2014 (10) TMI 78 - HC - Income Tax

Royalty u/s 9(1)(vi) DTAA between India and Austria - recurring payments - technical assistance agreement - lump-sum payment as attributable to information and services, to be furnished Held that - The differentiation between technical know-how and technical services - In know-how or under a know-how contract, one party agrees to grant right to use or simply provide to the other special knowledge and experience not revealed to the public - the granter may not guarantee the result of the formulae, information and for which licence for use is granted - This service element goes beyond mere providing of technical know-how - the consideration paid for right to use technical know-how etc. under the Agreement would be taxable in India as royalty under Article VI and consideration paid for technical services would be taxable in India to the extent of such amounts were attributable to the activities actually performed in the country of source, after allowing deduction of expenditure incurred in India - payments made for technical services furnished by the non-resident assessee outside India would not be taxable in India. The entire amount paid including the periodical payments were treated as royalty, ignoring Article VII of the DTAA and the relevant clauses of the Agreement - Ignorance and nescience was not due to lack of awareness, but attributable to failure to understand and deal with the issue inspite of the submission/contention - It was propelled with the desire to ensure 100% taxation of the entire consideration - No attempt was made to elucidate, and painstakingly answer the objections with facts and to bifurcate and divide the consideration in a reasonable manner between right to use technical information or know-how etc. and the consideration paid for services - in respect of services, differentiation regarding services rendered in the source state, i.e. India, the amount attributable to the activities actually performed in India and expenses incurred, was not undertaken - Consideration paid for technical services outside India had to be examined and excluded - the payments received were offered for taxation as royalty under Article VI of the DTAA - the findings/division of the appellate authorities may not be in terms of the reasoning and finding recorded - Evidence and material, by passage of time would have disappeared and desiccated. Assessee offered and stands taxed on 5% commission the matter cannot be remitted back on the ground that the bifurcation/division made should be ignored and on a reasonable basis after ascertaining full facts, the amounts should be bifurcated and amounts covered under Article VI should be taxed in India and the amounts covered under Article VII should be taxed in India only if they were attributable to activities actually performed in India, after deducting expenditure - It does appear that the assessee stands taxed on payments under clause 4.2 in India and therefore, has paid tax in India Consideration paid for technical services would be taxable under Article VII of the DTAA, to the extent the amounts were attributable to the activities performed by the respondent-assessee in India. Deduction of expenses would be made - consideration paid for right to use technical information and know-how would be taxable under Article VI of the DTAA - the consideration paid for furnishing technical services outside India, shall not be taxable in India - the expression royalty and the other similar expressions used in other DTAAs or u/s 9(1)(vi) of the Act may not or may warrant same interpretation Decided partly in favour of revenue.

Summary

Issues Involved:
1. Classification of payments as 'royalty' or 'technical services' under the DTAA.
2. Taxability of lump-sum payments under Article VI and VII of the DTAA.
3. Distinction between 'right to use' and 'technical services' in the context of DTAA.
4. Bifurcation of consideration into taxable and non-taxable components.

Detailed Analysis:

1. Classification of Payments as 'Royalty' or 'Technical Services' under the DTAA:
The appeals pertain to whether sums received by the assessee under a technical assistance agreement were in the nature of 'royalty' or 'technical services'. The distinction is crucial as per Articles VI and VII of the Double Taxation Avoidance Agreement (DTAA) between India and Austria. Article VI defines 'royalty' as payments for the right to use intellectual property, while Article VII covers payments for technical services, which are taxable only if performed in the source country.

2. Taxability of Lump-Sum Payments under Article VI and VII of the DTAA:
The respondent-assessee, an Austrian company, entered into an agreement with PPGML, an Indian company, to provide technical know-how and assistance. The agreement delineated payments into lump-sum amounts for information and services (Article 4.1) and recurring payments as 'royalty' (Article 4.2). The Tribunal held that payments under Article 4.1 were for technical services furnished in Austria and thus not taxable in India under Article VII, while those under Article 4.2 were for royalty taxable under Article VI.

3. Distinction between 'Right to Use' and 'Technical Services' in the Context of DTAA:
The judgment emphasized the distinction between 'royalty' and 'technical services'. 'Royalty' involves payments for the right to use intellectual property, while 'technical services' involve active assistance and expertise. The court noted that the agreement included both elements: providing technical information (royalty) and active technical assistance (technical services). The latter is taxable in India only if performed within the country.

4. Bifurcation of Consideration into Taxable and Non-Taxable Components:
The court criticized the Assessing Officer for not distinguishing between 'royalty' and 'technical services' and treating the entire amount as taxable royalty. The Tribunal's approach of using the agreement's headings to bifurcate payments was deemed insufficient. The court highlighted the need to examine the actual services rendered in India and the expenses incurred to determine taxability accurately.

Conclusion:
The court concluded that:
- Consideration for technical services is taxable under Article VII to the extent of activities performed in India, with deductions for expenses.
- Consideration for the right to use technical information is taxable as 'royalty' under Article VI.
- Payments for technical services furnished outside India are not taxable in India.

The court refrained from remanding the case due to the significant passage of time and potential loss of evidence. The questions of law were partly answered in favor of the Revenue but without disturbing the Tribunal's figures due to practical considerations. The appeals were disposed of with no costs.