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TMI Blog2004 (9) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... ply of technical documentation, on the facts of this case, is to be treated as 'royalty' or not. 3. The aforesaid neatly identified legal issue is set out in a narrow compass of undisputed material facts. The assessee, a Russian company, possessing knowledge and experience in the field of manufacturing technique of a product termed as "UR 9168 Polyurethane Wire Enamel", entered into agreement dated 8th March, 1994, with an Indian company, by the name of Intec Polymer Ltd. (IPL, in short). Under this agreement, the assessee-company was to provide to IPL a "non-exclusive right to use the 'know-how' for the purpose of realisation of the process and the technical process and the special process in the territory and sell the licensed product and the special product in the territory and zone of non-exclusive right". Under this arrangement, the assessee was, upon a request from the IPL, to render "technical assistance". The terms of rendering the technical assistance were set out in article 3 of the agreement which is reproduced below for ready reference: "The technical documentation shall be drawn up in conformity with the norms and standards of the licensor's country in Russian (1 cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied. Aggrieved by these actions of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Learned CIT(A) was of the view that in the light of the principles laid down by the Hon'ble Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626, in the case of 'an outright sale', the consideration for the transfer of such design, secret formulae, etc., cannot be treated as royalty. It was further observed that since the present case is a case of outright sale of technical know-how, the consideration received by the assessee-company cannot be treated as 'royalty' exigible to tax under article 12 of the India Russia DTAA. The CIT(A) thus reversed the order of the Assessing Officer and upheld the contentions of the assessee. 4. Revenue is aggrieved and in appeal before us. 5. We have heard Shri Mohit Kapoor, learned departmental representative, and Shri Divyesh Shah, learned counsel for the assessee. We have also carefully perused the material before us and duly considered factual matrix of the case as also the applicable legal position. 6. We consider it desirable to reproduce article 12 of the DTAA, dated 4th September, 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the provisions of article 7 shall apply. 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a sub-division, a local authority or a resident of that State Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties or fees for technical services was incurred and such royalties or fees for technical services are borne by such permanent establishment, then such royalties or fees for technical services shall be demeed to arise in the State in which the permanent establishment is situated. 7. Where, by a reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount or royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In such case the excess part of the payment shall remain taxable according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any property in them leaving the grantee to use or exploit them...." It was in this backdrop that Their Lordships concluded that the consideration for such 'out and out transfer or sale' of designs and drawings cannot be treated as 'royalty'. 8. It is thus clear that Davy Ashmore India Ltd.'s case merely lays down the proposition that in the case of an outright sale or transfer of designs and drawings and in a situation where non-resident does not retain any property in such drawings and designs, the consideration for such an outright sale and transfer cannot be regarded as in the nature of payment for use of, or right to use of, such patents, designs or models, plans, secret formulae or process, etc. Accordingly, it cannot be treated as 'royalty', as are the normal connotations of this expression in DTAAs including India Russia DTAA. However, this decision does not lay down the general proposition that consideration for transfer of designs and drawings in all cases is to be treated as consideration for outright sale of such designs and drawings. Let us now go back to the facts of the case before us. 9. An outright sale of designs and drawings essentially implies unfettered r ..... 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