9911796707
TMI Blog1999 (1) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... h know-how and Basic Process Engg. Documentation. 2. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts not holding that USD 250 lacs of which USD 75 lacs being the first instalment is a part and USD 35 lacs of which USD 10.5 lacs being the first instalment is a part, being lumpsum technical know-how and basic process Engg. Documentation fees as non-taxable 'Business Profits' under article 7(1) of the DTAA between India and Italy in view of no permanent establishment of M/s. Technimont, S.P.A. of Italy in India. 3. That the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts in holding that the assessee appellant has not made any out-right purchase of the exclusive rights over design, secret formula, or process and therefore, there is no acquisition of technical know-how whereas the assessee appellant did acquire rights over design, secret, formula or process know-how and technical know-how for that agreed payment is to be made. 2. The brief facts of the case are stated in assessment order as well as in CIT(A)'s order. For the sake of convenience, the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailed submissions were submitted before the CIT(A). Reliance was placed on a decision of the ITAT Special Bench, Calcutta in the case of Graphite Viscarb (India) Ltd. v. ITO [1993] 199 ITR 119 (AT). Reliance was also placed on a decision of the CIT(A)-XXII, Bombay in the case of Gujrat Apar Polymers Ltd. dated 18-11-1992. After considering the submissions and other materials on record, the CIT(A) was not satisfied and after giving reasons in detail in her order, the CIT(A) upheld the order of the Assessing Officer. Now the assessee is in appeal here before us. 5. The learned counsels S/Shri Dinesh Vyas alongwith Shri P.D. Desai appeared on behalf of the assessee. Shri Dinesh Vyas, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee before the CIT(A). He further submitted that the assessee entered into an Agreement with the Italian company which provided for supply of Basic Process Engg. Documentation as per article 3.2 of the Agreement and Transfer of technical know-how as per article 1.11 of the same agreement. The payment was to be made by the company as net of taxes. He further submitted that if General Law is seen then it may be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is an independent constitution of the country. Therefore, the guidelines prepared in Vienna Convention is not helpful to the assessee at all. It was further argued that legal effect has to be seen and on this aspect reliance was placed on CIT v. Gillanders Arbuthnots & Co. [1973] 87 ITR 407 (SC), CIT v. B.M. Kharwar [l969] 72 ITR 603 (SC) and Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790 (SC). 8. In reply of the submissions made by the learned D.R., the learned counsel submitted that no doubt, as per provisions of section 9(1)(vi) the amount paid can be treated as Royalty but the Agreement entered into by the assessee and the Italian company was in accordance with the DTAA between the two countries. Therefore, section 90 is overriding section 9(1)(vi) of the Income-tax Act. He further submitted that the cases relied upon by the learned D.R. are distinguishable as the facts of the case are different. In case of Alembic Chemical Works Co. Ltd. wherein the Hon'ble Supreme Court has held that the amount paid to the company of any other country was payment of revenue in nature and was not capital in nature. Therefore, the facts of this case are distinguishable with the facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to (v)." Now we will see the section 90 which says about avoidance of double taxation. Sub-clause (2) of section 90 says where the Central Government has entered into an Agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 10. We would like to define first that which provisions are applicable here in the present case i.e. whether provisions of section 9(1)(vi) or provisions to section 90 of the Income-tax Act. 11. The definition of 'Royalty' appeared in article 3 of the agreement for avoidance of double taxation made between India and Italy is no doubt different from the definition appearing in Explanation 2 to section 9(1)(vi) of the Act. In determining the liability of a non-resident company, if there is any agreement for avoidance of double taxation entered under section 90 of the Income-tax Act, 1961, the said Agreement must prevail over the provisions of Income-tax Act, otherwise, there was no point in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so seen the Circular No. 333 dated 2-4-1982, a copy of which is placed on record at page 113 of the Paper Book wherein the Board has laid down as follows:- "2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the country have been made in the agreement. 