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TMI Blog1999 (5) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... eting at Austria A.S. 22,75,000 (c) 40% within 10 days of completion of phase procurement of prototypes A.S. 36,40,000 (d) 15% on completion of project A.S. 13,65,000 ----------------------------- A.S. 91,00,000 ------------------------------ The actual payments were made as detailed below:-- Assessment year 1991-92:-- Date of payment A.S. Rs. 12-6-1990 18,20,000 26,87,542 16-1-1991 22,75,000 39,38,712 --------------------- 66,26,254 ---------------------- Assessment year 1992-93:-- Date of payment A.S. Rs. 9-11-1991 36,40,000 87,18,563 Assessment year 1994-95:-- Date of payment A.S. Rs. 10-2-1994 13,65,000 34,67,100 -------------------- The abovesaid agreement was entered into between TSL and AVL and was approved under the auspices of Technical Development Fund constituted by the IDBI and was approved by the Government of India. The Reserve Bank of India had also accorded sanction to the agreement as 'Technical Aid Agreement'. At the time of remittance of the fees in four instalments as noted above, the Deputy Commissioner of Income-tax had issued 'No Objection Certificate' for the remittances. 3. Subsequently it was noticed by the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest under section 201 (1A) of the Act. His contentions are summarised below. 5.1 TSL entered into an agreement with AVL on 13-4-1989 for technical assistance for- development of low fuel consumption and low emission level for motor bike produced by TSL, which would be comparable with four-stroke engines. Further, AVL had to provide supporting calculations for Thermo Dynamics. 5.2 The technical services agreed to be rendered AVL related to study and improvement fuel of efficiency of the carburetted engine of TSL's two wheelers. The services to be rendered by AVL were given in Article 2 of the agreement between TSL and AVL dated 13-9-1989 (page Nos. 6 to 26 of paperbook I). 5.3 As per Article 2 of the agreement AVL had to provide design, documents, calculations for modification of the existing carburetted engine of TSL to attain the efficiency of four-stroke engine. 5.4 AVL should procure parts and components to fit into the revised design. 5.5 AVL should prepare prototype engines and test the same till they achieve the desired efficiency. 5.6 AVL should supply 20 sets of component parts to TSL. 5.7 AVL should provide list of suppliers for component parts. 5.8 AVL sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was 'business profits' and if it was not attributable to a permanent establishment in India; (ii) If it was not in the nature of 'royalty' derived from sources in India; and (iii) If it was fees for 'technical services' and the services are rendered outside India. 5.16 Though, as per Article 6. 1.1 TSL would have a right to use drawings, calculations and reports as these relate only to modifications of existing design, the payment would not take the character of royalty. The Reserve Bank of India in their permit for remittance of foreign exchange also recognised the agreement as a technical aid fees agreement and referred to the payment as lump sum know-how fees. 5.17 It may be clear from the above that what had been done by AVL was nothing but providing technical consultancy for improving the efficiency of the existing engine. Clause 6. 1.1 of the agreement clearly stipulated that TSL shall have the 'worldwide rights' and clause 6.2.2 provided that AVL shall not disclose the results obtained during the design and development work to any third party. The entire services of AVL had been rendered outside India. Hence all the modifications as well as particulars of suppliers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1995, 1251 and 1252 (Mad.) of 1992 dated 14-9-1995] Madras B-Bench of Tribunal) (DRAA with Japan) (pages 45 to 52 of paperbook II). 6. Wellman Incandescent India Ltd. v. Dy. CIT [1995] 55 ITD 339 (Cal.) (DTAA with Italy) (pages 53 to 57 of paperbook II). 5.22 The agreement between TSL and AVL was viewed only as technical services by the Government, the Reserve Bank of India, the Austrian company and the Austrian tax authorities and the Assessing Officer of TSL. 5.23 Though Indian Income-tax law is blind to equity on grounds of doctrine of estoppel the Income-tax Officer taking a contrary and different view compared to Deputy Commissioner (Asstt.) should be forbidden. It was not correct on the part of the department to put the assessee company to hardship on grounds of more change of opinion. The Income-tax Officer himself in para 10 had admitted that a portion of the amount paid by the assessee would partake the character of technical services. 5.24 The Commissioner (Appeals) had rejected the contention of the assessee-company on the following grounds: (i) That the mention of 'world wide rights' and 'transfer of drawings' would make the payment fall under the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 400 (Mad.) at page 418. 3. Davy Ashmore India Ltd.'s case at page 630. 4. Arabian Express Line Ltd. of United Kingdom v. Union of India [1995] 212 ITR 31 (Guj.) at page 35. Relying on the above cited decisions it was contended that the definition of royalty as per the DTAA had to be applied. Where there is DTAA between two countries, in order to decide whether a payment is royalty, only the definitions contained in DTAA have to be seen. 5.28 The Karnataka High Court in the case of Citizen Watch Co. Ltd. at page 787 and the Calcutta High Court in the case of Davy Ashmore India Ltd, at pages 630 and 631 have clearly held that the definition of royalty under section 9(1)(vi) will apply only for that section and it cannot be applied for the purposes of determining whether a payment is royalty under DTAA. 5.29 The Karnataka High Court and the Calcutta High Court in the above two decisions have also clearly held that the royalty is a payment for grant of right to use any property, the ownership of which continues to vest with the grantor. Hence only where ownership is retained and the right to use is granted, the payment of the same "ill constitute royalty. 5.30 To sum up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by Article VI of the Double Taxation Avoidance Agreement between India and Austria, as per which, the term 'royalty' means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plants, secret processes or formulae, trade marks and other like property or lights. 