2004 (9) TMI 301 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of payment for supply of technical documentation as 'royalty' under the Income-tax Act, 1961.
2. Applicability of Article 12 of the India-Russia Double Taxation Avoidance Agreement (DTAA).
3. Interpretation of 'outright sale' versus 'non-exclusive right to use' in the context of transfer of technical know-how.

Detailed Analysis:

1. Taxability of Payment for Supply of Technical Documentation as 'Royalty':
The central issue is whether the payment received by the assessee for supplying technical documentation should be treated as 'royalty' and therefore taxable. The assessee, a Russian company, entered into an agreement with an Indian company to provide technical know-how for manufacturing a product. The agreement included a non-exclusive right to use the know-how and stipulated payments in the form of lump sum fees and royalties. The Assessing Officer (AO) treated the payment as 'royalty' under Article 12 of the DTAA, making it taxable at 20%. The assessee argued that the payment was for the outright sale of know-how and thus not taxable in India, as they did not have a permanent establishment (PE) in India. The CIT(A) sided with the assessee, referencing the Calcutta High Court's decision in CIT v. Davy Ashmore India Ltd., which stated that consideration for an outright sale of designs and drawings cannot be treated as 'royalty'.

2. Applicability of Article 12 of the India-Russia DTAA:
Article 12 of the DTAA defines 'royalties' and 'fees for technical services' and sets the tax rates applicable. The AO applied this article to the payment received by the assessee, asserting it was for the use of technical know-how, thus qualifying as 'royalty'. The CIT(A) disagreed, interpreting the transaction as an outright sale, which would not fall under the purview of Article 12. The Tribunal, however, emphasized that the agreement granted only a non-exclusive right to use the know-how, with the assessee retaining significant property rights. This retention of rights indicated that the transaction was not an outright sale, making Article 12 applicable.

3. Interpretation of 'Outright Sale' versus 'Non-Exclusive Right to Use':
The Tribunal scrutinized the agreement's terms to determine the nature of the transaction. Key clauses indicated that the assessee retained ownership and imposed confidentiality obligations on the Indian company. The non-exclusive nature of the rights granted and the ability to enforce confidentiality and claim damages demonstrated that the transaction was not an outright sale. The Tribunal referenced the Davy Ashmore case, noting that the Calcutta High Court distinguished between outright sales and transactions where the transferor retains property rights. Since the assessee retained significant rights, the payment was deemed 'royalty'.

Conclusion:
The Tribunal concluded that the payment received by the assessee was indeed 'royalty' under Article 12 of the DTAA, reversing the CIT(A)'s decision. The AO's original assessment was restored, making the payment taxable at the specified rate. The revenue's appeal was allowed, emphasizing the importance of the nature of rights transferred in determining the taxability of payments under international agreements.