1999 (1) TMI 58 - AT - Income Tax

Summary

Issues Involved:
1. Nature of Payments as 'Royalty' under Article 13(3) of DTAA.
2. Classification of Payments as 'Business Profits' under Article 7(1) of DTAA.
3. Ownership and Acquisition of Technical Know-How Rights.

Summary:

1. Nature of Payments as 'Royalty' under Article 13(3) of DTAA:
The core issue was whether the lumpsum Technical know-how fees of USD 250 lacs and Basic Process Engineering Documentation fees of USD 35 lacs were considered 'royalty' under Article 13(3) of the DTAA between India and Italy. The CIT(A) and Assessing Officer held these payments as royalty, taxable in India. The appellant argued that these payments were for acquiring technical know-how and not for the use of such know-how. The Tribunal noted that the definition of 'royalty' in the DTAA should prevail over the Income-tax Act, per section 90, and concluded that the payments did not constitute 'royalty' under Article 13(3) of the DTAA.

2. Classification of Payments as 'Business Profits' under Article 7(1) of DTAA:
The appellant contended that the payments should be classified as 'Business Profits' under Article 7(1) of the DTAA, as the Italian company had no permanent establishment in India. The Tribunal agreed, noting that the payments were for the supply of technical know-how and basic process engineering documentation, which constituted business profits for the Italian company. Since the Italian company did not have a permanent establishment in India, these profits were not taxable in India under Article 7(1) of the DTAA.

3. Ownership and Acquisition of Technical Know-How Rights:
The CIT(A) held that the appellant did not acquire exclusive rights over the technical know-how. However, the Tribunal found that the appellant acquired the right to use the technical know-how and basic process engineering documentation, and after 15 years, the secrecy obligations would terminate, allowing the appellant to use the know-how freely. The Tribunal inferred that the appellant effectively became the owner of the rights after the specified period.

Conclusion:
The Tribunal concluded that the payments made by the appellant to the Italian company were not 'royalty' but 'business profits' under the DTAA between India and Italy. Consequently, the appeal was allowed, and the payments were not subject to tax in India. The Third Member concurred with the Judicial Member's view, leading to the majority decision in favor of the appellant.