9911796707
TMI Blog2015 (2) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... prietary. Information/knowhow was to remain confidential during the term of the agreement and even after expiry or termination thereof, until the same entered public domain or was otherwise generally known. HCL could not have breached the said confidentiality clause. A material breach by HCL would have resulted in an earlier termination of the agreement and reversion of all rights granted to HCL. It entailed ceasure of right to manufacture, use or sell the licensed products. Tangible technical information was to be returned. The agreement permitted HCL to disclose the said confidential intellectual property rights to the sub-contractors or sub-licensees only to the extent required for proper and authorised use of technology.Clause 2.3 was similarly worded and stated that HCL might sub-licence or sub-contract in whole or in part production of the licensed products and might disclose the technology provided that such disclosure would not confer upon the sub-contractor or the sub-licencee any rights other than those accorded to HCL. As noticed above, lump-sum payments are covered under the term ‘royalty’. The agreement postulated grant of permission to use or right to use intellectual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to HCL Infosystems Limited as HCL and Apollo Domain Computers, GmbH Germany as ADC in this judgment. 4. Succinctly put, the issue raised in the present appeals is whether payments of ₹ 1,11,38,650/- and ₹ 50,51,050 made by HCL to ADC in terms of the inter se agreement dated 11th May, 1987 was royalty under Article VIIIA of the Double Taxation Avoidance Agreement (DTAA, for short) between India and the then Federal Republic of Germany. The aforesaid DTAA was notified on 13th September, 1960. Article VIIIA was inserted subsequently after protocol was signed on 28th June, 1984 and ratified on 10th July, 1985. As the said article arises for consideration, we deem it appropriate to reproduce the entire Article:- " ARTICLE VIIIA (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)However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State. But insofar as the fees for technical services are concerned, the tax so charged shall not exceed 20 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement." 5. In order to appreciate the ambit and scope of term 'royalty' and what would be taxable under Article VIIIA of DTAA, there was exchange of notes between the contracting States on 28th June, 1984 and the relevant portion reads:- "3. Notwithstanding the provisions of paragraph (3) of Article III of the Agreement, no deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of- (a) royalties, fees or similar payments in return for the use of patents or other similar rights; (b) commission for specific services performed or for management; and (c) interest on moneys lent to the permanent establishment, except in the case of a banking institution. 4. It is understood that the deductions in respect of the head office expenses as referred to in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this extent also, the parties are ad idem and there is no dispute. The dispute is whether the payments made under the agreement dated 11th May, 1987 are 'royalty' within the meaning of clause (3) of Article VIIIA of the DTAA. The term 'royalty' has been defined in the said clause to mean payments of any kind received as a consideration for use of, or right to use any copyright of literary, artistic or scientific work including cinematographic 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 use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. The said Article is in consonance with the UN Model Tax Treaties rather than OECD Model. The use of the words "right to use industrial, commercial or scientific equipment" expands the ambit and scope of the term 'royalty' in Article VIIIA. The term "royalties" in 1963 draft convention and the 1977 Model OECD Convention included payments "for use of, or the right to use, industrial, commercial or scientific equipment", but reference to these paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted in paragraphs 15 and 16 below as regards software, difficulties can arise in the case of a transfer of rights that could be considered to form part of an element of property referred to in the definition where these rights are transferred in a way that is presented as an alienation. For example, this could involve the exclusive granting of all rights to an intellectual property for a limited period or all rights to the property in a limited geographical area in a transaction structured as a sale. Each case will depend on its particular facts and will need to be examined in the light of the national intellectual property law applicable to the relevant type of property and the national law rules as regards what constitutes an alienation but in general, if the payment is in consideration for the alienation of rights that constitute distinct and specific property (which is more likely in the case of geographically-limited than time limited rights), such payments are likely to be business profits within Article 7 or a capital gain within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated, the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew information obtained as a result of performing services at the request of the payer. 11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof." 9. A reading of the aforesaid quotations would exposit that the taxable event would depend upon the nature of rights acquired by the payer under a particular arrangement. In case payment is made for acquisition of a partial right in the intangible property or know-how without the transferor fully alienating as the ownership rights, the payment received would be treated as 'royalty'. Where, however, full ownership rights are alienated as intellectual property of the transferee, the payment made is not royalty, but sale consideration paid for acquisition of the intangible rights. Such acquisitions are not equivalent to acquire or have access to or right to use the intellectual property. 