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TMI Blog1982 (3) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... to income-tax at Indore in the status of a company. Petitioner-company entered into an agreement (annex. A) with French company, M/s. LA SOCIETE DES ELECTRODES ET REFRACTORIES SAVOIE (hereinafter referred to as " M/s. SERS "), on November 26, 1973, for availing of the improved technique and know-how of the said French company. This agreement was duly approved by the Govt. of India. Petitioner-company had been using furnaces for preparation of electrodes etc., but the foreign collaborators, M/s. SERS, had developed new design of furnaces for baking and graphitisation. The adoption of this new design of furnaces developed by the French company would have improved the quality of the products of the petitioner-company and provided them better ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner also manufactures large diameter electrodes but the same were not acceptable in the international market unless they were first subjected to furnace trials and were found fit. Petitioner, therefore, consulted M/s. SERS in this behalf and M/s. SERS, vide their letter dated October 7, 1980 (annex. E), agreed to conduct the furnace trials of the petitioner's products in France on payment of 25,000 FF per year as testing fees. Petitioner sought approval for this payment also from the Ministry of Industries, New Delhi, and permission was accorded, vide letter dated January 15, 1981. Petitioner after obtaining approval of the Central Govt. for the payment of above amounts sought to remit the same to M/s. SERS. Permission of the Reserve Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the petitioner the aforesaid payments being for technical services and for services in the nature of supervision charges, were excluded from the term " industrial and commercial profit " under cl. v of art. III of the ADT and, therefore, were not liable to tax in India. These payments fell under arts. XV and XVI of the ADT and, therefore, no income-tax was payable thereon in terms thereof. The respondents had the statutory duty to issue the. NOC so that the remittances could be made through the Reserve Bank. The main ground advanced by respondents Nos. 1 and 2 in support of the impugned orders (annexs. J & L) is that the said remittances for which NOC was sought b the petitioner were neither industrial nor commercial profits nor fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art. III of the ADT. But it was contended that the said payments were covered under art. VII of the ADT as they constitute go royalties " payable by the petitioner to its French collaborators, M/s. SERS. On the other hand the petitioner contended that the said remittances fall under art. XI or XVI of the ADT and not under art. VII. To appreciate the rival contentions, it will be proper to reproduce the relevant articles : " Articles VII.-(1) Royalties derived by a resident of one of the Contracting States from sources in the other Contracting State may be taxed in both the Contracting States. (2) In this article, the term 'royalties' means payments of any kind received as consideration for the use of, or for the right to use, any copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing State in connection with the activities performed in that Contracting State." It was not in dispute that under the original agreement of collaboration dated November 26, 1973 (annex. A), described as "patents and know-how licence agreement ", the foreign company had agreed to make available the patents of its furnaces to the petitioner and royalty was charged for the petitioner's right to use the said patents and know-how of the French company. On remittances of this royalty, admittedly, tax was deducted at source. But we have to examine whether payments sought to be remitted to the French company for the services mentioned in their letter dated February 4, 1980 (annex. B); and 7th October, 1980 (annex. E), could be treated as royaltie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he French company, on 4th February, 1980. This technical advice was necessary for enabling the petitioner to modify its furnaces so as to make them workable under the patents and know-how made available to the petitioner by the French company, vide agreement (annex. A). This transaction did not fall within art. VII of the ADT. It squarely fell within art. XVI of the ADT. Similarly, with regard to the payment of FF 25,000 in a year by the petitioner to the French company, it was clear that the amount was payable for technical services and, therefore, did not amount to royalty. Reference may be made to the letter dated 7th October, 1980 (annex. E), sent by M/s. SERS to the petitioner. In this letter the French company wrote as under: " Dear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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