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TMI Blog2013 (9) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... e technical information and trademark and there are limitations placed on exercise of such rights by the assignee – Assignee cannot use or utilize the technical information or the trademark for sale of products either directly or indirectly outside the territory without prior approval of the assessee, which would be at its absolute discretion - Further the assignee cannot license or assign or transfer the technical information and trademark to any person other than the Cadila affiliates - There are also several restrictions on the assignee in the matter of use of technology, know how and trademark which makes it quite clear that the assignee has not been given ownership rights and only right to use - Such payment for use of technical information and know how has to be considered as royalty both under the provisions of Income Tax Act and under the provisions of DTAA between India and Germany even if the payment is lump sump and not recurring - The royalty is taxable in India under section 9(1)(vi) as well as under the provisions of DTAA – Decided against the Assessee. - ITA No. 5465/Mum/2008, ITA No. 6628/Mum/2008 - - - Dated:- 13-9-2013 - Shri Rajendra Singh And Shri Vivek Var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA between India and Germany. 2.1 The AO, however, did not accept the claim. After examination of records and the relevant terms and conditions of the agreement, the AO noted that the agreement had been made for transfer of technology, know how and trademark in respect of certain products details of which have been given in para 4 of the assessment order. The AO noted that the transferee company i.e German Remedies had been manufacturing the same products in India and also marketing the same since last several years under license. The assessee, who was a share holder of Germam Remedies holding more than 12.5% of shares was not charging any fees from German remedy. The assessee had now signed an agreement as per which payments were made for the transfer of the same technology, know how and trade mark, which was already being used by the transferee. He referred to the RBI approval as per which the payment was required to be made as consideration for technical know how fees. Duration of the agreement was ten years from the date of agreement or seven years from the date of commercial production whichever came earlier. AO, therefore, proceeded to examine the nature of payment i.e. w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The AO also referred to the provisions of DTAA between Indian and Germany in which the term "royaltie" has been defined as under:- The term "royalty" 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, trademark, design or model, plan, secret formula or process, or for the use of, of the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 2.4 The AO noted that the definition of the term "royalty" as per the DTAA between India and Germany clearly mentioned that any payment received as a consideration for use of or the right to use any trademark, design or model, formula or process etc. was covered as royalty which was taxable under Article 12 of the DTAA between India and Germany. AO also observed that the Article clearly mentioned payment of any kind which meant that the payment could be either in installments or lump sump payment and it was not necessary that there sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al only mentioned lump sump payment for the use of trademark and technology know how and there was nothing mentioned in the approval about royalty payment. The assessee further submitted that the word "property" as defined in section 2(14) was the word of widest amplitude and included any right in the property. Further section 32 w.e.f assessment year 1999-2000 recognized technical, know how and trademark as an intangible asset on which depreciation was allowable. Therefore, the technical, know how and trademark which are clearly covered by the definition of property have been transferred in this case for perpetual use by the assignee for certain consideration. Therefore, it was a case of capital gain on transfer of property which was covered by the Article 13.5 of the DTAA between India and Germany and was taxable only in the country of residence i.e. Germany. 4. CIT(A), however, did not accept the contentions raised by the assessee. He referred to the Article 2.2 of the agreement as per which the assignee could not use or utilize the technology, know how or technical information or the trademarks for sale of products either directly or indirectly outside the territory without t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal are mentioned below:- (i) 37 ITD 64 (Mum) in case of Jaeger GmbH Vs. ITO (ii) 30 ITD 329 (Mum) in case of first ITO Vs. Automobile Penggeot (iii) 53 ITD 293 (Mum) in case of Atlas Capco AB of Sweden Vs. DCIT (iv) 98 ITD 69 (Mum) in case of DCIT Vs. All Russia Scientific Research Institute of Cable Industry. (v) 55 TTJ 554 (Del) in case of ACIT Vs. SNIA FIBRE SPA 4.1 CIT(A), therefore, held that the payment was taxable as royalty in India. He accordingly upheld the order of AO, aggrieved by which the assessee is in appeal before Tribunal. 4.2 Before us, learned AR for the assessee reiterated the submissions made before lower authorities that the assessee had assigned the technical know how etc to German Remedies/Cadila Healthcare Ltd. which meant transfer of right of the assessee in the property. It was pointed out that the agreement clearly referred the assessee as assignor and the other party as assignee. Further the Article 2.1 of the agreement clearly mentioned that the technology, know how, etc. had been assigned for perpetual and exclusive use forever, which only meant that the right of the assessee in the property had been transferred to the assignee forev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid judgments. The learned AR also placed reliance the judgment of Hon'ble High Court of AP in case of CIT Vs. Koyo Seiko Co. Ltd. (233 ITR 421) in which the Japanese company had supplied drawings and data connected to the project in India. It was noted that the Japanese company had sold the secret process for the period of nine years and thus was held that the Japanese Company had exclusive knowledge part of which was lost in India. Therefore, the amount received was a capital receipt. Reference was also made to the decision of Delhi Bench of Tribunal in case of Swadeshi Polytex Ltd. Vs Income-Tax Officer ( 38 ITD 328) in which the payment received for supply of technical, know how had been held assessable as capital gain and not royalty. It was thus argued that amounts received by the assessee in this case were for transfer of technology, know how and technical information which was assessable as capital gain. The transfer had taken place in Germany which was clear from Article 16 of the agreement. Therefore, under Article 13.5 of DTAA the amount was taxable only in Germany. 