2012 (3) TMI 98 - HC - Income Tax

Capital Gain-Whether lump-sum consideration is a capital receipt in the hands of the assessee company- held that -the amounts were paid to the assessee on account of right to use the know how for a specified period and no outright transfer of know how amounts received thereunder would be nothing but royalty received Royalty -Whether the lump sum consideration was royalty within the meaning of Article-VII of the DTAA -held that - royalty means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, patents, models, designs, plans, secret processes or formulae, trademarks and other like property or rights -the amount received by the assessee was royalty covered under Article VII of the DTAA and therefore, taxable in India -Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory the questions raised were in favour of the revenue and against the assessee.

Summary

Issues:
1. Taxability of lump-sum consideration as capital receipt.
2. Classification of lump-sum consideration as royalty under Double Taxation Avoidance Agreement (DTAA) and Income Tax Act.

Issue 1: Taxability of lump-sum consideration as capital receipt

The case involved an assessment year of AY 1986-87 where a non-resident Swedish company entered into an agreement with an Indian company for the supply of technical know-how for the manufacture of air compressors. The assessee contended that the amount received was not taxable in India under the DTAA. However, the assessing officer, CIT(A), and ITAT held that the amount received was royalty under the DTAA and thus taxable in India. The ITAT analyzed the agreement clauses to determine that the payment was for the right to use the know-how for a specified period, not an outright transfer. As per the findings, the amounts received were considered as royalty for allowing the use of know-how, making them taxable in India.

Issue 2: Classification of lump-sum consideration as royalty under DTAA and Income Tax Act

The ITAT referred questions to the High Court regarding the classification of the lump-sum consideration under the DTAA and the Income Tax Act. The ITAT's analysis of the agreement clauses led to the conclusion that the payment received by the assessee for allowing the Indian company to use the know-how constituted royalty as per Article VII of the DTAA. The DTAA defined royalty to include consideration for the right to use copyrights, patents, trademarks, and other property rights. Since the agreement involved the use of know-how for a specified period in exchange for payment, it fell under the definition of royalty. Therefore, the ITAT's decision to hold the amounts as taxable in India under the DTAA and the Income Tax Act was deemed justified.

In conclusion, the High Court upheld the decisions of the assessing officer, CIT(A), and ITAT, ruling in favor of the revenue and against the assessee. The lump-sum consideration received for the right to use technical know-how was classified as royalty under the DTAA and the Income Tax Act, making it taxable in India. The reference was disposed of with no order as to costs.