3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income." In our view, the circular reflects the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contractin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid consideration constituted business profits for the foreign concern which too could not be assessed through the assessee as per article VII of the Convention as TL had no permanent establishment in India. In that case the case of Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.) was followed wherein the similar issue was decided by the Hon'ble Karnataka High Court. The facts in the present case are similar to the case of DCM Ltd. In the present case also the assessee entered into an Agreement with the Italian company and payments were made as per the agreement of Avoidance of Double Taxation. Therefore, we are not in hesitation to hold that the payments made by the assessee cannot be held as royalty as per section 9(1)(vi) as the provisions of section 90 shall prevail upon. In the present case the assessee paid amount to Italian company who was not having a permanent establishment in India. A certificate to this effect is placed at page 112 of the Paper Book wherein the Italian company has confirmed that it has no permanent establishment in India. It was further mentioned in the said certificate that the provisions set forth under the Treaty for the Avoidance of Double Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se decisions are not helping to the department. This view of ours finds further support from that no contradictory decision is available at present on this issue as before us. Therefore, we are of the opinion that assessee is entitled to succeed as the payment made by the assessee did not constitute Royalty as defined in Article 13 of the relevant Double Taxation Agreement between India and Italy. 17. In the result, the appeal of the assessee is allowed. Per Pradeep Parikh, AM: 18. I have thoroughly perused the proposed order passed by my learned Brother. After careful consideration of the said order, I find myself not to be in agreement with the conclusion reached by my learned Brother. Hence, I am constrained to make a separate order on the issue raised in appeal. The grounds of appeal and the facts of the case have been mentioned at paras 1 to 4 of the proposed order and hence I need not repeat them for the sake of brevity. 19. The point in dispute is that whether the consideration of US $ 250 lakhs payable by the assessee to use the process and technical know-how for the implementation of the plant and use and sell the product so manufactured, as well as the consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;" 22. Referring to the above 3 clauses, Shri Vyas urged the Bench to assume the 3 clauses as three separate boxes. It was submitted that as per the treaty, if the assessee's case was in the third box, it would certainly be called Royalty. However, it was contended that the assessee's case was not in the third box, as according to him, there was something more than mere right to use, which the assessee received. Similarly, the assessee's case was also stated not to be in the first box as there was no outright transfer of the formula or the process. Hence after ruling out the extreme position, it was submitted that the assessee's case was either somewhere in between box one and box two, or it was blend of the two boxes what the assessee received. 23. In other words, what the learned counsel contended was that it was not a more right to use the process which the assessee acquired, but there was something more. According to him the assessee required a bundle of rights like lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hable at least on two counts. Firstly, in DCM Ltd.'s case there was transfer. In the present case, the Italian Company, as a sub-licensor has granted the rights and sub-licence to use and practice the process in India. Secondly, in DCM Ltd.'s case, DCM had purchased equipment and know-how. In the instant case there is neither the purchase of equipment, nor the know-how but merely right to use the process is acquired. Moreover, it is also not the case of the assessee, as made out in the case of DCM that the case would be governed by the Article relating to profits. Thus in my view, the decision in DCM Ltd.'s case cannot be applied in the present case. 28. The main thrust of the learned counsel's argument was that it is not merely the right to use the process that the assessee has acquired, but there is something more than that. In fact, according to him, a bundle of rights has been acquired by the assessee. Hence now we shall unfold the bundle and see what it contains as was shown to us by the learned counsel. The bundle referred to is nothing but the agreement between the assessee (sub-licensee) and the Italian Company (sub-licensor). 29. Firstly, Article 1.11 was referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, without the licence would not be allowable. In the secondary sense it denotes a certificate or document which embodies the permission in question." The above paras, no doubt, explain the meaning of the term licence, whereas the case before us is that of sub-licence. Nonetheless, for all practical purpose, the same meaning would be applicable to the case of sub-licences also as they create rights with the same character. 