1990 (4) TMI 86 - AT - Income Tax

Summary

Issues Involved:
1. Classification of payments under clause 7(b) of the agreement as royalties.
2. Interpretation of Double Taxation Agreement (DTA) between India and Sweden.
3. Applicability of section 9(1)(vi) of the Income-tax Act.
4. Source of royalty payments.

Detailed Analysis:

1. Classification of Payments under Clause 7(b) of the Agreement as Royalties:
The appellant, a non-resident company, was assessed to tax on royalties received under clause 7(b) of an agreement with an Indian company. The appellant argued that these payments were not royalties but payments for services under clauses 3 and 4 of the agreement. Clause 7(b) states: "In consideration of all other obligations undertaken by the Swedish Company under or in pursuance of this Agreement... the Indian company shall pay to the Swedish Company a royalty at 3 per cent on internal sales and at 6 per cent on exports for a period of five years from the commencement of commercial production."

The Tribunal noted that the payment described as royalty was calculated on the net ex-factory sale price and restricted to the licensed capacity of the plant. The Tribunal concluded that the payments were indeed royalties for the use of technical know-how and assistance provided by the Swedish company, covering obligations under clauses 2, 3, 4, 5, and 6 of the agreement.

2. Interpretation of Double Taxation Agreement (DTA) between India and Sweden:
The appellant argued that the provisions of the Double Taxation Agreement between India and Sweden should prevail over section 9(1)(vi) of the Income-tax Act. The Tribunal agreed that the DTA provisions take precedence, as supported by the Board's Circular No. 333 and the decision in Visakhapatnam Port Trust's case.

Article VII of the DTA defines 'royalty' as "any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, patents, models, designs, plans, secret processes or formulae, trade-marks and other like property or rights." The Tribunal held that the payments under clause 7(b) fell within this definition and were taxable as royalties.

3. Applicability of Section 9(1)(vi) of the Income-tax Act:
The appellant contended that the payments did not fall under any sub-clauses of Explanation 2 to section 9(1)(vi) of the Income-tax Act. The Tribunal, however, found that the payments for services under clauses 3 and 4 were for assisting the Indian company in using the technical know-how, thus aligning with the definition of royalty under the Act. The Tribunal emphasized that the payments were linked to the use of technical know-how and patents, and therefore, were correctly classified as royalties.

4. Source of Royalty Payments:
The appellant argued that the source of the royalty was not in India, as the agreement was signed in Stockholm and the research and development were done outside India. The Tribunal rejected this argument, stating that the royalties were derived by the Swedish company from the Indian company, making the source of the royalty payments India. The Tribunal cited the Supreme Court decision in Performing Right Society Ltd. v. CIT, which held that royalties received under an agreement for broadcasting in India accrued in India.

The Tribunal concluded that the payments under clause 7(b) were royalties derived from sources in India, and thus taxable in India under Article VII of the DTA. The appeals were dismissed, and the assessment of royalties in the hands of the Swedish company was upheld.