1992 (9) TMI 121 - AT - Income Tax

Double Taxation Agreement Between India And France Tax Deducted At Source Transfer Of Technical Know-how

Summary

Issues:
1. Conflict among Tribunal Benches on appeal against order under section 195(2) of Income-tax Act.
2. Taxability of lump sum payment under collaboration agreement with a foreign company.
3. Maintainability of appeal under section 195(2) regarding tax deduction at source.
4. Interpretation of agreement for Avoidance of Double Taxation between India and France.
5. Taxability of payment for transfer of technical know-how under collaboration agreement.

Analysis:

1. The case was referred to the Special Bench due to a conflict among Tribunal Benches on the appealability of orders under section 195(2) of the Income-tax Act. The issue was whether an appeal lies against such orders.

2. The Indian company entered into a collaboration agreement with a French company for technical know-how transfer. The agreement included a lump sum payment and royalty. The Govt. of India approved the agreement. Disputes arose regarding tax deductions under section 195(2) on the lump sum payment.

3. Initially, the Income-tax Officer rejected the exemption claim on the lump sum payment. The CIT (Appeals) also upheld the taxability. The Appellate Tribunal earlier held that section 195(2) did not apply when the liability to deduct tax was denied. The issue of appeal maintainability was referred to the High Court.

4. The Revenue contended that the payment should be considered as royalty under section 9(1)(vi) of the Income-tax Act. The collaboration agreement's interpretation was crucial in determining the taxability of the payment under the Double Taxation Avoidance Agreement between India and France.

5. The Tribunal analyzed the collaboration agreement and tax provisions. It found that the payment for transfer of technical know-how fell within the definition of royalty under the Income-tax Act. However, under the Agreement for Avoidance of Double Taxation, the payment was considered a commercial profit exempt from tax due to the bifurcation approved by the Govt. of India and the High Court's precedent.

6. The Tribunal rejected the Revenue's contention that the payment should be treated as royalty or technical fee. It emphasized the bifurcation in the agreement and the High Court's decision, directing the Income-tax Officer to refund the tax deducted at source. The appeal was allowed based on the interpretation of the collaboration agreement and the Double Taxation Avoidance Agreement.

This comprehensive analysis covers the issues of appealability, taxability under the collaboration agreement, interpretation of tax provisions, and the application of the Double Taxation Avoidance Agreement in the given judgment.