33. In the present case, the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under a contract between the assessee and the Italian Company. I fail to understand as to what else the assessee acquired besides the right to use. It has not acquired the ownership of the know-how, as the preamble of the contract makes it clear that the same is owned by INCA International S.P.A., Italy. Further, the preamble also makes it clear that the sub-licensor has the right to sub-licence the technical know-how. No similar right has been acquired by the assessee under the contract. The other relevant clauses of the contract also do not mince words and are in conformity with the main object of the contract that the assessee has only the righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the consent of the other party. The truncation is much more. The assigned party remains primarily liable for the performance of the contract. It is only when for some good reason the assessee is not in a position to perform its part of the contract, it may ask someone else, with the consent of the sub-licensor, to make use of the know-how on its behalf under this very contract. But it can neither grant a sub-licence to use the process nor can it divest itself from this contract save as provided in Articles 12 and 13. 38. Then Article 12 was referred to by the learned counsel. It is as follows: "Article 12 ... Term of the contract 12.1 ... This contract shall come into force on the effective date and, unless sooner terminated as provided for in Article 13, shall continue in full force and effect till the 10th anniversary of the effective date except for secrecy obligations under Article 8 which shall survive. 12.2 ... From and after the expiration of the term of contract as specified in Article 12.1, the sub-licensee shall have acquired the fully paid-up right to continue the production of the product in the plant and to sell the product anywhere in the world without paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is dismissed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We, the Members of the Jaipur Bench of the Tribunal have differed in the order to be passed in the case of Modern Threads (India) Ltd v. DCIT [IT. Appeal No. 378 (Jp.) of 1997]. The question on which we have differed is referred to the Hon'ble President under section 255(4) of the Income-tax Act, 1961. The said question is as follows: "Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Tecnimont of Italy is 'Royalty' as defined in the Double Taxation Avoidance Agreement between India and Italy and hence liable to tax in India?" We direct the Registry to put the file before the Hon'ble President. THIRD MEMBER ORDER Per Nathu Ram: A.M. - On account of difference of opinion between the Judicial Member and the Accountant Member of Jaipur Bench of the Income-tax Appellate Tribunal, following question has been referred to me by the President of the Tribunal as per provisions of section 255(4) of the Income-tax Act, 1961 for adjudication as a Third Member: "Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Tecnimont of Italy is 'Royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering the assessee (sub-licensee) was required to pay to the sub-licensor US $ 35 lakhs net of any taxes imposed in India in the following instalments: a. 30% on or before the effective date; b. 30% not later than four months from the effective date; c. 30% not later than 8 months from the effective date; d. 10% not later than 18 months from the effective date. 2.3. In addition the assessee (sub-licensee) was required to pay to the sub-licensor a running royalty payment of US $ 5 per MT of products, manufactured in the plant after the plant acceptance date, upto a maximum of US $ 50 lakhs. 2.3.1 As per the terms of the contract Agreement the first instalment of 30% of US $ 250 lakhs which worked out to US $ 75 lakhs and 30% of US $ 35 lakhs which worked out to 10.5 lakhs US $ was payable to the sub-licensor. The assessee (sub-licensee), therefore, made an application before the Dy. Commissioner of Income-tax, Special Range-2, Jaipur for the grant of "No Objection" to the remittance of the said amount of first instalment to the sub-licensor as per provisions of section 195(2) of the Income-tax Act. The Assessing Officer having considered the various articles of the Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(vi) of the Income-tax Act but these provisions are overridden by section 90 under which the Government of India entered into Double Taxation Avoidance Agreement with the Government of Italy and the payments made are, therefore, governed by the provisions of the DTAA. It was further stated that the cases relied upon by the Revenue as quoted in Alembic Chemical Works Co. Ltd.'s case and N.V. Philips' case are distinguishable on facts. 3. The learned Judicial Member has taken the view: (i) That the term "Royalty" has been defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act but its definition as given in the Double Taxation Avoidance Agreement between India and Italy executed as per provisions of section 90 of the Income-tax Act would prevail over that provided in the Income-tax Act. According to him, in view of decisions in the cases of DCM Ltd. and Citizen Watch Co. Ltd. the amount payable by the assessee is neither royalty under section 9(1)(vi) of the Income-tax Act nor under DTAA. (ii) That as per Article 7 of the DTAA the profits of enterprise of a contracting State would be taxable only in that State unless the enterprise carries on business in the other cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. He considering the meaning of the term "Licence" as given in T.P. Mukerjee's Law Lexicon, Vol. 2(1982 Edition) and P. Ramanatha Iyer's Law Lexicon (1997 Edition) and referring to Article 2 of the contract agreement observed that the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under the contract between the assessee and the Italian Company and nothing more than that was acquired. The assessee has not acquired the ownership of the know-how as the preamble of the Contract makes it clear that the same is owned by INCA International SPA, Italy and the sub-licensor has only the right to sub-licence technical know-how. The assessee has not acquired similar rights under the contract. 