2019 (8) TMI 61 - HC - Income Tax

TDS u/s 195 - payment made for supply of designs drawings and specifications was in the nature of royalty or not - case of the assessee that the payment of 3 million Austrian Schilling was for the supply of material and their use would arise when the vehicles would be started to be produced - main plank on which the Tribunal passed its decision was its interpretation of the word supply and it held that supply includes use - HELD THAT - To our mind royalty is a payment to an owner for the ongoing use of its assets or property such as patents or natural resources for business purposes. Word royalty has been defined by the Supreme Court in the case titled as Entertainment Network (I) Ltd. v. Super Cassette Inds. Ltd 2008 (5) TMI 671 - SUPREME COURT as the remuneration paid to an author in respect of the exploitation of a work usually referring to payment on a continuing basis (i.e. 10 percent of the sale price) rather than a payment consisting of a lump sum in consideration of acquisition of rights. Word Royalty has been defined in Oxford Advanced Learner s Dictionary (New 9th Edition) as a sum of money that is paid by an oil or mining company to the owner of the land that they are working on Thus understood the assessee would have to pay a certain amount of money to PUCH for every vehicle which is sold using its designs. Tribunal has given an unnatural and strained meaning to the expression supply . Yes by entering into the agreement and by supplying the material PUCH authorized its use but its actual use would start only when production and sale commenced and that would be the stage at which royalty would be payable. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of agreement between the assessee company and PUCH, Austria regarding tax deduction at source.
2. Determining if the consideration paid for supply of designs, drawings, and specifications constitutes "royalty" and is subject to tax deduction at source.
3. Examining if the provisions of tax deduction at source are applicable to the payment made for the supply of designs and drawings.

Analysis:
1. The case involved an agreement between the assessee company and PUCH, Austria, where PUCH supplied technical information for manufacturing vehicles in India. The dispute centered around whether the payment made to PUCH was in the nature of royalty and thus liable for tax deduction at source.
2. The agreement specified separate payments for technical documentation and royalty based on the number of vehicles produced. The Assessing Officer (A.O.) contended that the entire payment was akin to royalty. However, the Commissioner and the Tribunal differed, stating that the payment for technical information was not royalty but for the supply of material.
3. The Tribunal's decision hinged on interpreting the word "supply," which it deemed to include "use." The Tribunal's view was that the actual use of the supplied material would commence during production and sale, triggering royalty payment.
4. The concept of "royalty" was elaborated upon, defining it as payment for ongoing use of assets or property. Legal precedents were cited to clarify the meaning of royalty, emphasizing payment for exploitation of works or rights.
5. The High Court disagreed with the Tribunal's interpretation of "supply," asserting that royalty payment would only become due upon the commencement of production and sale when the supplied material is utilized. The Court found no merit in other arguments presented.
6. Ultimately, the reference was answered in favor of the assessee, ruling against the revenue authority. The judgment clarified that the payment made for the supply of material did not constitute royalty and was not subject to tax deduction at source.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the arguments presented, and the court's decision, ensuring a thorough understanding of the legal complexities addressed in the case.