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TMI Blog2005 (11) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was that the payment constituted business profits of the said foreign concern. Since the foreign party had no PE in India, the payment was held not taxable and it was also held that the payment was not in the nature of royalty. After giving a finding on the issue of royalty, the respected Co-ordinate Bench in the case of Graphite Vicarb India Ltd. vs. ITO [ 1992 (9) TMI 121 - ITAT CALCUTTA-D] , has also taken into account the term PE . Once it was certified by the contracting party that it had no PE in India and the business had not been carried through a fixed place of business in India either wholly or partly, therefore, it was held that the said business were neither under the main definition nor under the inclusive part thereof, so that it could be said that the said foreign collaborator had a PE in India. For both the reasons assigned therein, the issue was decided in favour of the assessee. The Hon'ble Court in the case of Scientific Engineering House [ 1985 (11) TMI 1 - SUPREME COURT] has observed that the tenure of the agreement showed that the various documents such as drawings, designs, charts, processing data and other literature included in the certificates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and designing documentation fees prescribed in art. 4.1.2 of the impugned collaboration agreement. So, we hold that the consideration paid for transfer of design documentation was not in the nature of royalty as defined either in the articles of DTAA or in s. 9(1)(vi), Expln. 2 of IT Act. Further, we hold that considering the admitted position based upon evidence placed on record, the said German company had no PE in India. Ex consequenti, we are satisfied that there was no obligation upon the assessee to deduct the tax in respect of payment of design documentation fees, so the learned CIT(A) has rightly allowed the claim of the assessee and there is no infirmity in the said directions. We uphold the same. Before we part with, we may mention a word of appreciation to the learned Representatives of both the sides for their valuable assistance rendered in deciding these appeals. In the result, Revenue's appeals are dismissed. - Mukul Shrawat J.M. And Ahmad Fareed A.M. For the Appellant : Satya Prakash , Satyakam Mishra For the Respondent : B. K. Khare ORDER MUKUL SHRAWAT, J.M.: 1. All these three appeals have been filed by the Revenue out of which two are against a consolidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t M/s Uhde GmbH had no PE in India. The other claim of royalty had also been dismissed on the ground that the definition of royalty as per s. 9 of IT Act prevailed, as there was no difference in the definition of royalty as also prescribed under DTAT. With these observations, he has rejected the claim for issuance of No Objection Certificate and directed the assessee to deduct the tax at 20 per cent of the remittable amount as prescribed in DTAT with West Germany. 3. The assessee has filed two appeals before the learned CIT(A), one was dt. 7th Feb., 1990, and the other was dt. 5th Oct., 1990. Both these appeals have been decided by the impugned common order now under appeal. In this regard, the learned CIT(A) vide para 3 has clarified that at the time of 1st remittance, the assessee had paid tax of Rs. 53,43,997 on 8th Jan., 199O, and the AO has issued a No Objection Certificate on 10th Jan., 1990. The first appeal was against the said deposit of tax as the same was made under protest. Subsequently, at the time of 2nd instalment, the AO has passed the impugned order under s, 195, dt. 5th Sept., 1990, referred to hereinabove, through which the assessee was directed to deduct tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44,018 8. Thereafter, the assessee has given details of payment of technical know-how fees, design engineering fees and TDS as under (2nd remittance): DM Technical know-how fees (gross) 1,19,95,000 2nd 1/3rd instalment paid 39,98,333 TDS @ 20% 7,99,667 Equivalent to Rs. (This TDS payment has not been disputed) 92,07,450 Design engineering fees (gross) 80,00,000 2nd 1/3rd instalment paid 26,66,666 TDS @ 20% borne by Finolex Pipes Ltd. 53,33,331 Equivalent to Rs. (This TDS payment has been disputed) 61,40,852 5. Before the learned CIT(A), broadly speaking, four points were under consideration, firstly, whether the issue was appealable under s. 246 of the IT Act, secondly, the assessee was entitled to raise the issue as prescribed under s. 248 of the IT Act, thirdly, whether there was any liability to deduct tax at source under s. 195 of the Act, and lastly, the applicability of relevant articles of Double Taxation Avoidance Agreement (DTAA) between India and West Germany. In respect of applicability of s. 246, the argument was that the appeal lies under cl. (c) of sub-s. (1) of s. 246. In this regard, a portion of Chaturvodi Pithisaria, 3rd Edn., Vol. 5, p. 4244 was referred to, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and secondly, technical assistance, both were combined in one agreement. The assessee has denied liability of deduction of tax on the ground that the assessee had purchased plant and the plant cannot be considered to be a royalty. The process designing fees was the property of the assessee and entitled for the usage in its own right as there was no specific period prescribed for the use of such property claimed to be part and parcel of plant. So, it was pleaded that no tax was payable on remittance to foreign collaborator at the time of payment of the said amount. In this regard, a portion of written submissions was reproduced in the impugned order for reference