3.3. The learned A.M. has further noted that as per Article 8 of the contract agreement the assessee is under obligation to maintain strict secrecy about the process till fifteen years despite the fact that the contract is to terminate on completion of ten years. Unlike the sub-licensor the assessee has no authority to disclose the know-how to another party. 3.4. Further, meeting the arguments of the learned counsel on Article 11 of the Contract, ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bestowal or conferring of a right; a gift or assignment of money etc., out of a fund (S.13, Industrial Development Bank of India Act); 2. the thing granted or bestowed; 3. to bestow by a formal act (S. 24A(a) Companies (Profits) Surtax Act and S. 42, Prov. Plantations Labour Act); 4. to accede to (S. 432(2), Cr PC). "This word is taken largely where anything is granted or passed from one to another. And in this sense it both comprehend feoffments, bargains and, sales, gifts, leases, charges, and the like; for he that doth give, or sell, doth grant also. And thus it is sometimes in writing or by deed, and sometimes it is by word without writing. But the word being taken more strictly and properly, it is the grant, conveyance, or gift, by writing of such an Incorporeal thing as lieth in grant, and not in livery, and cannot be given or granted by word only without deed. Or it is the grant by such persons as cannot pass anything from them but by deed, as the king, bodies corporate, & c. And this albeit it may be made by other most proper to this purpose". 4.1.1 It is therefore, contended that the word "Grant" includes transfer of right, interest, title and possession and accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y [1986] 159 ITR 85 (SC); (ii) Mansinghka Bros. P. Ltd. v. CIT [1984] 147 ITR 361 (Raj.); (iii) CIT v. Gwalior Rayon Silk Mfg. Co. Ltd [1992] 196 ITR 149/62 Taxman 471 (SC); (iv) Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC); (v) CIT v. Dharam Chand [l993] 204 ITR 787/70 Taxman 390 (Raj.); (vi) CIT v. Trinity Hospital [1997] 225 ITR 178 (Raj.); and (vii) CIT v. Shyam Finance P. Ltd. [1998] 231 ITR 308 (SC). 4.4 The learned counsel arguing further submitted that the Revenue authorities have not examined and considered the provisions of the contract as a whole but they have been carried away by the words "right to use" in the contract. He submitted that it is not the form but the substance of the transaction that matters and in support he placed reliance on the decisions reported in the following: (a) Devidas Vithal Das & Co. v. CIT [1972] 84 ITR 277 (SC); (b) CED v. Aloke Mitra [1980] 126 ITR 599 (SC); (c) Associated Hotels of India Ltd v. R.N. Kapur AIR 1959 SC 1262; (d) Ram Niwas v. Municipal Board, Nawabganj AIR 1976 All. 241. 4.5 The learned counsel of the assessee has further made a submission that the sub-licensor under the authority of licensor was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract which were material to the issue involved have not been considered by the CIT(A) and therefore the conclusion reached by the CIT(Appeals) is vitiated. Moreover, on expiry of the contract period of ten years, the assessee will have full right to transfer the technical know-how received as per terms of the contract agreement. This aspect has been totally overlooked by the CIT(Appeals). 4.9. The learned counsel has further submitted that the case in N.V. Philips' case is distinguishable on facts and the another case cited by the learned D.R. in Krebs & Co.'s case not under Double Taxation Avoidance Agreement is also not applicable to the facts of the present case. 5. I have carefully considered the facts, rival submissions and have also gone through the orders of the lower authorities. Orders of the learned J.M. and learned Accountant Member, provisions of contract, double taxation avoidance agreement etc. and also the various case laws cited for and against. Before I advert to the question whether the said amount payable is royalty or not, I would like to discuss and consider the nature and scope of the contract Agreement entered into by the assessee company with the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and materials of civil works, insulation, painting. (b) Piping (c) Instrumentation; (d) Electrical; (e) General layout and plot plan; (f) Apparatus and machinery relating to vessels and columns; heat exchangers; pumps and agitators; compressor and blowers; package units and miscellaneous equipment. (g) Check, review and approval from the process and process guarantee point of view of the final issue of the following detailed engineering items: Plot plans with equipment layout; piping and instrumentation diagrams; critical lines piping assembly and isometric drawings; Vendors drawings for critical equipment and machines; their check, review and approval would be done by the Licensor. 