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TMI Blog1990 (4) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ement provided that the appellant company (hereinafter referred to as Swedish company) shall supply to M/s. Atlas Copco (India) Ltd. (hereinafter referred to as Indian company) know-how for use, application and exploitation. Shri Dastur argued that the know-how imparted, disclosed and supplied in terms of this clause was to become the absolute property of the Indian company and the payment for supply of such know-how was provided for in clause 7(a) of the agreement fixed the consideration equivalent of Rs. 15,00,000 for initial disclosure and supply of know-how which was to be paid in three instalments as described in that clause. Shri Dastur then referred to clauses 3 and 4 and argued that in terms of these clauses, the Swedish company was required to provide services in various fields such as selection of personnel, training of Indian personnel, deputation of Swedish personnel to Indian company etc. Shri Dastur then referred to clause 5 of the agreement and pointed out that the nature of the service which the Swedish company was required to render in terms of this clause was related to the supply of technical know-how as per clause 2, because in terms of this clause, the Swedish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under clause 7(b) were to be considered as for what was provided in clause 5, it could not be considered as royalty. Shri Dastur then argued that Explanation 2 to section 9(1)(vi) gave a very wide definitionof the term " royalty " whereas the same expression was given a restrictive definition in Article VII of the Double Taxation Agreement. Even assuming that section 9(1)(vi) was to be applied, the payment made in terms of the present agreement could not come under any of the sub-clauses of Explanation 2 to section 9(1)(vi). Sub-clause (i) spoke of transfer of all or any rights in respect of a patent, invention etc. and sub-clause (v) also spoke of transfer of all or any rights in respect of any copyrights. These clauses were not applicable in the present agreement. Sub-clauses (ii), (iii) (iv) which talk of imparting of any information concerning the working of or the use of patents or use of patents, secret formula etc. or information concerning technical, industrial, commercial or scientific knowledge were the types of services which were described in clause 5 of the agreement, and the payments made under clause 7 if relatable to services render under clause 5 could not corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gations undertaken by the Swedish Company to update drawings etc. the Indian company shall pay to the Swedish Company a royalty at 3 per cent subject to applicable taxes, if any, on internal sales and at 6 per cent subject to applicable taxes on exports for a period of five years from the commencement of commercial production. This royalty will be calculated on the basis of the net ex-factory sale price of the products exclusive of excise duties minus the landed cost of the imported components, irrespective of the source of procurement including ocean freight, insurance, custom duties etc. In addition, for the purpose of computing royalty payments, the main standard bought out components shall be excluded. The payment of royalty at the rate mentioned above will be restricted to the existing licensed capacity of the plant per annum plus 25 per cent in excess, thereof. In case of production in excess of, this quantum, the prior approval of the Indian Government will have to be obtained regarding the terms of payment of royalty in respect of such excess production." 6. The first thing that is clear on a plain reading of this clause is that it provides that the Indian company shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed by the Indian Company from outside the territory ; (d) assist and advise the Indian Company to enable it to manufacture the Products as far as possible from the raw materials available in the territory ; (e) assist and advise the Indian Company in developing the products covered by this Agreement to suit Indian conditions ; (f) assist and advise the Indian Company in marketing the products ; (g) generally assist and advise the Indian company in matters relating to the efficient operation and maintenance of the manufacturing plant ; and (h) supply to the Indian Company free of charge specimens of such samples, displays, sales promotional material and literature as the Indian Company may reasonably require or as in the Swedish Company's opinion may be of use to the Indian Company in the preparation by the Indian Company of their own sample, display materials and literature for sales promotion and sale of the products. 