as follows: The only point in the above appeal is whether the payment made to the German company under cl. 5.2 for the process design documentation as defined in cl. 3.5 of the agreement dt. 16th Aug., 1989, is liable to Indian tax. At the outset, it may be made clear that so far as the payments of technical fees or royalties, payable under other clause of the agreement are concerned, it is not disputed that they are liable to tax in India. However, the price paid for process design documentation is, it is submitted, not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) as below: (a) The use of or the right to use any copyright of literary article or scientific work including cinema photographic films; (b) Right to use films or tapes for radio or television broadcasting; (c) Right to use any patent, trademark, design model, plan or secret formula or process; (d) Right to use any commercial, industrial or scientific equipment; (e) Any information concerning commercial, industrial or scientific equipments, etc. 7. With this background of definition, the assessee has described several terms and clauses of the impugned agreement, according to which, firstly, the technical collaboration was for the purpose of manufacturing of product and secondly, the said technical collaboration was for setting up of a plant itself. So, it was argued that the payment for the process design documentation of the plant was really part and parcel of the plant itself because the plant had to be erected based upon such know-how and design. Before the learned CIT(A), it was emphasised that the assessee had also capitalized the said payment in its books of account and the same was not claimed as revenue expenditure. It was finally pleaded that the AO went wrong in dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Satyakam Mishra, both appeared and argued at length. From the side of the respondent assessee Shri B.K. Khare appeared as well argued at length. Both sides have relied upon several precedents and relevant provisions of the IT Act and the prescribed articles of DTAT. The clauses of the impugned collaboration agreement have also been quoted. At the outset, it is worth mentioning that after hearing both the sides consecutively for two-three days, the hearing was concluded on 4th May, 2005, but thereafter, both the sides have filed their submissions in writing in the registry and pleaded to place those submissions on record with an intention to facilitate the appellate proceedings. Hence, we have directed to exchange the copies of written submissions between both the sides and after providing a final opportunity, the hearing was concluded on 7th June, 2005. Revenue's argument 9. From the side of the Revenue, the case was opened by Shri Satyakam Mishra who has firstly narrated the background of the agreement. He has stated that the assessee had entered into an agreement with a non-resident company, viz., Uhde GmbH, West Germany, on 21st April, 1989. The title of the agreement was ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eel Co. Ltd. (2001) 71 TTJ (Cal) 323. In this manner, the learned Departmental Representative has mentioned that the additional ground is covered by this decision in favour of the Revenue. 9.2 The next plank of his argument was on the merits of the case and in this connection referred to para 3.2 of the impugned agreement, according to which, the contractor , i.e., Uhde, Germany, has authorized the owner, i.e., the assessee, the non-exclusive right, including non-exclusive licence under the patent rights to use the technical information and to operate the process in plant. In this clause it is mentioned that the contractor undertook not to assert any of its proprietary rights, including the patent rights but excluding trade names, to prevent the manufacture of product in the plant and the sale of product by owner to any country of the world except in the Federal Republic of Germany. So, the argument of the learned Departmental Representative that the interpretation is required whether the payments made were in the nature of royalty or fees for technical services. The learned Departmental Representative has also drawn our attention on art. 4 of the impugned agreement dealing with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the agreement, the assessee was under obligation to make the payment in instalments. He has emphasized that the whole of the document, i.e., the agreement in question has to be read as a whole to arrive at the correct determination of the nature of service provided by M/s Uhde. He has mentioned that otherwise also the rules of statute insofar as the document is concerned is that it should be read as a whole unless some part of which is illegal. For this proposition, reliance was placed on the decision of Madras High Court in the case of CIT vs. Neyveli Lignite Corpn. Ltd. (2000) 162 CTR (Mad) 206 : (2000) 243 ITR 459 (Mad). Further advancing his arguments, it was stated that fee for technical services is defined in s. 9(1) (vii) (which) means any consideration for rendering technical or managerial or consultancy services but it does not include consideration for any construction, assembly, mining, etc., deemed to be income accrues or arises in India and chargeable under the statute. After narrating the provisions of the Act, the learned Departmental Representative has referred to DTAA between Federal Republic of Germany and Republic of India. In this connection, art. VIII-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (SC). He has argued that right of appeal is of a person who denies liability of the tax. In this case, the said foreign company has a right to challenge the charge ability of tax and can file an appeal