2. Basic Process Engineering - Effective date shall mean the date on which the contract comes into force as per article 15; 3. Plant - Plant shall mean the assessee's facilities for the production of product in accordance with the technical know-how and basic process engineering as per Ext. 4 to the contract with the capacity of 2,50,000 MT of product per year during 7992 operating hours to be constructed and operated in India; 4. Process - Process shall mean the process by disclosure for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -licensor grants to the sub-licensee the rights to use the basic process engineering for the design, engineering, construction and operation of the plant only. 6.2 Article 3 of the Contract provides for supply of basic process engineering and technical assistance and promptly after the effective date, a Design Conference shall be held in Milano, Italy between the sub-licensor and the sub-licensee to establish the design basis required by the sub-licensor for the preparation of the basic process engineering to be used by the sub-licensee in the engineering, construction and operation of the plant. 6.3 The sub-licensee shall select an Engineering contractor to be approved by the sub-licensor for the preparation of the engineering and construction drawings and specifications for the plant based on the basic process engineering under the supervision of the sub-licensor. 6.4 The sub-licensor shall provide training services relating to the operation and maintenance of the plant safely and efficiently in order to make them adequately familiar with the process. Such training shall be carried out by the sub-licensor at its office and at sub-licensor's plant or at any other licensed plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the sub-licensor to the sub-licensee under the contract. 6.13 The assessee company agrees that it will use the technical know-how and basic process engineering only to design, construct and operate the Plant. 6.13.1 The assessee company's secrecy obligations under Article 8 shall terminate fifteen years after the effective date. 6.14 Article 9 provides for protection against patent infringement. 6.15 The maximum financial liability of the sub-licensor for all expenses, indemnifications, reimbursements costs of plant modifications to avoid infringement, legal cost relevant to the defence and disposal of suit or action including claims under Articles 4 & 9 shall be to the extent of 80% of the amount to be paid under Article 5.1 i.e., US $ 250 lakhs for supply of technical know-how. 6.16 Article 10 of the Contract provides for liabilities of the sub-licensor to the extent of 80% of the total amount received of US $ 250 lakhs. 6.17 Article 11 of the Contract provides that the Contract shall inure to the benefit of and be binding upon the parties and shall not be assignable in whole or in part by either party without the prior written consent of the other party, provided that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... $ 250 lakhs payable. (e) That the assessee company has undertaken to pay US $ 35 lakhs for supply of Basic Process Engineering Documentation for designing, construction and operation of the plant as per the Technical know-how and this payment is not subject to any restrictions as in the case of amount payable for supply of technical know-how. (f) That the assessee company would pay royalty of US $ 5 per metric ton of product to Italian company subject to maximum of US $ 50 lacs. (g) That the Italian Company would provide technical personnel for supervision of erection, construction and operation of the Plant and they would be paid at the rates prescribed. (h) That the Italian Company would also train the technical personnel of the assessee company in its own office or in the plants outside India and the cost of the training is to be borne by the assessee company as prescribed. (i) That the assessee company has a right to assign the contract to its successor also to a third party with the prior written consent of the sub-licensor and such consent is not to be withheld unreasonably on expiry of contract period, the assessee company would have absolute right to transfer the techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the act of the Sub-licenser in granting the right and Sub-licence to use the Process and technical know-how amounts to transfer of the right, interest, title and possession of the Process for the production of PTA as per the technical know-how developed by the Licensor to the assessee company. However, simple grant of such right and licence is meaningless unless necessary facility for production of PTA as per the Process and technical know-how is created and for this purpose the Sub-licensor agreed to supply necessary technical know-how and basic Process Engineering Documentation for designing, construction and operation of the plant for consideration. The word "Supply" as per T.P. Mukherjee's Law Lexicon (Vol. 2 1982 Edition) is merely a form of sale and despatch, and unless there was sale there was no supply of goods. (Karamchand Thapar & Bros. v. State of Bihar [1956] 7 STC 58 (Pat.). The words sale and supply go together. Since the Sub-licensor has supplied the technical know-how and Basic Process Engineering Documentation for a consideration the transaction amounts to sale in the hands of Sub-licensor and purchase in the hands of the assessee company. It is also noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or scientific experience. 