9911796707
TMI Blog1999 (1) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... ocumentation and are not the consideration for the use of or right to use such know-how and Basic Process Engg. Documentation. 2. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts not holding that USD 250 lacs of which USD 75 lacs being the first instalment is a part and USD 35 lacs of which USD 10.5 lacs being the first instalment is a part, being lumpsum technical know-how and basic process Engg. Documentation fees as non-taxable 'Business Profits' under article 7(1) of the DTAA between India and Italy in view of no permanent establishment of M/s. Technimont, S.P.A. of Italy in India. 3. That the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts in holding that the assessee appellant has not made any out-right purchase of the exclusive rights over design, secret formula, or process and therefore, there is no acquisition of technical know-how whereas the assessee appellant did acquire rights over design, secret, formula or process know-how and technical know-how for that agreed payment is to be made. 2. The brief facts of the case are stated in assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of DTAA read with various terms of the contract agreement. The detailed submissions were submitted before the CIT(A). Reliance was placed on a decision of the ITAT Special Bench, Calcutta in the case of Graphite Viscarb (India) Ltd. v. ITO [1993] 199 ITR 119 (AT). Reliance was also placed on a decision of the CIT(A)-XXII, Bombay in the case of Gujrat Apar Polymers Ltd. dated 18-11-1992. After considering the submissions and other materials on record, the CIT(A) was not satisfied and after giving reasons in detail in her order, the CIT(A) upheld the order of the Assessing Officer. Now the assessee is in appeal here before us. 5. The learned counsels S/Shri Dinesh Vyas alongwith Shri P.D. Desai appeared on behalf of the assessee. Shri Dinesh Vyas, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee before the CIT(A). He further submitted that the assessee entered into an Agreement with the Italian company which provided for supply of Basic Process Engg. Documentation as per article 3.2 of the Agreement and Transfer of technical know-how as per article 1.11 of the same agreement. The payment was to be made by the company as net o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution is not guided by any authority of the World as the Indian Constitution is an independent constitution of the country. Therefore, the guidelines prepared in Vienna Convention is not helpful to the assessee at all. It was further argued that legal effect has to be seen and on this aspect reliance was placed on CIT v. Gillanders Arbuthnots & Co. [1973] 87 ITR 407 (SC), CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and Pandit Lakshmi-kanta Jha v. CIT [1970] 75 ITR 790 (SC). 8. In reply of the submissions made by the learned D.R., the learned counsel submitted that no doubt, as per provisions of section 9(1)(vi) the amount paid can be treated as Royalty but the Agreement entered into by the assessee and the Italian company was in accordance with the DTAA between the two countries. Therefore, section 90 is overriding section 9(1)(vi) of the Income-tax Act. He further submitted that the cases relied upon by the learned D.R. are distinguishable as the facts of the case are different. In case of Alembic Chemical Works Co. Ltd. (supra) wherein the Hon'ble Supreme Court has held that the amount paid to the company of any other country was payment of revenue in nature and was not capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v)." Now we will see the section 90 which says about avoidance of double taxation. Sub-clause (2) of section 90 says where the Central Government has entered into an Agreement with the Government of any country outside India under sub-section (1) for granting relief 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. 10. We would like to define first that which provisions are applicable here in the present case i.e. whether provisions of section 9(1)(vi) or provisions to section 90 of the Income-tax Act. 11. The definition of 'Royalty' appeared in article 3 of the agreement for avoidance of double taxation made between India and Italy is no doubt different from the definition appearing in Explanation 2 to section 9(1)(vi) of the Act. In determining the liability of a non-resident company, if there is any agreement for avoidance of double taxation entered under section 90 of the Income-tax Act, 1961, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistency between the terms of the agreement and the taxation statute, the agreement alone would prevail. We have also seen the Circular No. 333 dated 2-4-1982, a copy of which is placed on record at page 113 of the Paper Book wherein the Board has laid down as follows :- "2.The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the country have been made in the agreement. 3.Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income." In our view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal held that the payment did not constitute 'royalty' as defined in article XIII of the Convention and it was further held that the aforesaid consideration constituted business profits for the foreign concern which too could not be assessed through the assessee as per article VII of the Convention as TL had no permanent establishment in India. In that case the case of Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.) was followed wherein the similar issue was decided by the Hon'ble Karnataka High Court. The facts in the present case are similar to the case of DCM Ltd. (supra ). In the present case also the assessee entered into an Agreement with the Italian company and payments were made as per the agreement of Avoidance of Double Taxation. Therefore, we are not in hesitation to hold that the payments made by the assessee cannot be held as royalty as per section 9(1)(vi) as the provisions of section 90 shall prevail upon. In the present case the assessee paid amount to Italian company who was not having a permanent establishment in India. A certificate to this effect is placed at page 112 of the Paper Book wherein the Italian company has confirmed that it has no permane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have also considered the other case laws relied upon by the learned D.R. and after pursuing the ratios of those decisions, we are of the view that those decisions are not helping to the department. This view of ours finds further support from that no contradictory decision is available at present on this issue as before us. Therefore, we are of the opinion that assessee is entitled to succeed as the payment made by the assessee did not constitute Royalty as defined in Article 13 of the relevant Double Taxation Agreement between India and Italy. 17. In the result, the appeal of the assessee is allowed. Per Pradeep Parikh, AM : 18. I have thoroughly perused the proposed order passed by my learned Brother. After careful consideration of the said order, I find myself not to be in agreement with the conclusion reached by my learned Brother. Hence, I am constrained to make a separate order on the issue raised in appeal. The grounds of appeal and the facts of the case have been mentioned at paras 1 to 4 of the proposed order and hence I need not repeat them for the sake of brevity. 19. The point in dispute is that whether the consideration of US $ 250 lakhs payable by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii)the imparting of any information concerning the working of, or the use, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii)the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;" 22. Referring to the above 3 clauses, Shri Vyas urged the Bench to assume the 3 clauses as three separate boxes. It was submitted that as per the treaty, if the assessee's case was in the third box, it would certainly be called Royalty. However, it was contended that the assessee's case was not in the third box, as according to him, there was something more than mere right to use, which the assessee received. Similarly, the assessee's case was also stated not to be in the first box as there was no outright transfer of the formula or the process. Hence after ruling out the extreme position, it was submitted that the assessee's case was either somewhere in between box one and box two, or it was blend of the two boxes what the assessee received. 23. In other words, what the learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be taxed in India as TL did not have a permanent establishment as a fixed place of business in India. On these facts the Tribunal accepted the claim of DCM. 27. The facts in the present case, I am afraid, are certainly distinguishable at least on two counts. Firstly, in DCM Ltd.'s case (supra) there was transfer. In the present case, the Italian Company, as a sub-licensor has granted the rights and sub-licence to use and practice the process in India. Secondly, in DCM Ltd.'s case (supra), DCM had purchased equipment and know-how. In the instant case there is neither the purchase of equipment, nor the know-how but merely right to use the process is acquired. Moreover, it is also not the case of the assessee, as made out in the case of DCM that the case would be governed by the Article relating to profits. Thus in my view, the decision in DCM Ltd.'s case (supra) cannot be applied in the present case. 28. The main thrust of the learned counsel's argument was that it is not merely the right to use the process that the assessee has acquired, but there is something more than that. In fact, according to him, a bundle of rights has been acquired by the assessee. Hence now we sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icon (1997 edition) describes the term "licence" as follows : "An authority to do something which would otherwise be inoperative, wrongful or illegal; a formal permission from a constituted authority to do something. In the popular as also in the legal sense a licence is a permission to do something which, without the licence would not be allowable. In the secondary sense it denotes a certificate or document which embodies the permission in question." The above paras, no doubt, explain the meaning of the term licence, whereas the case before us is that of sub-licence. Nonetheless, for all practical purpose, the same meaning would be applicable to the case of sub-licences also as they create rights with the same character. 