4. (a) The Swedish Company shall impart at its or its associate Companies plants in Sweden or elsewhere outside the territory to the representatives of the Indian Company in such number and for such period of time as may be mutually determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from the wording of the following clause 7(a) " 7. (a) In consideration of the initial disclosure and supply of know-how from outside the territory by the Swedish Company under this Agreement, the Indian Company shall pay to the Swedish Company, in Sweden, in Swedish currency, a lump sum consideration equivalent of Rs. 15,00,000 (Rupees fifteen lakhs) in three instalments as detailed below : i. 1/3 after the Agreement has been taken on record ; ii. 1/3 after the time of transfer of technical documentation ; iii. 1/3 after the commencement of commercial production." Therefore, what is paid under clause 7(a) as lump sum consideration is only for initial disclosure and supply. Now clause 2(a) requires the Swedish company to impart, disclose and supply know-how for use application and exploitation in the territory. We cannot give a restrictive meaning to clause 2(a) and say that it provides only for supply of know-how. All the clauses of the agreement have to be read as a whole. It was the burden of Shri Dastur's argument that the term ' royalty ' must mean payment for use of know-how, patents, rights, designs etc. or any other like property. It was also the burden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and maintenance of the manufacturing plant. We are, therefore, not prepared to accept Shri Dastur's argument that the payments in terms of clauses 3 and 4 were only for services rendered and did not help the Indian company in the use of patents and rights. The assistance provided by the Swedish company in all these areas was for enabling the Indian company to use the know-how supplied. The assistance was in every area of activity of the Indian company. It was for selection, for training etc. Further, we are not prepared to accept that what was provided by the Swedish company in terms of clause 5 could be related to what is provided in clause 2(a). Clause 5 read as under : " 5. The Swedish Company shall from time to time supply, impart and disclose from outside the territory the benefits of any improvement modification and research made by the Swedish Company and its associate companies relating to the manufacture of the products and in particular shall supply impart and disclose any modification, improvement and research in the know-how or in any technical information, advice, assistance or services rendered or given by the Swedish Company to the Indian Company under or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s anything in Article VII of the Double Taxation Agreement which supports the various arguments made by Shri Dastur in this behalf. This Article reads as under : " Article VII - Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory. In this article, the terms ' royalty ' means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, patents, models, designs, plans, secret processes or formulae, trade-marks and other like property or rights, but does not include any royalty or other like amount in respect of the operation of mines, quarries or other natural resources, or in respect of cinematographic films." Firstly, Shri Dastrur tried to argue that the source of the royalty was not India but Sweden. We are, not prepared to accept this argument. The royalty is derived by the Swedish company (resident of one of the territories) from the Indian company. Clause 7(b) clearly mentions that the Indian company shall pay to the Swedish company and such payment is for all other obligations undertaken by the Swedish company. These obligations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Swedish company and enables the Indian company to make use of the expertise and assistance offered by the Swedish company. We are, therefore, satisfied that even within the meaning of the Article VII of the Double Taxation Agreement, the payment received by the appellant under clause 7(b) is royalty. 10. Finally we will briefly deal with the Board's Circular No. 333 dated April 2,1982 reproduced at 137 ITR page 1(Statutes) which clearly supports the arguments of Shri Dastur that the provisions of Double Taxation Agreement should prevail over the provisions of the Act. That is also the burden of the decision of the Andhra Pradesh High Court in Visakhapatnam Port Trust's case. We, therefore, agree that Articles III and VII of the Double Taxation Agreement will have to be taken into account for considering the question of what constitutes royalty and further the question whether the amount received by the Swedish company is taxable as royalty in its hands. For the reasons stated in the preceding paragraphs, we are of the view that the amounts received by the Swedish company under clause 7(b) of the Agreement are taxable as royalty even within the meaning of that terms as it appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the assessee generally but to his separate source of income, profits and gains and that it is possible for an assessee to have a different previous year for each separate source of income, profits and gains. In both the decisions, the Courts were concerned with the term ' source of income ' in the contexts of the language of section 2(11)(i)(a) of the Indian Income-tax Act, 1922. This, in our opinion, does not, in any way, support the interpretation of the appellant's counsel he tried to put on the term ' sources ' used in Article VII. Shri Dastur also referred to the decision of the Tribunal in Automobile Peuggeot's case. We have carefully gone through this decision and fail to see how it helps the appellant's case. In that case, there was an agreement for transfer of technology for use in India. The Tribunal held on the facts of that case that the source was the user of the technology or its exploitation and since the user or exploitation took place in India, the source of royalty was in India. It may be mentioned here that in that case also an effort was made to refer to Double Taxation Agreements with Belgium and Japan and such effort was rejected by that Bench by pointi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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