10. At this stage itself, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said case after referring to the various clauses of the agreement to hold that there was absolute or full transfer of technology and know-how, albeit on non-exclusive basis, which was confined to the factories of the assessee in India and with conditional right to sub-lease, as sub-licensing of technology or know-how required consent of the UK party. The exact reasoning given by the High Court in the said case reads:- "8.1 In our view, it is quite clear by virtue of the aforementioned agreement what the assessee obtained was a complete transfer of technology and know-how albeit on a non exclusive basis which was confined to its factories in India with a conditional right to sub-licence it to third parties. The sub-licencing of technology and/or know-how had to have, however, the consent of Tate and also the approval of the Government of India. The obligation of Tate to update the technology and/or know-how transferred to assessee based on research and development carried out by it, had obviously to be restricted in point of time, bearing in mind that it was a transaction which dealt with complete transfer of technology. The time span provided was 5 years from the effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred was use of technology. In this regard, specific reference may be made to clause (c) appearing at page 524 which provided that any information disclosed by the assessee to the Indian company under the agreement would remain confidential and would not become the property of the Indian company until such time and to the extent that such information had "become public" by application and user. The judgment of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. (supra) would also not be applicable on a similar rationale." The decisions noted, were cases in which there was no absolute or full transfer of intellectual property rights or know-how, but only grant of right to use or permission to use intellectual property rights or know-how. 13. Having elucidated on the legal position, we would now proceed to examine the agreement between HCL and ADC styled as "Technology Transfer and Technical Assistance Agreement". With regret, that the agreement placed on record by HCL i.e. the appellant, is incomplete and also several relevant clauses are unreadable. With the assistance of the counsel, we have tried to decipher the unreadable portions. We have also taken advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in its commercial manufacture of the Licensed Products. 2.5 It is understood and agreed that neither party shall be required to convey or disclose to the other party any developments, improvements, modifications, or inventions unless same are directly related to the Licensed Products, in the manner described in this Article 2. Discontinuance of Manufacture 2.6 The parties hereby agree that APOLLO shall have the absolute right, in its' sole discretion, to discontinue the manufacture, use, sell, or otherwise do business with respect to any of the Licensed Products, at any time during the term of this Agreement and in such eventuality APOLLO shall have the discretion to eliminate said Licensed Product, from the Agreement upon such elimination from prior written notice of same to HCL. Upon such elimination herefrom, neither APOLLO nor HCL shall have any further obligation hereunder with respect to such eliminated Licensed Product, except that notwithstanding any such discontinuance and elimination by APOLLO of any Licensed Product, APOLLO shall perform all of its obligations hereunder with respect to all the Licensed Products for a minimum period of at least two (2) years after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the product space of the first Licensed Product (to wit: DN 3000). A version is a family of engineering workstations or any significant enhancement or upgrade to said family and shall not be understood to be in any way linked to a specific product model number as used by APOLLO. For example, all products set forth in Exhibit 2 known as DN 3000 series, will constitute one version. It is further agreed that the further three versions covered under this agreement will be agreed and defined, from time to time by HCL and APOLLO and will be subject to the approval of the appropriate US Government agencies." ARTICLE 4. CONFIDENTIALITY. 4. 1 It is understood and agreed by the parties that the Technology and any other information which APOLLO consider proprietary to itself and to its will be conveyed and disclosed by APOLLO to HCL in carrying out the provisions of this Agreement is and shall remain confidential during the terms of this Agreement and after the expiration or termination thereof for any reason whatsoever, until such time as same shall enter the public domain or otherwise become generally known without any material breach of this Agreement by HCL. 4.2 HCL agrees tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of APOLLO and its Licensor covering the Licensed Products and constituting the Technology, and shall not aid or encourage others to do so. 5.2 APOLLO hereby declares that, to the best of its knowledge the rights, of any third parties will not be infringed by the parties performance of this Agreement and by HCL's use of the Technology, to manufacture, use, sale and maintenance of the Licensed Products by HCL under this Agreement. APOLLO makes no representation or warranty, implied or otherwise, as to whether the Technology conveyed hereunder to HCL and embodied in the Licensed Products, the methods of manufacture the licensed products, the methods of or the maintenance and sale of the Licensed Products in India will infringe the industrial property rights or any other rights of any third party. 