33. In the present case, the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under a contract between the assessee and the Italian Company. I fail to understand as to what else the assessee acquired besides the right to use. It has not acquired the ownership of the know-how, as the preamble of the contract makes it clear that the same is owned by INCA International S.P.A., Italy. Further, the preamble al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended that if the assessee assigned the contract after obtaining the consent of the Italian Company, the latter was bound by such assignment. It was vehemently stressed that the truncation of the assigning rights was in mutual interest. 37. It has to be appreciated that truncation of the assigning right is not merely with regard to obtaining the consent of the other party. The truncation is much more. The assigned party remains primarily liable for the performance of the contract. It is only when for some good reason the assessee is not in a position to perform its part of the contract, it may ask someone else, with the consent of the sub-licensor, to make use of the know-how on its behalf under this very contract. But it can neither grant a sub-licence to use the process nor can it divest itself from this contract save as provided in Articles 12 and 13. 38. Then Article 12 was referred to by the learned counsel. It is as follows: "Article 12 ... Term of the contract 12.1 . . . This contract shall come into force on the effective date and, unless sooner terminated as provided for in Article 13, shall continue in full force and effect till the 10th anniversary of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed peacefully by each country and the agreements should be interpreted in good faith. I have certainly kept the principles of the Vienna Convention in mind while interpreting the DTAA between India and Italy, which is an Agreement, not only for the avoidance of double taxation but also for the prevention of fiscal evasion. 44. In the result, the appeal of the assessee is dismissed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We, the Members of the Jaipur Bench of the Tribunal have differed in the order to be passed in the case of Modern Threads (India) Ltd. v. DCIT [IT. Appeal No. 378 (Jp.) of 1997]. The question on which we have differed is referred to the Hon'ble President under section 255(4) of the Income-tax Act, 1961. The said question is as follows : "Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Tecnimont of Italy is 'Royalty' as defined in the Double Taxation Avoidance Agreement between India and Italy and hence liable to tax in India ?" We direct the Registry to put the file before the Hon'ble President. THIRD MEMBER ORDER Per Nathu Ram : A.M. - On account of difference of opinion between the Judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay to the sub-licensor US $ 250,00,000 net of taxes imposed in India to be paid in the following instalments : a.30% on or before the effective date; b.30% not later than six months from the effective date; c.30% not later than 18 months from the second instalment; d.10% at the plant acceptance date or within 48 months from the effective date, whichever is earlier. 2.2. For the supply of basic process engineering the assessee (sub-licensee) was required to pay to the sub-licensor US $ 35 lakhs net of any taxes imposed in India in the following instalments : a.30% on or before the effective date; b.30% not later than four months from the effective date; c.30% not later than 8 months from the effective date; d.10% not later than 18 months from the effective date. 2.3. In addition the assessee (sub-licensee) was required to pay to the sub-licensor a running royalty payment of US $ 5 per MT of products, manufactured in the plant after the plant acceptance date, upto a maximum of US $ 50 lakhs. 2.3.1 As per the terms of the contract Agreement the first instalment of 30% of US $ 250 lakhs which worked out to US $ 75 lakhs and 30% of US $ 35 lakhs which worked out to 10.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter was decided by the Tribunal in favour of the assessee. 2.5. The learned D.R. on the other hand supported the orders of the authorities below placing reliance on Alembic Chemical Works Co. Ltd.'s case (supra ), N.V. Philips's case (supra) and also 27 ITR 407 (sic); B.M. Kharwar's case (supra) and Pandit Lakshmikanta Jha's case (supra). 2.6 In reply it was claimed by the learned counsel of the assessee that the amount paid can be treated as royalty under section 9(1)(vi) of the Income-tax Act but these provisions are overridden by section 90 under which the Government of India entered into Double Taxation Avoidance Agreement with the Government of Italy and the payments made are, therefore, governed by the provisions of the DTAA. It was further stated that the cases relied upon by the Revenue as quoted in Alembic Chemical Works Co. Ltd.'s case (supra) and N.V. Philips' case (supra) are distinguishable on facts. 