4.3 The learned AR also submitted that the amount was not assessable as royalty even under the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal held that it was not a case of transfer but only a case of use of know how and the amount was held assessable as royalty. It was pointed out that the said decision of the Tribunal has been upheld by the Hon'ble High Court of Bombay as reported in 18 Taxmann. Com 159. The High Court upheld the view taken by the Tribunal that the assessee had retained all the rights in the know how to itself and only limited right to use the know how had been parted with. Therefore it was held that it was not a case of outright sale. It was, therefore, urged that the order of CIT(A) upholding the payment as royalty should be confirmed. 6. In reply the learned AR for the assessee submitted that the various judgments relied upon by the learned DR were distinguishable. It was pointed out that in case of Atlas Capco AB of Sweden Vs. DCIT (Supra) relied upon by the learned DR, the agreement was not perpetual but only for a period of 5 years though it could be further renewed as per the agreement. Either party could terminate the agreement on happening of certain events, which was not so in the present case. In the case of International Tires Engineering Resources LLC (Supra) referred to by lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned, clause 7.1 provided that the trademark and trade-names which were owned by the assessee shall remain the exclusive property of the assessee which means that the assignee had been given only the right to use the trademark. Further as per clause 4.1, the agreement was subject to approval by RBI and the RBI had given approval for a period of ten years from the date of agreement or for a period of seven years from the date of commencement of the production whichever came earlier. No further extension of approval by RBI has been placed on record before us. Therefore, though the agreement referred to perpetual use, the same was for the period approved by the RBI. Another important fact which needs to be taken note of is that the assessee was earlier holding 12.5% of share holding in German Remedies Ltd. and had allowed the later to use the same technology, technical know how and trademark without payment of any fees for several years. The assessee sold the shares in assessment year 2002-03 and, thereafter, it had entered into an agreement for payment of certain consideration for transfer of technology, know how and trademark for use by the assignee. The dispute is whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the right to grant lease was a capital asset. 7.2 Relying on the above judgments, the learned AR for the assessee has argued that the assessee had transferred its right in the technical information and trademark in the defined territory to the assignee and, therefore, even if the assessee had retained the same right in other territories, there was transfer of assets in the defined territory and, therefore, income had to be considered as capital gain. The learned AR has also referred to the para 4 of preamble of the agreement which stated that the assignor was prepared to transfer the technology, know how and trademark to the assignee for use within the defined territory. The word "assignee" it was pointed out meant transfer. Further as per clause 2.1, the assessee had assigned and transferred the technology, know how and trademark for perpetual and exclusive use forever in the territory for manufacturing of certain products. Reference has also been made to clause 6.2 as per which the assignee could license or transfer the technology and know how for any group affiliates. Considering all these clauses and judgments referred to it has been submitted that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's prior consent and the assignee is also required to make sure that the employees and licensees did not disclose any of the confidential information to any other person or organisation. Further as per clause 12.1 even if the assessee could license or assign the technical information/trademark to Cadila Healthcare affiliates, the latter is also bound by the terms and conditions of this agreement. In case of trademark, Article 7.1 makes it quite clear that all trademarks and trade-names shall always remain the exclusive property of the assessee in the territory. Therefore, in so far as the trademark/trade- names is concerned the assessee has not transferred the rights and has only allowed the use of it which is obvious from the agreement. As regards the technical information and know how though the right granted is exclusive and perpetual but it is only for use of the technical information and know how as pointed out earlier. Though para 4 of the preamble to the agreement referred to by the Ld. AR speaks of transfer, the said para makes it clear that the transfer is for use in the defined territory. The words "assignment" and "transfer" used in other clauses of the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be mentioned that the assessee had not relinquished the rights completely even in the defined territory as the assessee exercised sufficient control in the manner of utilisation of technical information and trademark as mentioned earlier and, therefore, it could not be considered as the case of outright sale or transfer. The learned AR has also relied on decision of Delhi bench of Tribunal in case of Swadeshi Polytex Ltd. Vs Income-Tax Officer ( 38 ITD 328). In that case payment had been made for supply of improved and modified technical know how. The issue was whether it could be considered as transfer giving rise to capital gain. The Tribunal noted that the payment was not based on user of technology because the assessee had to make the payment irrespective of whether it had used the technical know how or not and there was no provision for any refund. Further the Tribunal also noted that the assessee could share the use of technology with any other Indian company subject to sharing of the license fee with the foreign company which was not possible if the assessee was having mere right to use. It was under these circumstances that it was held that the amount had to be assessed as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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