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TMI Blog1990 (7) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... design and engineering, supply of FOB equipments. Art. 3 gives the scope of supplies and service to be done by Clecim. Art. 3.3.6 says that the "design and engineering including documentation to be supplied by foreign contractor including major foreign sub-contractor shall be delivered in France and shall be received by principal contractor/purchaser's engineer deputed to Clecim office in France or at the request of the purchaser delivered on FOB port of shipment basis or sent by first class airmail/air freight at foreign contractor's cost". It would be seen from this Article that designs and documentations would be received inFranceby the engineers of the assessee deputed for that purpose. 3. Both Mecon and Clecim should provide supervisory service for erection and commissioning and, while Mecon should provide Indian supervisory services for 900 Mandays, Clecim should provide services partly for erection and fully for commissioning of works. For this purpose, the foreign supervisory personal of Clecim could be deputed for a ceiling of 450 Mandays. The assistance for this purpose should be at the site. 4. Article 4 gives the correct prices. Article 4.1.1. (ii) provided that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle VII of the DTA agreement which states that royalties derived by a resident of one of the contracting States from sources in the other contracting State may be taxed in both the contracting States. He further pointed out that the term 'Royalties' defined in Article VII(2) means the payment of any kind received as consideration for the use of or for the right to use any copyrights of literary, artistic or scientific work, design, plans, script, processes or formula or for the use of industrial commercial, scientific equipment or for information concerning industrial, commercial or scientific experience. Thus, he submitted that the definition is very wide and can include the documentation and designs for which the assessee is to make the payment. Shri Tandan then submitted that the CIT(A) had treated the subject-matter as if it was an appeal by the French Company itself. He had misconceived the scope of the appeal. The only issue before him was, whether, prima facie, tax has to be deducted at source or not. That does not mean that the liability has to be finally adjudicated. He took exception to the Commissioner's remark that "in the absence of any materials, he would hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the French company has any income accruing of deemed to accrue in India. Therefore, it is very necessary to consider all the aspects of the case, as if the French company itself is in appeal. 11. The assessee, as a matter of fact, is the French company and since there is an agreement in existence betweenIndiaandFrancefor avoidance of the double taxation, it is necessary first of all to see, whether any income accruing or arising to the French company can be brought to tax. As per Art. 3 of this Agreement, the industrial or commercial profits of an enterprise of one of the contracting States would not be subject to tax in the other contracting State unless the enterprise has a permanent establishment situated in the other contracting State. It is undisputed that Clecim, the French company, does not have a permanent establishment inIndia. Therefore, the industrial or commercial profits cannot be brought to tax. The term "Industrial and commercial profits" however, is defined in Art. III(5). It says that the industrial and commercial profits would not include income in the form of dividends, interest, rent, royalty and similar payments which are referred to in Art. VII. Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esponsible for putting up this plant. The process of putting up the plant has several steps and the agreement deals with each step and fixes responsibility thereof. Article 2, therefore, specifies the design and technology. Article 3 says what is the scope of the service and equipment. Design is for the plant to be erected and the equipment would go into the erection of the plant. As part of the design for the plant, Clecim has to furnish the documentation. These documentations were to be delivered inFranceto the principal contractor, i.e. Mecon and not the assessee. No doubt, Mecon would take delivery of these designs and documentations at the request of the assessee. But what is to be noticed is that the interest of the Indian company is not in acquiring any documents for its own sake. They are not even given to them. It would be delivered to Mecon as part of the process for setting up of the plant. 14. Article 4.1.2 deals with the contract price for the design and engineering including documentation. The payment we are concerned with, is a payment for this documentation. On a commonsense approach, it would appear to us to be merely purchase of certain designs and documentation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a finding that the information to be supplied was not such that can be used repetitively. Perhaps the requirement of repetitive use is expected in the grammatical meaning of the word "royalty". But when the Article VII(2) defines royalty, in our opinion, it is not necessary to see whether it is repetitive. What is to be seen, is whether any payment has been made for "information" gathered by the French company in industrial, commercial or scientific experience over the years. As a fact, we have found it to be so. The CIT(A) also had stated that the payments covered a number of services. We may state here that, at present, we are only concerned with the payment made for the transfer of documents. There are certainly other services rendered. But separate payments are to be made for these services. That issue has not come before him except in overall context, which we discuss later below. So, for the payment for documentation, these were not relevant. 18. We would now consider the submissions made by Shri Ganesan. These submissions are also relevant for considering, whether, under the IT Act, any income accrues or arises inIndia. The discussion in the above paragraphs is only for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nIndiaand Article VIII. Therefore, the finding given therein would not be relevant for Understanding the Agreement betweenIndiaandFrance. Apart from that, the High Court was mainly considering, whether there was a business connection under s. 9(1)(I) of the IT Act. That issue does not arise here. They further found that there was no permanent establishment. Ultimately, they found that the income was industrial or commercial income of the foreign enterprise and since there was no permanent establishment, it could not be brought to tax. 21. The second decision relied upon was that of Madhya Prades High Court in the case of Hindustan Electrographities Ltd. This is also distinguishable on facts. In that case, the Indian company wanted to adopt the improved technique by a foreign company, known as SERS. Since the furnace of the Indian company was different detailed engineering was required to be carried out before SERS could draw modified designs suited to the assessee company. For this, they required a payment of Rs. 1 lakh French Francs. For periodical testing, they required another 25,000 French Francs. It is these payment which came for discussion before the High Court. The High C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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