3. The learned Judicial Member has taken the view : (i)That the term "Royalty" has been defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act but its definition as given in the Double Taxation Avoidance Agreement between India and Italy e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now-how but merely right to use the process was acquired. Further, it is also not the case of the assessee, as made out in the case of DCM, that the case would be governed by articles relating to profits. Accordingly, the decision in the DCM Ltd.'s case (supra) has no application to the facts of the case. 3.2. The learned A.M. further noted that the main thrust of the learned counsel was that it was not merely the right to use process that the assessee acquired but there was something more than that and according to him a bundle of rights had been acquired by the assessee. He considering the meaning of the term "Licence" as given in T.P. Mukerjee's Law Lexicon, Vol. 2 (1982 Edition) and P. Ramanatha Iyer's Law Lexicon (1997 Edition) and referring to Article 2 of the contract agreement observed that the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under the contract between the assessee and the Italian Company and nothing more than that was acquired. The assessee has not acquired the ownership of the know-how as the preamble of the Contract makes it clear that the same is owned by INCA International SPA, Italy and the sub-licensor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for grant of rights and sub-licence to the assessee company to use and practice the process in India and to supply know-how and documentation for the design, construction and operation of the plant as per terms set out in the contract. 4.1. He further submitted that as per Law Lexicon the word "Grant" is described : "Grant. An operative word of conveyance, particularly appropriate to deeds of grant, properly so called, but used in other conveyances also, such as deeds of bargain and sale, and leases. 1. The action of granting or bestowing; an authoritative bestowal or conferring of a right; a gift or assignment of money etc., out of a fund (S.13, Industrial Development Bank of India Act); 2. the thing granted or bestowed; 3. to bestow by a formal act (S. 24A(a) Companies (Profits) Surtax Act and S. 42, Prov. Plantations Labour Act); 4. to accede to (S. 432(2), CrPC). "This word is taken largely where anything is granted or passed from one to another. And in this sense it both comprehend feoffments, bargains and, sales, gifts, leases, charges, and the like; for he that doth give, or sell, doth grant also. And thus it is sometimes in writing or by de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. The expression of these terms in the contract make it clear that the technical know-how and related documentation have been transferred to the assessee company by the sub-licensor and there is nothing in the contract that the same have not been provided, supplied or transferred to the assessee company. He further made a submission that the provisions of section 195 read with terms of the Contract and DTAA are required to be construed and interpreted liberally and beneficially in favour of the assessee company and in support of such proposition, he has placed reliance on the following decisions : (i) CIT v. J.K. Hosiery Factory [1986] 159 ITR 85 (SC); (ii) Mansinghka Bros. P. Ltd. v. CIT [1984] 147 ITR 361 (Raj.); (iii) CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149/ 62 Taxman 471 (SC); (iv) Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/ 62 Taxman 480 (SC); (v) CIT v. Dharam Chand [1993] 204 ITR 787/ 70 Taxman 390 (Raj.); (vi) CIT v. Trinity Hospital [1997] 225 ITR 178 (Raj.); and (vii) CIT v. Shyam Finance P. Ltd. [1998] 231 ITR 308 (SC). 4.4 The learned counsel arguing further submitted that the Revenue authorities have not examined and considered the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y other person and this right has been retained by the foreign company. He also argued to show that the facts of the case of Graphite Viscarb India Ltd. (supra) are distinguishable. The learned D.R. further adopting the reasoning given by the CIT (A) in para 2.5 of the appellate order contended that the payment made is a royalty and the same is taxable in India as per Article 13 of the Double Taxation Avoidance Agreement. In support he has also placed reliance on the following decisions : (a) N.V. Philips' case (supra); (b) CIT v. Krebs & Co. [1998] 229 ITR 615 (MP). 4.8 In reply the learned counsel of the assessee pointed out that articles 11, 8.4 and 5.6 of the contract which were material to the issue involved have not been considered by the CIT(A) and therefore the conclusion reached by the CIT(Appeals) is vitiated. Moreover, on expiry of the contract period of ten years, the assessee will have full right to transfer the technical know-how received as per terms of the contract agreement. This aspect has been totally overlooked by the CIT(Appeals). 