under s. 246(1)(c) but not the assessee because he was not affected in any manner by merely deduction of tax. For this proposition, he has cited the decision of the Calcutta Bench of Tribunal in the case of ITO vs. Tata Iron Steel Co. Ltd. and the decision of the Supreme Court in the case of Raza Textiles Ltd. vs. ITO. 9.5 Once the first appellate authority had no jurisdiction over the issue, therefore, in turn, the Hon'ble Tribunal also had no jurisdiction to decide this appeal, the learned Departmental Representative made a concluding remark. Respondent's arguments 10. From the side of the respondent-assessee, Mr. Khare has opened his arguments by referring to charging s. 4 of the Act. Sub-s. 2 of this section states that in respect of income chargeable under sub-s. (1) income-tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provisions of this Act. According to him, first of all this is to be ascertained whether tax at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to him, even otherwise, the right laid down in the case of TISCO, as cited by the learned Departmental Representative is also in favour of the assessee because the Hon'ble Calcutta Bench has held that an appeal can be filed under s. 248 and the assessee is at liberty to pay tax to get the right of appeal before the CIT(A). The Bench has gone to this extent that a belated appeal should also be entertained by condonation of delay if the condition precedent in s. 248 of deposit of tax is satisfied by the taxpayer. 10.2 Coming on the merits of the case, the learned Authorised Representative has mentioned that an agreement was made between the assessee and Uhde, GmbH, Federal Republic of Germany, for licence, process, design and technical assistance for polyvinyl chloride complex. This agreement was signed on 21st April, 1989, containing preamble and as many as 14 articles. The assessee is termed as owner in this agreement and the German company was termed as contractor . There was a mention of Hoechst AG as licensor who has developed process and was in possession of technical information including know-how, process, design and information for related equipment and technology con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd erecting of plant. The contractor was also under obligation to provide technical personnel having knowledge of manufacture of the product, safety check of plant, commissioning of plant and its initial operation such as guarantee test run. Article 4 provides price of the agreement which was to be transferred as consideration for obtaining technical information and process design fees. Mr. Khare has mentioned that art. 4 has two main clauses as far as the deduction of tax is concerned i.e. cls. 4.3 and cl. 4.4. The normal clause provides tax deduction @ 20 per cent in respect of technical information as defined in arts. 3, 3.1 and 3.2. However, the latter clause, i.e., 4.4 provides that tax if any, was to be borne directly by the owner in such a way that the contractor shall receive the agreed amounts in the Federal Republic of Germany net of taxes, customs, cess, etc., in respect of payments made in consideration of supply of process, design documentation. The assessee had adhered to these clauses and acted upon accordingly. Due to this reason at the time of payment of first instalment pertaining to technical information, the tax was deducted. The dispute is only with respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration paid was a commercial profit as far as the German company is concerned, hence, out of the ambit of the term payment for royalty . In support of this argument, he has relied upon decision of Tribunal, Delhi Bench, in the case of Munjal Showa Ltd. vs. ITO (2001) 117 Taxman 185 (Del)(Mag). He has also cited one more decision of Tribunal, Delhi Bench, in the case of Swadeshi Polytex Ltd. vs. ITO, wherein the DTAT was also in respect of Federal Republic of Germany and the issue was in respect of the assessee having business connection in India whether constituted PE or not Though in that appeal, the technology services were not immediately used by the Indian company even then it was held by the Co-ordinate Bench that since the payment was for out-right sale and not for mere user of the technology, therefore, the agreement would not militate against the assessee. He has also cited few instances where the collaboration agreement admittedly having two components-one, lump sum consideration for transfer of technical know-how and the other, independent regular payment on percentage basis for the right to use the know-how as a royalty. The Courts have taken into account such bifu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionary, a conscious view was taken that even though the payment was made in lump sum but the assessee had become the owner of such rights, hence the supply of technical know-how was a business profit and not a royalty either under the articles of DTAA or as prescribed under s. 9(1)(vi) of the IT Act. Finally, he has cited a decision of Hon'ble Andhra Pradesh High Court in the case of CIT vs. