1990 (7) TMI 162 - AT - Income Tax

Summary

Issues Involved:

1. Whether tax needs to be deducted under section 195(2) on remittances to a foreign company.
2. Whether the payments made to the foreign company constitute royalty under section 9(1)(vi) of the Income-tax Act.
3. Applicability and interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and France.

Detailed Analysis:

1. Whether tax needs to be deducted under section 195(2) on remittances to a foreign company:

The assessee, a limited company, entered into a tripartite agreement with MECON and CLECIM (a French company) for the establishment of a continuous galvanising line. Under the agreement, MECON and CLECIM were responsible for design, engineering, supply, and supervision of the plant. The assessee sought a no objection certificate from the ITO for remittance of payment to CLECIM. The ITO directed the assessee to deduct tax at the rate of 30% on the grounds that the payment amounted to royalty under Explanation 2 to section 9(1)(vi). The CIT(Appeals) held that no part of the payment was subject to Indian Income-tax, leading to the Department's appeal.

2. Whether the payments made to the foreign company constitute royalty under section 9(1)(vi) of the Income-tax Act:

The Department argued that the payments were in the nature of royalty as defined under section 9(1)(vi) and the DTAA between India and France. The definition of royalties includes payments for the use of or the right to use any design, plans, or information concerning industrial, commercial, or scientific experience. The Tribunal noted that the documentation provided by CLECIM was derived from years of industrial experience, thus falling under the definition of royalties. Therefore, the payments for documentation were considered as royalties and taxable in India.

3. Applicability and interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and France:

The CIT(Appeals) had overlooked the DTAA, which allows for the taxation of royalties in both contracting states. The Tribunal emphasized that the French company did not have a permanent establishment in India, thus its industrial or commercial profits could not be taxed. However, royalties are excluded from this protection under Article III(5) of the DTAA. The Tribunal concluded that the payment for documentation constituted royalties under Article VII of the DTAA. The Tribunal also distinguished the present case from previous judgments cited by the assessee, noting that the facts and agreements in those cases were different.

Conclusion:

The Tribunal allowed the Department's appeal, restoring the order of the Income-tax Officer. The payments made to the French company for documentation were deemed as royalties, taxable in India under both the Income-tax Act and the DTAA between India and France. The appeal was thus allowed in favor of the Department.