6.28 The term "Royalty" in the DTAA has been given a restricted meaning as compared to the term "Royalty" defined in Explanation 2 to Section 9(1)(vi) of the Income-tax Act reproduced hereunder: "Explanation 2 - For the purposes of this clause, "royalty" means consideration (including any lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge experience or skill; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her property belonging to the Government. Two important features of royalty have to be noticed: they are, that the payment is made for the privilege of removing the articles in proportion to the quantity removed, and the basis of the payment in an agreement." 6.33 The word "Royalty" has also been described in Black's Law Dictionary (Fifth Edition) to mean compensation for the use of property; usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. A payment which is made to an author or composer by an assignee, licensee or copyright holder in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent. Royalty is share of product or profit reserved by owner for permitting another to use the property in its broadest aspect, it is share of profit reserved by owner for permitting another the use of property. In mining and oil operations, a share of the product or profit paid to the owner of the property. 6.34 It is clear from the meaning of the word "Royalty" described that the royalty payment is linked to the production or profits earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the sub-licensor in Italy and the sub-licensor in that eventuality would also be in a position to claim the liability provided under the contract to the extent of 80% against the business profits received. The payment thus made as per clause (i) & (ii) of article 5 of the contract Agreement for supply of technical know-how and Basic Process Engineering Documentation, therefore, in my considered opinion could be assessed in the hands of the sub-licensor in Italy as business profit and not in India as royalty. 6.35.1 The contract Agreement between the assessee company and the Italian company provides for payment for supply of technical know-how and basic process engineering documentation for designing, construction and operation of the plant and it is further provided for payment of royalty for use of the Process as defined in contract for manufacturing of PTA. This has been duly approved by the Government of India. The payment to be made separately for each type of technical assistance to be provided shows that the same are not of the same character and the same have to be treated as such distinctly. The payment for supply of technical know-how and basic process engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esigns, plans, etc. In other words, the consideration for the right to use technical know-how will be royalty which is subjected to tax in both the countries whereas the consideration for acquisition of the know-how would not be a royalty and consequently, it would be a commercial profit exempt under article III as the foreign company had no permanent establishment in India. Taking advantage of this differentiation, the parties to the collaboration agreement have clearly bifurcated the consideration by stating that the lump sum consideration for transfer of technical know-how abroad will, be an outright sale and would be independent of the royalty at 3 per cent payable for the right to use the know-how. It must be remembered that this bifurcation had been approved by the Government of India. In the circumstances, the second instalment paid under clause 11 of the collaboration agreement was commercial profit within the meaning of article III of the Agreement for Avoidance of Double Taxation between India and France and since, admittedly, the foreign company had no permanent establishment in India, it was not liable to be taxed in India." (b) In the case of DCM Ltd., the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were made in Japan and accordingly the receipt of documentation fee was outside India. On these facts the documentation fees and technical assistance fees were held as not chargeable to Income-tax in India. (d) In the case of Swadeshi Polytex Ltd., the assessee company established a polyster staple fibre manufacturing plant in India with collaboration of a German company. To expand the said plant the assessee entered into an agreement with the foreign company for supply of technical know-how for rendering services outside India. There was a clause in agreement enabling the assessee company to allow any other Indian party to use technical know-how subject to condition that licence payment would be shared by assessee with foreign company. The assessee company was bound to pay agreed amount even though it had not used technology transferred to it. The Tribunal held that receipts in the hands of German company would be taxable