2004 (9) TMI 302 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of payment received for supply of technical documentation.
2. Classification of the payment as 'royalty' under the India-Russia Double Taxation Avoidance Agreement (DTAA).
3. Applicability of the principles laid down by the Calcutta High Court in the case of CIT vs. Davy Ashmore India Ltd.

Issue-wise Detailed Analysis:

1. Taxability of Payment Received for Supply of Technical Documentation:
The primary issue in this appeal is whether the payment received by the assessee, a Russian company, for the supply of technical documentation should be treated as taxable income in India. The assessee entered into an agreement with an Indian company to provide technical documentation and assistance related to the manufacturing of "UR 9168 Polyurethane Wire Enamel." The agreement specified a lump sum fee of US $50,000 and current fees (royalty) of 4% of the selling price of the licensed product for the first five years. The assessee received the first installment of US $20,000 and contended that this payment was for the outright sale of technical know-how and not taxable in India due to the absence of a permanent establishment (PE) in India, as per Article 7 of the India-Russia DTAA.

2. Classification of the Payment as 'Royalty' Under the India-Russia DTAA:
The Assessing Officer (AO) disagreed with the assessee's contention, stating that the transaction was not an outright sale of know-how and that the provisions of Article 12 of the India-Russia DTAA, which deals with 'royalties,' were applicable. According to Article 12, royalties and fees for technical services may be taxed in the contracting state where they arise. The AO concluded that the payment received by the assessee was taxable as royalty at a rate of 20%. The CIT(A) reversed this decision, holding that the payment was for an outright sale of technical know-how and not liable to be treated as royalty under Article 12 of the DTAA.

3. Applicability of the Principles Laid Down by the Calcutta High Court in CIT vs. Davy Ashmore India Ltd.:
The CIT(A) relied on the Calcutta High Court's judgment in CIT vs. Davy Ashmore India Ltd., which stated that in the case of an outright sale, the consideration for the transfer of designs, secret formulae, etc., cannot be treated as royalty. However, upon examining the agreement, it was found that the assessee had granted a non-exclusive right to use the 'know-how' and retained property rights in the technical documentation. The agreement included clauses on confidentiality and restrictions on assigning rights, indicating that the transaction was not an outright sale. Therefore, the case did not align with the principles laid down in Davy Ashmore's case, where the transferor did not retain any property rights in the designs and drawings.

Conclusion:
The Tribunal concluded that the payment received by the assessee for the supply of technical documentation was not an outright sale but a non-exclusive right to use the 'know-how,' making it subject to tax as royalty under Article 12 of the India-Russia DTAA. The CIT(A)'s reliance on the Davy Ashmore case was misplaced, and the order of the AO was restored. Consequently, the Revenue's appeal was allowed.