4.9. The learned counsel has further submitted that the case in N.V. Philips' case (supra) is distinguishable on facts and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... composition and operating conditions of process fluids including flowrates, composition, phase, temperature, pressure, operating and standard specific gravities, densities and molecular weights for gases and vapours, heat content, final material balance; utilities requirements for operation of plant such as steam, cooling, water and demi-water, nitrogen, oxygen and hydrogen; equipment list; supervisory operating manual; Analytical methods and procedures; General safety information for the operation of the plant; Prescriptions and/or suggestions concerning particular process requirements to the effect of instrumentation, electrical system, ventilation, air conditioning, lighting, type and materials of civil works, insulation, painting. (b)Piping (c)Instrumentation; (d)Electrical; (e)General layout and plot plan; (f)Apparatus and machinery relating to vessels and columns; heat exchangers; pumps and agitators; compressor and blowers; package units and miscellaneous equipment. (g)Check, review and approval from the process and process guarantee point of view of the final issue of the following detailed engineering items : plot plans with equipment layout; piping and instrumenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract the sub-licensor grants to the sub-licensee the non-exclusive right and sub-licence : (a) to use the process and the technical know-how for the implementation of the plant to the extent required to erect and operate the plant and to manufacture thereby the product; and (b) to use and sell the product so manufactured in the territory which includes : all countries of the word except Europe, former USSR, countries all American countries and Middle East countries including Turkey and Iraq; (c) for the purpose of practising the sub-license granted, sub-licensor shall disclose to the sub-licensee, process and technical know-how in the manner prescribed. (d) the sub-licensor grants to the sub-licensee the rights to use the basic process engineering for the design, engineering, construction and operation of the plant only. 6.2 Article 3 of the Contract provides for supply of basic process engineering and technical assistance and promptly after the effective date, a Design Conference shall be held in Milano, Italy between the sub-licensor and the sub-licensee to establish the design basis required by the sub- licensor for the preparation of the basic process engineering to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for training services carried out outside Italy. The assessee company is also to pay to the technical personnel of Sub-licensor deputed at site at daily rate of US $800/720. 6.10 Article of the Contract provides for mode of payment to the sub-licensor. 6.11 Article 7 of the Contract provides for future cooperation in the updating of the process and technical know-how in manufacturing of TPA. 6.12 Article 8 provides for secrecy. The assessee company undertakes not to disclose and to bind its personnel having access to the technical know-how not to disclose to other all or any part of the technical know-how, basic process engineering and/or any other information supplied by the sub-licensor to the sub-licensee under the contract. 6.13 The assessee company agrees that it will use the technical know-how and basic process engineering only to design, construct and operate the Plant. 6.13-1 The assessee company's secrecy obligations under Article 8 shall terminate fifteen years after the effective date. 6.14 Article 9 provides for protection against patent infringement. 6.15 The maximum financial liability of the sub-licensor for all expenses, indemnifications, reimbursements cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of PTA; (b) That the sub-licensor has granted to the assessee company the right and sub-licence to use the process for production of PTA. (c) That the Italian Company, as the preamble indicates, would supply the technical know-how and basic process engineering documen-tation for designing, construction and operation of the plant; (d) That the assessee company would pay US $ 250 lakhs for supply of technical know-how and the sub-licensor is liable to bear the loss to the assessee company on account of defect in designing, construction or operation of the plant or on account of litigation, if any, relating to the technical know-how used to the extent of 80% of US $ 250 lakhs payable. (e) That the assessee company has undertaken to pay US $ 35 lakhs for supply of Basic Process Engineering Documentation for designing, construction and operation of the plant as per the Technical know-how and this payment is not subject to any restrictions as in the case of amount payable for supply of technical know-how. (f) That the assessee company would pay royalty of US $ 5 per metric ton of product to Italian company subject to maximum of US $ 50 lacs. (g) That the Italian Company would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... something which would otherwise be in operative wrongful or illegal; a formal permission from a constituted authority to do something. In the popular as also in the legal sense, a licence is a permission to do something which without the licence would not be lawful. 