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP) and compared that in the case of the assessee the contract of sale was that of process design documentation which was lent to the sale of engines, etc. Further, the consideration for technical supervision was separately stipulated in the agreement. Hence, the said foreign company had no business connection as far as this agreement was concerned. The process design documentation is defined distinctly in the agreement having different character altogether from the technical information provided and the clause of secrecy and confidentiality was only in respect of technical information and not in respect of process design documentation. The assessee was entitled for use of technical information, improvement, patent rights and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is being made through an agreement for supply of know-how as well as for supplying of information for setting up of a plant, it was held that 50 per cent of the amount to be in the nature of royalty and balance 50 per cent to be in the nature of fees for technical services. This percentage has duly been approved by Hon'ble Calcutta High Court in the case of N.V. Philips Glocilampenf Abricken (1988) 73 CTR (Cal) 86 : (1988) 172 ITR 541 (Cal). Again, heavily relying upon the Delhi Bench decision of Tribunal in the case of Asstt. CIT vs. Hewlett Packard Ltd. (2002) 75 TTJ (Del) 786, the learned Departmental Representative has stressed that in that case as well, the agreement in question was between India and Germany wherein there was a transfer of technology and know-how vis-a-vis user of technology. The German company had entered into an agreement of technical collaboration with an Indian company for rendering technical assistance against a lump sum consideration. There were certain stringent clauses in the agreement as in the present case, placing restrictions, limitation, controls, checks over user of technical know-how. So, it was held that there was no transfer of technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensor . We are mainly concerned with art. 3 through which contractor's obligations were defined. Article 3.2 was in respect of technical information and art. 3.5 was for supply to owner, i.e., the assessee the process design documentation. This distinction was taken into account when the price was fixed as per art. 4 of the impugned agreement. Clause 4.1.1 has fixed the consideration for the transfer of technical information. However, cl. 4.1.2 has fixed the consideration in respect of process design documentation. In the like manner, the obligation of tax liability has also been separately fixed in respect of both these two components. Clause 4.3 provides payment in respect of technical information was subject to tax deduction at source in India on behalf of the contractor @ 20 per cent. According to DTAA between India and Germany, owner was responsible to provide the contractor the tax receipts. So there is no dispute as far as this clause is concerned. Next is the cl. 4.4 in respect of payment pertaining to process design documentation which was not inclusive of any tax, cess, duty, etc. This clause has provided that if any tax liability may arise the same shall be borne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding lump sum consideration for transfer of all or any rights in respect of patent, invention, model, design, secret formula, imparting of any information concerning the working of, or the use of, a patent invention, use of any patent and right to use any industrial or commercial or scientific equipment. The object of insertion of this section appears to be that due to the advancement of civilization and inter-communication and co-operation between different countries, royalty payment under collaboration agreements have greatly increased. Surprisingly, earlier there was no specific provision for grouping any such payments in the net of taxes in India. So, the Finance Act, 1976, has inserted cl. (vi) in s. 9(1) defining the expression royalty and also prescribing circumstances wherein such royalty income shall be deemed to accrue or arise in India. In this regard, CBDT has also issued a Circular No. 202, dt. 5th July, 1976, explaining the effect and scope of this section. A non-resident taxpayer is chargeable to tax in India in respect of income by way of royalty which is received in India and it was also mentioned that any lump sum payment made for the supply of know-how is not cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on profits earned through use of process or the formula or a patent, etc. Contrary to this, in the present appeal, the process design documentation has a direct nexus with the production and commissioning of the plant. Due to this reason, the main thrust of the argument of Mr. Khare is that the lump sum consideration was not at all the royalty but part and parcel of plant . 15. We have also laid hands on the extracts from the Model Tax Convention of India, published by OECD committee on fiscal affairs known as Organization for Economic Co-operation and Development, Paris; a condensed version published in April, 2000. Relevant article of this convention is art. 12 concerning the taxation of royalties. As per preliminary remarks, 1. In principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. The letting may be granted in connection with an enterprise (e.g. the use of literary copyright granted by a publisher or the use of a patent granted by the inventor) or quite independently of any activity of the grantor (e.g. use of a patent granted by the inventor's heirs). 2. Certain countries do not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of para 2. Finally, vide para 16, it was also formulated that, Each case will depend on its particular facts but in general such payments are likely to be commercial income within art. 7, or a capital gains matter within art. 13, rather than royalties within art. 