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TMI Blog1990 (9) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ment carried on by it which shall be provided by the assessee, free of cost. Clause 5 provides for the secrecy of the know-how provided with a right to PBI to sub-licence the same to third parties on approval condition. Clause 8 and clause 9 of the agreement are to the following effect : " 8. Jaeger shall, relative to manufacture by PBI of the products, arrange for imparting to such trainees nominated by PBI and for such period as may be agreed upon between the parties training at their works or the Works of any of its associates in the Federal Republic of Germany or elsewhere. All travelling and living expenses and salaries of such trainees shall be borne by PBI. Except as otherwise provided, PBI shall reimburse Jaeger in West German Marks in Germany all monies as may from time to time have reasonably to be paid by Jaeger to or for or on behalf of any such trainee and shall indemnify and keep indemnified Jaeger from and against all claims, payments, proceedings and expenses whatsoever arising from any cause whatsoever by or in respect of any such trainee. The terms of training of such trainees shall in due course be settled between the parties and shall be subject to the approva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The parties agree that no royalty shall become payable in terms of this agreement in respect of any ball bearings manufactured by PBI. It is further agreed that this agreement envisages payment of royalty in respect only of Roller Bearings of newer types, i.e., other than those specified in the Annexure hereto. 19. The amounts payable to Jaeger in terms of clauses aforegoing shall be paid by PBI at Wuppertal-Elberfeld in the Federal Republic of Germany in West German Marks at semi-annual intervals as follows : (a) By November 30 each year in respect of the products sale during the period ending on August 31, previous thereto ; (b) By May 31, each year in respect of the products sold during the period ending on February 28/29 previous thereto. Remittances of the said amounts shall be accompanied by statements setting out details of the products sold during the relative period. Further more, at the end of each financial year, PBI shall forward to Jaeger a statement, duly certified by its auditors, showing the amounts payable by PBI to Jaeger in terms hereof in respect of the products sold during such financial year. " 4. During the year under consideration, the assessee rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the obligations undertaken by the appellant regarding imparting of training to the employees of the Indian company, making available engineers/Technicians for employment by the Indian Company etc. are in the nature of rendering of services in connection with the provision of technical know-how and, therefore, the consideration received by the appellant in respect thereof, constitutes 'royalty' under clause (vi) of Explanation 2 to section 9(1)(vi). Therefore, the amounts of Rs. 4,81,202 and Rs. 11,68,823 received/receivable by the appellant under the agreement constitute royalty. Since the royalty was paid by a person resident in India, the income is deemed to accrue in India under section 9(1)(vi) and the appellant is liable to pay tax thereon. 7. As I have held that the amounts of Rs. 4,81,202 and Rs. 11,68,823 constitute royalty assessable under section 9(1)(vi), these amounts cannot be treated as fees for technical services falling under section 9(1)(vii). In this connection, a reference may be made to the decision of the Gujarat High Court in the case of Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311, where it was held that income by way of fees for technical services, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty', its definition as given in Explanation 2 to section 9(1)(vi) will have to be adopted for the purpose of deciding as to whether the consideration received by the appellant for providing recurring know-how and performing other obligations constitute 'royalty'. As already discussed, under Explanation 2 to section 9(1)(vi), the amounts of Rs. 4,81,202 and Rs. 11,68,823 received/receivable by the appellant constitute 'royalty'. As such, both these amounts will not constitute 'Industrial or commercial profits' within the meaning of Article III(3) of the Double Taxation Avoidance Agreement between India and West Germany. I have gone through the decision of the Karnataka High Court in the case of Citizen Watch Co. Ltd. In this case, the assessments related to the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71. As section (9)(1)(vi) was introduced in the Income-tax Act w.e.f. 1-6-1976 the Court held that the ITO's reliance on the definition of the term 'royalty' occurring in Explanation 2 to section 9(1)(vi)(c) was illegal and unwarranted. It is in this context the Court observed that the definition of royalty occurring in Explanations 2 to 9(1)(vi)(c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , includes not only the income which accrues or arise to him in India, but also the income which was received in India. As the amount of Rs. 4,81,202 was received by the assessee during the relevant previous year, according to him, it formed a part of its total income. He, therefore, held that the ITO was justified in including the sum of Rs. 4,81,202 and Rs. 11,68,823 as royalty income of the assessee under section 9(1)(vi) of the Act. 7. The learned counsel for the assessee, Shri S.E. Dastur, submitted before us that the consideration was for services mentioned in clauses 3, 8 and 9 