6.25. The word "Right" has been defined in K.J. Aiyer's Judicial Dictionary (8th Edition 1980) to mean - Claim a thing. That which is so directed for the protection and advantage of an individual is said to be his right. It is the liberty of doing or possessing something consistently with law. A right is an interest which is recognised and protected by law. 6.26 Looking to the judicial meaning of the words "Grant", "Right" and "Licence" as described above, the act of the Sub-licenser in granting the right and Sub-licence to use the Process and technical know-how amounts to transfer of the right, interest, title and possession of the Process for the production of PTA as per the technical know-how developed by the Licensor to the assessee company. However, simple grant of such right and licence is meaningless unless necessary facility for production of PTA as per the Process and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are dealt with separately in other Articles of the convention, than the provisions of those Articles shall not be affected by the provisions of Article 7. Article 13 of the DTAA provides for mode of taxation of royalties and fees for technical services. The term "Royalty" as per clause (3) of Article 13 of DTAA means payments of any kind received as a consideration : (i) for the use of, or the right to use any copyright of literary, artistic or scientific work, including cinematography film or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or (ii) for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 6.28 The term "Royalty" in the DTAA has been given a restricted meaning as compared to the term "Royalty" defined in Explanation 2 to Section 9(1)(vi) of the Income-tax Act reproduced hereunder : "Explanation 2 - For the purposes of this clause, "royalty" means consideration (including any lumpsum consideration but excluding any considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Sub-licensor has granted a right and sub-licence to use the Process for manufacturing of PTA. The payment made for use of the Process or secret formula for manufacture of PTA would obviously fall within the definition of the term "Royalty" under DTAA. 6.32 The term "Royalty" has been defined in K.J. Iyer's Judicial Dictionary according to which "Royalty" has several meanings : "a. Percentages or dues payable to land-owners for mining rights; b. Sums paid for the use of a patent; c. Percentages paid to an author by a publisher on the sales of a book. "Royalty" was a payment to the owner of minerals for the right of working the same, and that the charging was based on produce. (Sethi Marblestone Industries v. State of Rajasthan AIR 1958 Raj. 140) Royalty is payment which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government. Two important features of royalty have to be noticed: they are, that the payment is made for the privilege of removing the articles in proportion to the quantity removed, and the basis of the payment in an agreement." 6.33 The word "Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll within the term "Royalty" as defined in clause 3 of article 13 of the DTAA. Moreover, as mentioned above, the payment made as per clause 5.1 of the contract Agreement for supply of Technical know-how is also subject to the liability of the sub-licensor to the extent of 80% of the total amount receivable at US $ 255 lakhs on account of rectifying fault, if any, in designing, construction and operation of the plant and on account of litigation imposed by the third party for use of their patent, right, design, process etc. unauthorisedly. As the sub-licensor has supplied by way of sale to the assessee company the technical know-how as well as Basic Process Engineering Documentation for setting up of the plant, the consideration received would undoubtedly be a business profit in the hands of the sub-licensor and the sub-licensor having no permanent establishment in India such business profits are liable to be assessed in the hands of the sub-licensor in Italy and the sub-licensor in that eventuality would also be in a position to claim the liability provided under the contract to the extent of 80% against the business profits received. The payment thus made as per clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue in favour of the assessee holding : "(ii) That the main question was whether the payment of the lump sum was entitled to exemption. Under article III of the Agreement for Avoidance of Double Taxation between India and France, the industrial or commercial profits of an enterprise of one of the contracting states shall not be subjected to tax in the other contracting state, unless the enterprise had a permanent establishment situated in that other Contracting State. Clause 5 of that article states that the term "Industrial or commercial profits" shall not include income from royalties. Article VII provides that royalties derived by a resident of one of the contracting state from sources in the other Contracting State might be taxed in both the Contracting States. Clause (2) of article VII of that agreement defines "royalties" to mean payment of any kind received 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al know-how for the manufacture of watches and the Indian Company agreed to pay to the Japanese Company, documentation fee, technical assistance fee and royalty. Under Double Taxation Avoidance Agreement between India and Japan fee for technical services were to be treated as income from sources within the contracting state in which services were rendered. The Japanese company accepted liability to income-tax in India with regard to the royalty payment but it claimed complete exemption from tax with regard to the documentation fee and technical assistance fee. The Revenue declined to accept such claim of Japanese company. The Hon'ble High Court held the view that the agreement between the assessee company and Japanese company showed that the documentation fee, technical assistance fee and royalty could not