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TMI Blog2014 (11) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is in the field of petro chemicals. It entered into collaboration-cum-service agreements with the foreign company. Under the respective agreements, the foreign company was to supply and instal certain machinery and to transfer the relevant know-how. The total consideration was in the range of One Million US Dollars. The respondent was making payments to the foreign company in foreign currency, by applying for no objection certificate, referable to Rule 115 of the Income Tax Rules (for short, the Rules). The respondent has been submitting its returns and paying income tax regularly. The assessing officer intended to treat the respondent, as the agent of the foreign company, in terms of Section 163 of the Act and to bring the payments made to the foreign company, under the purview of the income tax. A notice was issued in this behalf, and on a consideration of the objections raised by the respondent, the assessing officer passed an order dated 19-11-1990 under Section 163 (2) of the Act holding that the respondent is liable to be regarded and treated as the agent of the foreign company, for the assessment year 1988-89. Thereafter, he passed an order of assessment on 11-04-1991, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt provisions of the Act, and the Rules. He submits that a perusal of the agreement between the respondent and the foreign company discloses that there was a clear transfer of patent, secret formulae, technical know-how and thereby the consideration paid therefor answered the description of royalty. He submits that though the contract was in several parts, it was only for the sake of convenience and, at least the amount that is paid for the transfer of know-how or patents, ought to have been treated as royalty. He contends that the Tribunal has placed excessive liberal interpretation upon the Double Tax Avoidance (DTA) Agreement entered into between India and the United Kingdom and treated the transaction between the respondent and the foreign company, as covered by the same. Learned Senior Counsel submits that since the agreement has provided for restriction of usage of patent or other know- how, totally different legal consequences flow and thereby, the agreement stands taken away from the regime under Section 90 of the Act. He has taken us through the relevant provisions of law, the text of agreement between the respondent and the foreign company, the relevant clauses of DTA Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assessment years, separate orders under Section 143(3) of the Act were passed imposing the tax liability vis--vis the amounts that were paid to the foreign company. For the assessment year, 1992-93, the permission for remittance was denied. The respondent pleaded that what it made through the agreement with the foreign company is an outright purchase and no royalty whatever was paid. The assessing officer however took the view that a substantial amount of consideration is towards royalty for transferring the patent and other technical know-how and that the same is liable to tax. The arrangement between the respondent and the foreign company is covered by separate agreements, namely, (a) licence know-how and engineering agreement, (b) supply of equipment and materials agreement and (c) services agreement. The scope of the first agreement is spelt out in the preamble, which reads: (A) APL intends to install an Oxo Alcholols plant at Vizag in the Republic of India for the production of 2-ethylhexanol and butanols. (B) APL intends to appoint Davy Powergas India Private Limited (or another Indian Contractor acceptable to both DML and APL) to render certain services in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t not limited to, designs, data from process developments and experiments, process data, manufacturing data, drawings, specifications, procedures, flowsheets, construction and operation techniques, the composition, nature, properties and use of the catalyst used in the DAVY PROCESS (but not information and know-how relating to the manufacture, recovery or refining of rhodium containing materials) and other useful technical information and know-how, relevant to the PLANT. 8. DMLs IMPROVEMENTS means technical information and know-how relevant to the PLANT relating to and within the scope of the DAVY PROCESS and coming within the control of DML after the date of this Agreement, including, but not limited to, designs, data from process developments and experiments, process data, manufacturing data, drawings, specifications, procedures, flowsheets, construction and operating techniques, the composition, nature, properties and use of the catalyst used in the DAVY PROCESS (but not information and know-how relating to the manufacture, recovery or refining of rhodium- containing materials nor to information and know-how relating to production of synthesis gas) and other useful technical in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or earning any income from any source in India. The proviso and remaining part of the section deals with the other details as well as exemptions. It is not in dispute that the amount paid to the foreign company is otherwise taxable under Section 9. The basis for the respondent to plead that the amount paid by it to the foreign company is not royalty is that (a) it is paid in lumpsum and not year after year for the use of patent or any facility; (b) the transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery and (c) that the arrangement is covered by the DTA Agreement. This plea did not weigh with the assessing officer as well as the Commissioner. The Tribunal however accepted that. Royalty, by its very nature is a sum payable to the owner of a design, invention or trade mark by another for using it. It is clearly opposed to an outright transfer. The original patent or the facility of other description continues to remain with the owner and the user would be permitted to avail the facility in a limited or absolute manner on payment of royalty. On cessation of the arrangement, the user loses the right and the owner of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed device, whether it is used much or little or not at all. The word has been held an appropriate term as applied to improvements which are nonpatentable. In oil and gas leases, a share of the product or profit reserved by the owner for permitting another to use the property; the amount reserved or the rental to be paid to the original owner of the whole estate; the compensation for the privilege or rights created by the lease; the compensation provided for the privilege of drilling for oil and gas, and consists of a share in the oil and gas produced under existing leases; the share of the product or profit paid to the owner of the property. As applied to an existing lease, a share in the oil and gas produced, but the term does not include a perpetual interest in the oil and gas in the ground. If these tests are applied to the amount that is paid by the respondent to the foreign company, it becomes difficult to treat it as royalty. Firstly, the amount is paid in lumpsum and it is not referable to any particular period. Secondly, though there is a possibility to interpret the clauses in such a way that, (a) the foreign company retained with it the ultimate patent but permitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief 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. (2A) Notwithstanding anything contained in sub- section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. (5) The assessee referred to in sub-section (4) shall also prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with under Article 13 which reads: Article 13 Royalties and fees for technical services (1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) xxx (3) The term royalties as used in this article means payments of any kind including rentals received as a consideration for the use of, or the right to use (a) any patent, trade-mark, design or model, plan, secret formula or process; (b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience; (c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting; But does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources [clause (2) is omitted] A comparison of the definitions or descriptions of the word royalty under Explanation 2 of Section 9(1)(vi) of the Income Tax Act, on the one hand, and the one, under Clause 13(3) of the DTA Convention, on the other hand, discloses that the amount, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt with a transaction, which is similar to the one, which is the subject matter of this case, and held that the different components of the contract cannot be read in isolation. The relevant portion reads, Para 21: A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Parts I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. The one cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non- resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad From the above discussion, it becomes clear that, a) the amount paid by the respondent to the foreign company is part of lumpsum consideration for supply of technical know-how, machinery installation and erection and the same cannot be treated as royalty and b) even if the amount is t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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