only under Article 5 of Double Taxation Avoidance Agreement entered into between India and the Government of Germany and since the German company was not having a permanent establishment in India, receipt by German company would be taxable in Germany and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be included or not. The House of Lords held that the sums in question should be so included as being part of the receipt of the company's trade. (g) In the case of Koyo Seiko Co. Ltd., the Japanese company entered into a collaboration agreement with Andhra Pradesh Industrial Development Corporation Ltd. for assisting the Andhra Pradesh Companies in the project programme for establishing a bearing factory in India. The agreement provided for technical fee, payment of royalty as well as payment of fee for preparing a project report. The question that arose was whether the technical fee received for providing know-how was taxable in India. The Tribunal found that Japanese company had to supply drawings and data on contracted projects and to share a secret process for a period of agreement of nine years and held the view that the fee received as compensation was a capital receipt and could not be taxed in India. The view so taken by the Tribunal was upheld by the Hon'ble Andhra Pradesh High Court. 6.37 It would be seen from the facts and the ratio of the rulings given in the cases cited on behalf of the assessee and discussed above that the payment made for supply of technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld bear the character of royalty. The Hon'ble High Court thus agreed with the lower authorities that the payment for technical assistance was not royalty. 6.39 I agree with the arguments advanced by the learned counsel of the assessee that this decision also support the case of the assessee as in the present case also the payment made for use of the process for manufacturing of PTA has been shown as royalty in the contract itself whereas the payment made for supply of technical know-how and Basic Process Engineering Documentation in setting up of the plant fall within the ambit of "business profit" and accordingly the Italian company having no permanent establishment in India such payment made being its business profit is not taxable in India. In the case of CIT v. Krebs & Co. the assessee, a Swiss company entered into agreement with Indian company for supplying know-how, complete engineering and services for the extension of the existing chlorine and caustic soda plants of the Indian company. The agreement was approved by the Government of India. The assessee company undertook to perform all engineering services necessary for the supply of imported items and for procurement of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company was entitled to get rebate on the actual amount paid by it to its employees for the technical assistance and services and the rest of the amount had to be treated as royalty. 6.40 It would be seen from above that the said fees was for supervision of the erection and commissioning of plant which is held to be treated as royalty whereas the payment made for supply of technical information drawing, specification etc. for erecting, repairing and maintenance of the plant has been held as business profit of the Swiss company not taxable in India. 6.41 In the present case as per the contract Agreement the Italian company is to provide training to the personnel of the assessee company and also to provide technical personnel for supervision, erection and operation of the plant and there is no dispute of taxability of the payment made therefore to the Italian company. The payments in question are, however, for supply of technical know-how and Basic Process Engineering Documentation for designing, construction and operation of the plant and the same is accordingly to be assessed as business profits in the hands of the Italian company as has been done in the aforecited case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (4) of the section 255 of the Income-tax Act. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT Per Shri R.K. Gupta, J.M. - This appeal was filed by assessee against the order of the CIT(A) dated 11-3-1997 relevant to assessment year 1997-98. The issue involved in this appeal was under section 195(2) of the Income-tax Act, 1961. The assessee made lump sum payment to M/s. Technimont, S.P.A., Italy. The department treated this amount as Royalty and in view of the department the payment made on account of Royalty was taxable and accordingly an order under section 195(2) was passed by which it was held that assessee was liable to pay tax on account of TDS accounting to Rs. 6,10,47,000. The CIT(A) confirmed the order of the Assessing Officer. The matter came before the Tribunal. The case was allotted to Judicial Member who decided the issue in favour of the assessee by holding that the amount paid by assessee is not tantamount to Royalty. However, the ld. Accountant Member dissented by holding that the payment made to M/s. Technimont, SPA Italy was in nature of Royalty. Hence the assessee was liable to deduct the tax. The following question was framed by the Members of the Tribunal- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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