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TMI Blog2014 (12) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee entered into a Technology License agreement with Paltough Ltd. Israel (in short 'Paltough') vide agreement dated 30.06.1994. The agreement envisaged transfer of technology to manufacture extruded PVC sheets. Paltough is stated to own and possess proprietary technical know-how and technical expertise with regard to the manufacturing of thermoplastic rigid sheets including PVC, Polycarbonate and acrylic sheets. It is provided in the agreement, a copy of which has been placed at pages 9 to 35 of the Paper Book, that Paltough agreed to transfer, disclose, supply technical data, information, specifications, plans and drawings relating to the manufacture, and design and production of the products and other know-how mentioned in the agreement. As per terms of the agreement, assessee was required to pay first installment of US$ 150,000 as consideration which comprised of US $ 125,000 towards Design engineering services, and US $25000 towards commercial services. Accordingly, it made an application dated 09.05.1995 to the Income Tax Officer Ward 1(5)Nigdi, for issuance of a certificate that no tax was liable to be deducted at source in respect of such remittance under section 195(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (P) Ltd. vs. CIT 157 ITR 86 (SC); that the foreign collaborator, Paltough, signed the agreement in Israel and the delivery of the designs to the assessee was also to be effected abroad; and, that the commercial services will be provided by Paltough not from India but from abroad in terms of Clause (6) of the Technology License Agreement. For all the above reasons, it was sought to be made out that the impugned payments were not liable for deduction of tax at source in India. Before the Assessing Officer, it was also sought to be canvassed, based on the CBDT Circular No. 23 dated 23.07.1969, that a non-resident is not subject to tax in India if in terms of the contract the payment and the delivery against such payment takes place outside India. 7. The Assessing Officer has not agreed with the pleas of the assessee and instead held that the amounts in question were in the nature of fees for technical services and therefore , subjected to tax in India and in this context, he has referred to section 9(1)(vii) of the Act. 8. Before the CIT(A), assessee raised similar pleas as it had raised before the Assessing Officer. The CIT (A) has not agreed with the assessee, and rather held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the foreign collaborator, Paltough. The relevant clauses of the agreement are 1 (v), (vi) and (vii). Clause 1(v) regarding Design engineering vis-a-vis plant know-how reads as under :- "(v) Design Engineering vis-à-vis Plant Know-how shall mean and include: 1. Technical know-how for erection of complete PVC foamed, rigid flat & corrugated sheets and polycarbonate rigid & corrugated sheet plan including , complete description and characterization of plant and machinery, building, infrastructure, accessories. 2. PALTOUGH shall at the request of FSPL undertake to fabricate, assemble and/or supply agreed plant, machinery, equipment or any part thereof to FSPL on such terms as may be mutually agreed upon by the parties. 3. Designs of proprietary process control, manufacturing, equipment and tools designed by Paltough. 4. Assistance in the setting up of the research and development facilities, technology absorption, indigenization and expansion programmes and assistances in ensuring environmental and ecological safeguards. 5. Assistance in adopting any improvements in the manufacture of the products and their derivatives." 12. Similarly, clause 1(vi) of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rights, and Trade mark to manufacture the products in India." 15. As per the assessee, with respect to the fee paid as per Clause 1(v) towards design engineering vis-à-vis plant know-how, no part of the income of the foreign company arises in India. It is submitted that since the payment relates to acquisition of plant know-how in the form of technical and engineering data, designs, etc. the same cannot also be treated as 'Royalty' also. The assessee has attempted to distinguish between two type of services viz. Plant know-how and Product know-how. As per the assessee, what it has acquired in terms of the payment in Clause 1(v) is the Plant know-how, which is covered in the definition of 'Plant' following the judgment of the Hon'ble Supreme Court in the case of Scientific Engineering House (P) Ltd. (supra). On this aspect, a reference has been made to the judgment of the Himachal Pradesh High Court in case of MAGGRONIC Devices (supra). In the case before the Hon'ble Himachal Pradesh High Court, the payment related to the services rendered by the foreign recipient for technical and engineering design, drawings, data for erection of Plant for undertaking manufacture of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof. In the present case also, as per Clause 2(a) of the Agreement assessee is granted a permanent right to use and exploit the design engineering, which is qua the services provided in Clause 1(v) of the agreement. Therefore, to the extent that the agreement in question envisages payment for obtaining plant know-how i.e. designing, characterization of plant and machinery, etc. the same cannot be considered as payments falling within the purview of 'Royalty', as per the ratio of the judgment of the Hon'ble Himachal Pradesh High Court in case of Maggronic Devices Pvt. Ltd. (supra). 17. So however, in so far as the Technical and Process know-how services provided under the agreement are concerned, the same are clearly covered by the definition of 'Royalty' under the Act and therefore the CIT(A) made no mistake on this count. The learned representative for the assessee has also conceded the said position. 18. In view of the aforesaid, we therefore set-aside the order of the CIT(A) and restore the matter back to the file of the Assessing Officer who shall pass a fresh order on this aspect segregating the nature of remittances to the foreign collaborator. The amounts which are payab ..... 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