interpretation that the payment was for technical services and not royalty. This decision was contested by the Department, which argued that the payment was indeed for the use of technology and should be taxed in India as royalty.

Tribunal's Conclusion:
The Tribunal reversed the CIT(A)'s order, holding that:

1. Nature of Payment: The payment was for the use of technology, not a transfer of technology. The agreement contained several restrictive covenants, continuous updates, and obligations, indicating that the payment was for the use of technology, fitting the definition of 'royalty' under Article VII(2) of the Treaty.

2. Source of Income: The Tribunal concluded that the source of income was the exploitation of technology in India. The agreement and the technology, by themselves, do not generate income unless exploited in India. Thus, the source of income was deemed to be in India.

3. Taxability: The payment was classified as royalty, and since the source of income was in India, it was taxable under the Indian Income-tax Act. The Tribunal rejected the CIT(A)'s reliance on the absence of similar clauses in other treaties, stating that the facts of the case clearly indicated the source was in India.

4. Assessment Year 1982-83: The Tribunal also reversed the CIT(A)'s order for the assessment year 1982-83, as the facts were identical to the previous year.

Final Order:
The appeals were allowed, and the payments received by the assessee-company were held to be taxable in India under the head 'royalty'.