5.3 In the event of any suit or threatened suit or claim against HCL by any third party for infringement of industrial property rights or any other rights resulting from the manufacture, use, sale or maintenance of the Licensed Products, HCL shall forthwith, upon receiving knowledge thereof, give written notice of any such suit or threatened suit to APOLLO and APOLLO shall make availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusive basis (other than for HCL themselves) and at no charge to APOLLO, except for the royalty which must be paid by a licensee to the inventor of patent as a matter of Indian law. Quality Control 5.8 APOLLO represents that the Technology to be conveyed to HCL hereunder shall be the same Technology on the basis of which APOLLO itself manufactures the Licensed Products and that the Technology, together with the Technical Assistance to be furnished to the HCL hereunder, 'shall by sufficient for the manufacture of the Licensed Products. Therefore, HCL utilising the Technology and the Technical Assistance, should, be able to manufacture the Licensed Products with the same quality as those manufactured by APOLLO. Subject to any approval by the relevant agencies, and department of the U.S. Export Licensing Authorities APOLLO agrees to provide additional Technology, if same is available to APOLLO, and Technical -Assistance to clarify the Technology, if requested by HCL, to facilitate HCL's achieving the standard of quality of the Licensed Products contained in the Technology, at a cost to HCL to be mutually agreed upon by the parties. However, nothing containing in this Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of creditors, or upon the appointment of a Receiver, Liquidator or Trustee of any of its' property or assets, or upon the liquidation, dissolution or winding up forthwith be terminated or cancelled by the other party hereto. 14.3 The early termination of this Agreement for any reason shall not affect any accrued rights or obligations of the parties as of the effective date of such termination, nor shall it affect any rights or obligations of the parties under this Agreement which are intended by the parties and agreed herein by them to survive any such termination, especially the secrecy provisions of Article 4 hereof, nor shall it preclude any claim for damages or other remedy of the party effecting such early termination against the other party hereto. 14.4 The HCL agrees that, upon the early termination of this Agreement attributable to material breach by HCL: (a) All rights granted hereunder shall revert to APOLLO; (b) HCL, its sublicensee(s) and subcontractor(s) shall cease to use the Technology and to manufacture, use, and sell the Licensed Products and; (c) the HCL shall forthwith deliver to APOLLO (or its' designated subsidiary or affiliated corporation)all ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract in India in whole or in part production facilities of the licensed products under the technology and could disclose the said technology to the sub-licensee or sub-contractor, provided that such disclosure would not confer on the sub-licensee or the sub-contractors any right other than those granted to HCL and shall be subjected to restrictions and confidentiality provisions of Article 4. Clause 2.4 stipulated that subject to necessary approvals, ADC would also convey to HCL improvements, modification or inventions relating to the licensed products during the term of the agreement, which shall become a part of the technology. Thus the rights granted to HCL by ADC were restricted to specified and listed licensed property. Clause 2.6 stipulated that ADC had the absolute rights in its own discretion to discontinue and eliminate manufacture, use of, sale or otherwise stop business in respect of licensed products at any time during the term of the agreement. Notwithstanding, such dis-continuance/elimination, ADC would perform all obligations for a period of two years after the effective date of discontinuance. HCL could continue to manufacture, use and sell such eliminated licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was obliged to make available to HCL all information, evidence and particulars in their possession to them to defend or deal with said suit or threatened suit. The said stipulations were regarding defending a suit or threatened suit. It further stipulated that the HCL could be granted right in India to enforce, enjoin or recover damages on behalf of the ADC for infringement of any registered patent, non-registered trademark etc. regarding licensed products conveyed to HCL. HCL was advised to submit to ADC, copy of patent application or renewal in respect of the licensed products, which was filed or acquired by HCL in India within 30 days of such filing or acquisition. HCL on filing of such patent application or to obtain renewals was required to file corresponding patent application or renewal application at ADC's written request and expense. 19. The agreement was to remain in full force and affect, whether ADC had at any time owned or controlled patents in India covering the licensed products. ADC or its licensors had exclusive right to file any patent application in India relevant to the licensed products and any patent, granted to ADC or its offices in India with respect to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations effective on the date of termination nor shall it affect the obligations or rights of the parties under the agreement. Specific reference is made to the secrecy and confidential provision contained in clause/article 4. Thus, irrespective of earlier termination, the confidential or secrecy provision would continue to apply. In categorical terms, it is specified that claim for damages or remedy would not be barred or affected because of earlier termination against either party. In clause/article 14.4, HCL agreed that upon earlier termination of this agreement attributable to material breach on the part of the HCL, all rights granted to them shall revert to ADC and the sub-licencees and sub-contractors of HCL shall cease to use technology, manufacture, and use or sell the licenced products. Lastly, HCL shall forthwith deliver to ADC the tangible material in the form of original copies embodying the technology including but not limited to technical information under Article 31 or at the request of the ADC, destroy the same. 24. Having considered various clauses of the agreement, we do not think the present case is one of absolute or full transfer of ownership in technology made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asting. Developments and improvements were rapid, widespread and vigorous. Constant upgradation and improvements were eminent and rule of business. 