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency. So, an important guideline was issued that where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the said article do not apply. This statement is also lifted from cl. 15 of comment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of AEG Aktiengesselschaft vs. IAC and agreeing to this decision, mentioned that royalties can De distinguished from fees for technical services. Article of DTAA 17. Before we examine several precedents on this subject, it is necessary to peruse the relevant articles of DTAA between Federal Republic of Germany and Republic of India. Article VIII-A of DTAA has defined the term royalty as follows: The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. This definition has indicated that royalty is an information in the form of industrial, commercial or scientific equipment based upon the industrial, commercial or scientific experience. Though under art. VIII-A royalty arising in a Contracting State and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry for granting relief of tax for avoidance of double taxation, then the provisions of income-tax shall apply to the extent they are more beneficial to the assessee. In support of this argument, a decision of Tribunal, Delhi Bench, in the case of Munjal Showa Ltd. vs. ITO was cited. In that appeal, as per contract agreement, the assessee company had received the licence to use the industrial property right for manufacture of shock absorbers and also technical documents and know-how relating to the process for manufacturing shock absorbers. The agreement was composite, however, the issue was in respect of technical know-how and services in connection with manufacture of shock absorbers. Assessee has sought drawings and designs of equipments in order to fabricate plant and machinery in India. The Japanese company has charged a consideration towards cost of supply of know-how and design, etc. Revenue's case was that the said consideration was in the nature of royalty as defined in Expln. 2 to s. 9(1)(vi) of the IT Act. It was also directed by the AO to deduct tax at source. The first appellate authority has taken into account DTAA between India and Japan and held that the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation of any charging section is concerned, undoubtedly, the same has to be interpreted as written in the statute. We will discuss in the following paras, the charging section as well as also discuss the law applicable in respect of interpretation of statute. Likewise, the decision of Gursahai Saigal vs. CIT also deals with rule of construction and held that it is well recognised that the rule of construction that if a case is not covered within the full corners of the provisions of a taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter, applies only to a taxing provision and has no application to all provisions in a taxing statute. The law so laid down by the Hon'ble apex Court has to be followed and the provisions contained in a taxing statute have to be constructed in an effective and workable manner and so this rule shall be followed by us while deciding this appeal. There is one more decision cited by the learned Departmental Representative in the case of ITO vs. T.S. Devinatha Nadar, wherein the ratio laid down was that the decisions of Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacture of the machinery itself with the aid of such designs. The contract between the assessee and the manufacturer did not in any way refer to any specific patent owned by the supplier which the buyer was permitted to accept. All that the contract provided was an indemnity to the buyer to protect the buyer against any action by a third party claim, patent, trademark or other rights in the equipments supplied. The Hon'ble Court has given a finding that there was no transfer or licence of any patent, invention, model or design. The design referred to in the contract was only the design of the equipment required to be manufactured by the supplier abroad and supplied to the predecessor. No licence to any patent is involved, so the Hon'ble Court has held that the payments made were not liable to deduction of tax at source. This decision is squarely in favour of the assessee and directly on the issue in hand though cited by the learned Departmental Representative, Mr. Satyakam Mishra. As far as the general ratio laid down in respect of interpretation of a document is concerned, undoubtedly, a document or agreement has to be read as a whole unless some part of which is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ln. 2 of the IT Act. So, we have to examine whether in the present appeal also, the payment in question was separately mentioned as a fees and segregated from the payments towards cost of technical information and know-how supplied by the foreign company. It may not be out of place to mention, at the outset that considering the factual matrix as stated supra, there was no such segregation and the entire agreement was in respect of process of design documentation and technical know-how. Due to this distinction, this limb of the precedent need not to be followed. Further, we are going to examine the exact nature of the payment agreed upon in the light of terms of the agreement between the contracting parties. 19.3 Mr. Satya Prakash, learned CIT-Departmental Representative, has strongly relied upon the decision in the case of Asstt. CIT vs. Hewlett Packard Ltd. This is an important decision decided by the Tribunal, Delhi Bench, wherein several judgments for and against the issue have been considered and thereafter having regard to the fact of that case, it was held that receipts have fallen within the definition royalty and were exigible to tax in India under art. VIII-A of DTAA. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d purpose and limited period. At this juncture, it is justifiable to simply mention that we have conscientiously examined the facts and the law laid down in this precedent, so as to examine the present appeal in the light of this decision. On admissibility and jurisdiction 19.4 Few decisions have been cited in respect of admissibility of this appeal by the learned Departmental Representative in respect of s. 248 of IT Act and s. 246(1)(c) of IT Act. The first plank of argument of learned Departmental Representative was that the assessee has not paid the tax and simply furnished a guarantee, so furnishing of bank guarantee did not amount to actual payment as prescribed in this section. Reliance placed on the decision in the case of Asstt. CIT vs. Mugat Dyeing Printing Mills. We have examined the facts of that case which were in respect of s. 43B of IT Act and in that regard, the decision was about the entitlement of deduction of excise duty liability. In this context, the Co-ordinate Bench has held that the assessee shall be entitled for such deduction in the year when the amount shall be paid and not in the year when the fixed deposit of the bank was made as a bank guarantee. Witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The respected Co-ordinate Bench has stated that before filing an appeal, undisputedly under s. 248, assessee must deduct tax due from non-resident and must also pay the same to the Government. In case assessee did not make full payment, even then assessee should be given liberty to pay the tax and should also be given right to file a fresh appeal along with an application for condonation of delay. Therefore, this citation has also not denied the right of the appeal to an aggrieved party i.e. the assessee. As far as the appeal in hand is concerned, this is not in dispute that the taxes have been deducted and paid to the Government thought at first instance, furnished a guarantee but later on converted into actual tax payment, as duly certified by bank. It is interesting to note that the learned Departmental Representative has cited a decision of Raza Textiles Ltd. wherein also, the Hon'ble Court has expressed the same view as we have discussed hereinabove and for ready reference a portion from the note is reproduced below: Held also, that the provisions of s. 30(1A) which required that a person seeking to file an appeal thereunder, must have first deducted tax at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mechanical or industrial operation. If we examine the facts of the present case in the light of the ratio laid down by Hon'ble apex Court, we may find that the agreement in question was for supply of technical information including know-how, process, design and information for the purpose of manufacture of EDC, PVC etc. Undisputedly, assessee was establishing a polyvinyl chloride complex for manufacturing of PVC. The entire process of manufacturing, thus cannot be segregated from the know-how and design engineering fees. At this juncture, we may also clarify that we are not concerned with the technical know-how fees because this is not the issue raised by either side and confined ourselves only to design engineering fees . Once such designs are part and parcel of the commissioning and processing and manufacturing of a product, then naturally, the ratio laid down by the Hon'ble Court in the case of Scientific Engineering House can be safely followed, but will a little distinction on facts. 21.1 Next are few decisions of Tribunal, Pune Bench, namely, in the cases of Be-Delft Electronics and Toshniwal Instruments Ltd. Both these decisions were on the subject of royalty as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its manufacture. The agreement envisaged to furnish information in respect of working methods, manufacturing process, methods of analysis and quality control, etc. The said foreign company was entitled to receive 5 per cent of the net selling price of the manufacturing product as consideration for supply of both technical assistance and information. It was observed by the Hon'ble Court that there was a significant distinction between technical assistance and information. The information agreed to be supplied by the foreign company was in respect of working methods of the product which were considered to be exclusive information only available to the assessee and not generally disseminated, so payment in respect thereof was held in the character of royalty. So, the distinction made by the Hon'ble Court itself is glaring leaving no scope of doubt. In the latter decision, as cited above, there was a composite collaboration agreement, so in that context, since the agreement was for supply of know-how as well as for supply of information necessary for setting a plant, so the Hon'ble Calcutta High Court has held that 50 per cent of the amount was to be held in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt without deduction of tax under s. 195(2) of the IT Act. The first appellate authority has held that there was an outright purchase for permanent use, so taxable as business profits. Since there was no PE of the collaborator in India, hence it was directed by CIT(A) to refund the tax deducted. The Tribunal has endorsed the said view of the first appellate authority on both the counts, firstly, that the said non-resident collaborator had no PE in India and, secondly, the payment in question was for outright purchase of technical documentation for which consideration was payable in that case in France. In that case also, the agreement did not provide duration or period nor did it provide that the said technical documentation was to be returned to the supplier. The respected Co-ordinate Bench has followed the decision in the case of CIT vs. Davy Ashmore India Ltd. and also a decision of Special Bench in the case of Graphite Vicarb India Ltd.. This decision of Co-ordinate Bench applies in all fours in the context of present appeal. We have also examined the decision of Special