6.3 Section 9(1)(vi) of the Income-tax Act, 1961 defines royalty on the similar lines, as per which royalty income consisting of lump sum consideration for the transfer outside India of or the imparting of information outside India in respect of any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formulae, or process or trade mark or similar property are ordinarily chargeable to tax in India. Thus royalty is the payment made by one person for the use of certain exclusive rights belonging to another person. 6.4 In the present case the Semi Direct Injection System (SDIS), which was developed by AVL, on which AVL had exclusive rights and patents, was introduced in the 100CC motorbike engine owned by TSL. Thus the existing carburetted engine of TVS-S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the remittances referred to above. Thus the certificate did not state that the fees were not liable to Indian Income-tax, instead it stated that TVS had made necessary arrangements for payment of the tax due under the Income-tax Act. 6.10 In this connection he referred to Article 5.3 of the agreement between TSL and AVL, which states: "The amount in 5.1 is net of Indian taxes and any taxes due will be borne by TSL". Thus the payment of taxes was the responsibility of TSL. Hence no objection certificates were issued for remittance abroad of the amounts. 6.11 The argument that TSL was paying royalty to Suzuki, Japan was also not relevant because TSL was paying royalty to Suzuki, Japan for the 100 cc machine and other patent rights, etc., whereas the royalty paid to AVL is for the SDIS introduced by it in the 100 cc machine, the information, drawings, designs, calculation, etc. provided by it and the world-wide rights acquired by TSL, etc. Thus the payments made to Suzuki, Japan and AVL, Austria are for two different purposes/rights, etc. acquired. 6.12 It may be possible that a portion of the amounts paid by TSL to AVL is towards' fees for technical services' re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be answered: (i) Whether the provisions of DTAA between India and any other country prevail over the provisions of the Income-tax Act, 1961 ? (ii) In case the DTAA prevails over the Act, whether the impugned payments made by TSL to AVL fall under the definition of 'royalty' or 'technical know-how fees' as per the DTAA vis-a-vis the collaboration agreement between India and Austria ? (iii) In case the impugned payments fall under the term 'technical fees' as per DTAA between India and Austria, whether the Indian company, viz., TSL is liable to deduct tax at source, particularly when AVL, The Austrian company the partner to the collaboration agreement had treated the same as income and offered to Austrian Income-tax in terms of the same DTAA? 7.1 Now let us consider the first question as to whether the provisions of DTAA prevail over that of the Income-tax Act, 1961. The very phrase 'double taxation avoidance agreement' suggests that there shall not be double taxation of the same assessee by both the countries and there shall not be double avoidance by an assessee. In other words both double taxation and double avoidance are to be prohibited. Section 90(1) of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has observed as follows : "It is obvious and inevitable that there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting states to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement." 7.4 In the case of Arabian Express Line Ltd. of United Kingdom's case the Hon'ble Gujarat High Court has observed as follows: "Sub-section (2) of section 90 of the Income-tax Act, 1961 specifically provides that 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 the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 333 dated April 2, 1982, issued by the Central Board of Direct Taxes provides that where a specific provision is made in the double taxation avoidance agreement, that provision with prevail over the general provisions contained in the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, namely, TSL. There was no grant of any right to use any property of AVL. The payment was only for the work done by AVL and for the transfer of technology absolutely to TSL. AVL had not patented any of such drawings. Hence there was no question of AVL permitting TSL the 'right to use their patented technical know-how. Under these circumstances the contention of the assessee's counsel that 'the payment for the services rendered by AVL could only be termed as fees for technical services and could not be considered in the nature of royalty, since it was not payment for the right to use any property of AVL', is very much convincing. Further, the payment by TSL was lumpsum payment in four instalments and was not periodical or dependent or production volume, which were the characteristics of royalty. There is also force in the argument of the assessee's counsel that when there was an outright transfer of designs, documents, etc., the consideration for such transfer of design, drawings, documents could not be treated as royalty. We find that the Income-tax Officer, TDS-V, Chennai, was influenced by the provisions in the Income-tax Act than the provisions of the DTAA and the real acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner (Appeals) was right in holding that the deduction of tax at source was not called for in this case and the Assessing Officer should have issued no objection certificate for the remittances of technical know-how fees without deduction of tax at source. Thus the departmental appeal was dismissed. The facts of the case in hand are identical with those in the case considered by the Patna Bench of this Tribunal. In the instant case also the Austrian Company (AVL) had no permanent establishment in India and the technical services were all rendered in Austria, i.e. outside India. Also the payment was not in the nature or royalty, as had been already held by us. 7.8 The following factors would also fortify the claim of the assessee in this regard. TSL entered into an agreement with AVL for technical assistance under the auspices of technical development fund constituted by the IDBI and was approved by the Government of India. The Reserve Bank of India had also accorded sanction to the agreement as' technical aid agreement'. Also the Deputy Commissioner had issued no objection certificate for the impugned remittances. It is also noticed that TSL by its letter dated 12-1-1994 addre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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