25. Dias in his work "Jurisprudence" has defined "ownership" as an interest recognize by law, which consists of innumerable number of claims, privileges, powers and immunities with regard to the thing owned. Ownership, therefore, is a bundle of rights, which a person who has title over the property, enjoys and commands. Holland, T.E. in Element of Jurisprudence observed that rights of ownership, conventionally could be arranged under three heads i.e. possession, enjoyment and dispossession. Right of dispossession carries with it right of alienation or destruction. Alienation may be either total when the ownership itself is transferred; or may be partial when a fraction of the rights, is granted or permitted. In cases of immoveable properties, the owner can grant right to use in the form of lease to a third person without transferring the ownership. Similarly, in cases of moveable properties, the owner may grant a license to use. For example, a contract for hire or by way of hire in a contract of bailment. The hirer obtains a right to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to use may be in respect of a single act, restricted to a location or for a limited period of time or duration. It may be a one-time act or there can be stipulations as to upgradation or right to access future technological advances. One of the important attributes of intellectual property rights in cases of technology, patent etc. is confidentiality. It is confidentiality, which gives the owner the commercial edge, competitive position and superiority. Confidentiality enforces monopoly. Confidentiality and monopoly are the most valuable rights which the owner possesses and commercially exploits. License to use know-how or technology is, therefore, and often given with riders and condition to maintain confidentiality to ensure that the valuable asset of the licensor is preserved and secured. Thus, the owner can grant a trail of licenses to third parties with identical or similar limited rights of use with the confidentiality clause and without assignment or transfer of ownership. The price agreed, between the licensor and the licensee for right to use, could depend upon several factors. The commitment by the licensee not to disclose the know-how or technology to third parties, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utright alienation is the one clear-cut extreme, viz. outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear-cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer (for more details regarding the distinction between licensing and the provision of services, see infra m.nos. 54ff., in connection with the various subjects of licences). Neither extreme comes under Art. 12, all that does is the central category, viz. 'letting'." 31. This is indeed the true and appropriate test, which has to be applied. Paragraph 11 DCM Limited (supra) specifically makes reference to the decision of the Calcutta High Court in N.V. Philips versus Commissioner of Income Tax (No. 1), (1988) 172 ITR 521 and it was held that the said decision was related to transfer or use of technology as it provided that the information disclosed under the agreement would remain confidential and would not become property of the Indian company till such time and to such extent the information became public by appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a capital asset of the patentee as observed by Romer L.J. in the case of Handley Page [1935] 19 TC 328. This secret process which the non-resident assessee-company is parting with in this case is analogous to the parting of a monopoly right of the patentee and, therefore, the remuneration received by the assessee for the same should be treated as royalty and for the reasons as aforesaid, the answer to the question referred should be in the affirmative and in favour of the Revenue." 32. In Shriram Pistons and Rings Limited versus Commissioner of Income Tax, (2008) 307 ITR 363 (Delhi) a clear distinction was made between outright sale and a right to use and the effect thereof. Reference was made to the decision of the Supreme Court in CIT versus Ciba India Limited, (1968) 69 ITR 692 (SC) to the effect that the technology agreement was to remain in force for a period of five years and there was a provision for earlier termination and Indian company could not have assigned the benefits and obligations without taking consent of the foreign party. What had been acquired by the Indian company was mere access to the technical information and experience in the pharmaceutical field and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have invariably a short life span, due to rapid progress and advancement in such fields. In Alembic Chemicals Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC) with reference to rapid advances and research in micro biology, it was observed that it would not be correct to attribute a degree of durability and permanence to technical knowhow in medical sciences. The same principle would be equally applicable, as it has not been shown or indicated that the right to use technology had an enduring or long term commercial benefit. The clause relating to upgradation, elimination and discontinuance of manufacture by ADC, reflects the fleeting and momentary life span of the technical information. In Alembic chemical (supra) elucidating the said facets, it was held that acquisition in such fields with rapid and fast strides indicate grant of right to use of knowhow, rather than ownership acquisition. This aspect, when read cumulatively with restrictions on the right of the assessee in dealing with knowhow and conditions as to non-partibility, confidentiality and secrecy, reference to intellectual property rights of ADC and their protection, reflect and re-enforce our finding. ADC continued and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