and, therefore, it was fees for technical services and not royalty. He, further, submitted that there being no permanent establishment in India, Article III of the Double Taxation Avoidance Agreement did not apply to tax its industrial or commercial profits. He further submitted that clause 3 to Art. III of DTA did not exclude services forming part of industrial or commercial profits and, therefore, they would not be taxable under any other provision of the DTA. In this connection, he referred to the French Agreement for avoidance of double taxation providing specifically for the taxation of the fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was only the system of accounting which was applicable to non-resident assessees. The receipts having not been assessed in the earlier years, it was submitted, were validly brought to tax by the departmental authorities by invoking the provisions of section 5(2)(b). The present year is the first year of production/receipt and, therefore, the maintenance of the accounts has to be justified on the sound principles of law. The Special Bench decision in the case reported in Reinz Dichtungs' case, he submitted, was a case where the system was accepted by the revenue in the past. No accounts in the instant case are maintained in India either on cash system or mercantile system. 9. We have heard the parties and considered their rival submissions. On a careful consideration of the agreement entered into by the assessee with Precision Bearings India Ltd. ('PBI' in short), and the other materials on record, we are of the opinion that the receipt by the assessee in pursuance of the agreement was mainly and basically for the provision of technical know-how. It also covers the receipt for performing other obligations undertaken by the assessee under the agreement, vide clauses 3, 8 and 9 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuss and obtain improved designs, manufacturing methods and other useful data for manufacture and supply of products to the customers ". Similarly, the purpose of the visit of Dr. H. Morell was " discussion with directors of the company on successful implementation of the agreement and constructive suggestions for the difficulties faced by the company ". The purpose of the visit was stated as training only in the case of Mr. N.K. Ghosh. In these circumstances, in our opinion, a very negligible part of the consideration received by the assessee in pursuance of clause 18 was for training. On the facts and circumstances of the case, we estimate the same to be at 20 per cent. The balance consideration was for providing recurring know-how including improvement in the methods of manufacture as the result of research and development carried on by the assessee and would be in the nature of royalty. 10. The contention of the learned counsel for the assessee that the entire amount would form part of industrial and commercial profits and as the assessee had no permanent establishment in India, no part thereof would be taxable in India because of the provisions of Article III of the Double T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the royalty, other than the royalty under Art. IX of the DTA, the same would be subject to Indian taxation and taxable in India under section 9(1)(vii) of the Act. DTA does not provide that if any receipt which does not fall in any of the clauses, the same would be taxable under the Income-tax Act or would be excluded from the purview of Indian taxation. 13. The further contention of the assessee that it was a case of acquisition of knowhow as PBI was entitled to use it even after the expiry of the agreement and, therefore, a capital receipt and not royalty also has no force. The receipt of consideration was for the user of the know-how and, therefore, the fact that PBI had a right to use it even after the expiry of the agreement would not make any difference. The proprietory rights in the know-how remained with the assessee. They had not been sold of to PBI to the exclusion of the assessee or for any other person. At least, nothing of that sort was brought to our notice. By the very nature of the term " know-how ", it cannot be parted with ; it could only be imparted or its fruits shared. By imparting it to or sharing the fruits thereof with some one, the author is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irection be given for its taxation in the year of accrual has no force as our jurisdiction is limited to the year under appeal and any directions given for an year which is not in appeal would be of no legal sanctity. We, therefore, leave the matter like that Ground No. 4 in this appeal is, thus, allowed. 15. Ground No. 5 is for the credit of tax deducted at source on the income of Rs. 11,68,823. According to the assessee, it should be allowed in the year in which the amount is subjected to taxation, i.e., the year under consideration. This has no force. Section 199 of the Act allows credit of tax deducted at source on the production of the certificate furnished in the assessment made for the immediately following assessment year under the Act. The assessee is, therefore, not entitled to the credit of tax with respect to the royalty income of Rs. 11,68,823 for the year under consideration. We hold that the CIT(A) was, therefore, justified in rejecting this claim of the assessee. The assessee fails on this ground. 16. The last ground is against the levy of interest under section 217 of the Act. The assessee's stand is that its entire income was subject to tax deductible at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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