be treated as being of the same character. The documentation fee and technical assistance fee were separate fees and were not "royalty". Moreover, as per the assessee company the documents were made in Japan and accordingly the receipt of documentation fee was outside India. On these facts the documentation fees and technical assistance fees were held as not chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een engaged in metallurgical research and the discovery and development of engineering techniques and secret processes. As a result it acquired in the course of the years a fund of technical knowledge or "know-how", of which only a comparatively small part was capable of forming the subject-matter of patent rights. For some years the company, as a general rule, used the said know-how only in its own trade, but later on it entered into a number of agreements whereby in consideration of lump sum payments and royalties, it undertook to supply the foreign government or company with technical knowledge, plans, a licence and facilities for the interchange of staff to enable them to manufacture specified types of aircraft engines. The agreements were for periods of from five to ten years with provision for giving full information regarding improvements and the like during that time and with options to renew on terms. The question arose whether in computing the company's profits the lump sum payments received under the agreements should be included or not. The House of Lords held that the sums in question should be so included as being part of the receipt of the company's trade. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Indian company agreed to pay to the assessee company the consideration of the technical assistance and information supplied, 5 per cent of the net selling price of vitamin D manufactured and sold by the Indian company subject to Indian Income-tax Act. The Assessing Officer treated the amount received as royalty. The CIT(Appeals) held the view that 50 per cent of the payments received by the assessee was in the nature of fees for technical assistance and information and should be taxed as such and the balance 50 per cent should be treated as royalty and taxed in the hands of the assessee company accordingly. The Tribunal upheld the view taken by the CIT(Appeals). The Hon'ble High Court observed that it was significant that a distinction has been made in the agreement between technical assistance and information and the information agreed to be supplied in respect of working method and manufacturing process of the product were exclusive information and knowledge available to the assessee company and not generally disseminated and payment in respect thereof would bear the character of royalty. The Hon'ble High Court thus agreed with the lower authorities that the payment for techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical information, drawings etc. for erection, repair, and maintenance of the plant did not accrue in India and so was not taxable. The Assessing Officer, however, after deducting the remuneration paid to the two engineers from the sum of 2,04,032 Swiss francs, taxed the balance. The Tribunal held that the entire amount of 2,04,032 Swiss francs was not paid for technical services and there was an element of royalty in the agreement. The Tribunal, therefore, fixed the royalty at 20% of the total consideration which worked out to 40,806 Swiss francs. The Hon'ble High Court observed that an analysis of the provision of section 9(1)(vi) and (vii) would show that what had been made not taxable was only the fees paid for technical services and not royalty. Clause 4 of the agreement made it clear that sum of 2,04,032 Swiss francs would be the cost of supervision of erection and commissioning of the plant. The Hon'ble High Court, therefore, did not approve the Tribunal's action in treating the 20% of the amount as royalty there being no basis therefore. It was, however, held that the assessee company was entitled to get rebate on the actual amount paid by it to its employees for the techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon'ble Supreme Court in the cases of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 and Shaan Finance (P.) Ltd.'s case (supra). 6.43 Having regard to the facts, material on records and ratio of various decisions cited I come to the only irresistable conclusion that the amount payable to the Italian company for supply of technical know-how and Basic Process Engineering Documentation for setting of the plant in India for manufacturing of PTA is the business profit in the hands of Italian company and the Italian company having no permanent establishment in India the same is taxable in Italy and not in India. The revenue authorities are, therefore, not justified in taxing the said payments in India treating the same as royalty. I, therefore, concur with the opinion held by the learned Judicial Member on the issue. 6.44 The case may now go back to the regular Bench which heard the appeal for disposal in accordance with the opinion of majority as per provisions of sub-section (4) of the section 255 of the Income-tax Act. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT Per Shri R. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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