Bench in the case of Graphite Vicarb India where an Indian company entered into a collaboration agreement wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived as consideration for the use of or for the right to use, any copyrights, designs, 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 art. III as the foreign company had no PE 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 that 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 cl. 11 of the collaboration agreement was commercial profit within the meaning of art. III of the DTAA between India and France and since, admittedly, the foreign company had no PE in India, it was not liable to be taxed in India. Permanent establishment defined 22. The next questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held that the portion of lump sum consideration pertaining to transfer of technical know-how being an outright sale will be independent of royalty. It was held that the royalty is subject to tax for the portion pertaining to the right to use of that know-how. So, even in that complex situation, when there was payment in respect of royalty mixed with the payment of outright sale of know-how, the respected Co-ordinate Bench has duly considered both the conditions and thus segregated both the amounts in question. As far as the appeal in hand is concerned, there is no such complex situation, so the view taken in this precedent can be followed in most simplistic manner. 22.1 Though hereinabove, we have gone through number of decisions wherein the term royalty has been considered and defined but even then, a decision of Delhi Bench in the case of DCM Ltd. vs. ITO is worth mentioning because there was an agreement with a foreign enterprise for transfer of comprehensive technical information, know-how and supply of equipment by the foreign enterprise to the assessee. One more provision was there that the assessee was entitled to sub-license its right to another party in India. The paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty and the excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any information concerning the working thereof. The assessee, in our view, is right in submitting that the things for the transfer of which DCM agreed to pay to TL franc 1,55,000 as such squarely fell within these two exclusionary clauses which do not form part of the definition of the term 'royalty' under art. XIII(3) of the DTAA. The IT authorities in our view, were not right in being influenced by the term 'payment of any kind' preceding the definition of this term under the DTAA.......... 22.2 After giving a finding on the issue of royalty, the respected Co-ordinate Bench has also taken into account the term PE . Once it was certified by the contracting party that it had no PE in India and the business had not been carried through a fixed place of business in India either wholly or partly, therefore, it was held that the said business were neither under the main definition nor under the inclusive part thereof, so that it could be said that the said foreign collaborator had a PE in India. For both the reasons assigned therein, the issue was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recedent on its own fact because each case presents its own feature so as to apply the ratio of the decision in the context it was held considering the facts and legal aspect of a particular case with due care. Though the law of stare decisis i.e. binding nature of precedent delivered by the higher judicial authority is manifest, nevertheless, the context has to be examined leaving no room for doubt about seeing the tone and tenor under which the quoted decision is delivered. Therefore, we withhold ourselves and do not prescribe a clear finding on this proposition of Mr. Khare whether the lump sum consideration in question was in the nature of capital asset and the documentation was in the nature of plant. 24. An interesting situation has cropped up before Jaipur Bench since there was a difference of opinion in the case of Modem Threads Ltd. which was resolved by a Third Member decision cited as. Therein as well, the meaning of royalty was defined and held that the amount paid for supply of technical know-how for designing, construction and operation of plant in India was not in the nature of royalty as defined in DTAA with Italy. To resolve the dispute, firstly, a finding was give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to any PE. Conclusion 25. Having regard to the facts of the case and considering the totality of the circumstances, in the light of elaborate discussion made hereinabove, and several precedents cited, we are of the considered view that the company, namely, M/s Udhe GmbH, Germany, has transferred design engineering to the assessee and such an alienation was not merely a right to use but an out and out transfer or sale which was used by the assessee for establishing and commissioning a polyvinyl chloride complex; as duly distinguishable from technical information in the said collaboration agreement vide, arts. 3.2 and 3.5 of the impugned agreement. The consideration is also distinguishable in respect of technical information as prescribed in art. 4.1.1 from the lump sum consideration fixed for process and designing documentation fees prescribed in art. 4.1.2 of the impugned collaboration agreement. So, we hold that the consideration paid for transfer of design documentation was not in the nature of royalty as defined either in the articles of DTAA or in s. 9(1)(vi), Expln. 2 of IT Act. Further, we hold that considering the admitted position based upon evidence placed on record, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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