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TMI Blog1988 (1) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty. In the alternative, it was contended that the know-how constituted a capital asset and the payment received by the assessee company from the sale of such capital asset and the profit arising therefrom was the capital gain and as such, it was not taxable by virtue of Art. XI of the agreement for avoidance of double taxation between the Government of India and the Government of Norway (short DTA agreement). The ITO was of the view that the payment was made to the assessee company by the aforesaid Indian company for imparting knowledge relating to the operation of the furnace in the production of pig iron and to grant the Indian company the right to use confidential design and information including the right to use the relevant patents owned by the company. The ITO was further of the view that s. 1(b) of the agreement executed between the assessee company and the Indian company clearly indicated that the payment received by the assessee company was in the nature of royalty. While coming to this conclusion the ITO took into consideration the definition of the term 'royalty' as given under Art. VII of the DTA Agreement. The ITO accordingly did not accept the contention advanced o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian company, the non-resident Norwegian company received remuneration which did not constitute technical fees. According to the CIT(A) the sum of Rs.14,200 represented income from personal services as referred to in Art. III (3) of the DTA Agreement and such income was assessable to tax in India. So, the ITO's action in this regard was also confirmed by the CIT(A). Aggrieved, the assessee has come up in second appeal before the Tribunal. 5. The assessee company entered into yet another agreement with Maharastra Elektrosmelt Ltd., Bombay. The agreement was executed on 31st July, 1979. During the accounting year relevant to the asst. yr. 1981-82, the assessee company received from the said Indian company a sum of Rs.2,77,557 (equivalent to Norwegian Kr. 1,81,800) under the aforesaid agreement. The assessee company claimed that the said amount was not liable to tax in India by virtue of the DTA Agreement. it was further claimed that the aforesaid amount represented engineering fees. The ITO did not agree with the contention advanced on behalf of the assessee and held that the aforesaid receipt was in the nature of royalty and hence, it was liable to tax in India. The order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., as also the agreement executed in July, 1979 between the assessee company and Maharashtra Elektrosmelt Ltd., in support of the contention that the payments received from these two Indian companies were not in the nature of the royalties. Regarding the payments made by the State Industrial and Investment Corporation of Maharashtra Ltd., it was urged by Shri Sanyal that the Agreement executed in Nov., 1973 clearly showed that the payments of Rs.12,35,284 (equivalent to Norwegian Kr. 7,59,000) was made; (i) to impart to the Indian company knowledge relating to the operation of the furnace in production of pig iron; (ii) to grant to the Indian company the right to use confidential design and (iii) to impart information to the Indian company. It was urged that payments made by the Indian company in so far as it related to the right to use confidential design could at the most be regarded as royalty within the meaning Art. VII and that the payment in so far as it related to the remaining two items could not be treated as royalty for the simple reason that knowledge and information imparted to the assessee company are not covered by the definition of the tern 'royalty' as given in Art. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. III(1) and that this receipt did not amount to royalty as defined under Art. VII. In this connection reliance has been placed on the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft vs. ITO (1987) 64 CTR (Trib) (Bom) (SB) 21; (1987) 34 Taxman 258 (Tax Magazine). 10. Shri B.B. Kundu, learned Departmental Representative, has on the other hand, strongly supported the impugned orders of the authorities below. It was contended that relevant laws which were in force during the relevant assessment years would be applicable in this case. In this connection reference was made to the provisions contained in s. 4(1). according to Shri Kundu, the payments received by the assessee company in the accounting years relevant to the two assessment years under appeal, would be taxable as income in the hands of the assessee under s.(9)(1)(i) of the IT Act, 1961 as because of the collaboration agreements with different Indian companies and the payments received thereunder by the assessee company it was clear that there was a business connection in India between the assessee company and those Indian companies. In support of this contention reliance has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions contained in the IT Act, 1961. 12. Art. III of the DTA Agreement is as follows; (1) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first mentioned territory. If profits are so derived, tax may be levied in the first mentioned territory on the profits attributable to the said permanent establishment. (2) there shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. and dealing at arm's length with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is capable of determination, or the ascertainment thereof presents exceptional diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls within the mischief of Art. III(3), the benefit of Art. III(1) would not be available to the assessee with the result that such income would be taxable in India. On the other hand, if the payments received by the assessee from Indian parties do not fall within the ambit of Art. III(3), in that event, such payments forming part of its industrial or commercial profits would not be taxable in India by virtue of Art. III(1). Here it may be pointed out that though the lower authorities have not found that the assessee company has no permanent establishment in India, this fact has not been disputed before us on behalf of the department. 15. Explanation 2 to cl. (vi) to s. 9(1) of the Act, 1961 defines the term 'royalty' for the purpose of cl. (vi). The definition of the term 'royalty' introduced in s. 9(1) solely as an Explanation to cl. (vi) cannot, therefore, be taken into con for the purpose of interpreting the scope of the term 'royalty' as used in Art. III of the DTA Agreement. In taking this view we stand fortified by the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft vs. ITO. As has already been pointed out above, the term 'royalty' is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies for imparting information and knowledge and granting rights as specified in s. (1)(b). Under s. (1)(b), the assessee company undertook to impart knowledge relating to the operation of the furnace in production of pig iron and to grant to the Indian party the right to use confidential designs and information from the assessee company. We are not impressed by the arguments advanced on behalf of the assessee that under s. (1)(b), only a part of the payments received under s. (III)(2) and attributable to the right to use the design would fall within the definition of the term 'royalty' as given under Art. VII. As has been rightly pointed out on behalf of the Department the definition of the 'royalty' as given under Art. VII also includes any amount received as consideration for or any other like property or rights. In the instant case, information and knowledge which the assessee company was required to impart to the Indian party relates to the operation of the furnace in production of pig iron. The grant of the right to use confidential design also relates to the furnace for production of pig iron. Though the words 'information and knowledge' have not been specifically used in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... boe an engineer of the assessee company. This engineer/technician was deputed by the assessee company to render technical assistance to the Indian party in terms of s. (1)(c) of the agreement. One of the contentions advanced on behalf of the assessee company is that the sum of Norwegian Kr. 8697.50 (equivalent to Rs.14,250) was paid by the assessee company to Mr. Yesteboe and that this amount was taxed in India in the hands of the said engineer/technician and for this reason it is not again taxable in the hands of the assessee company. In support of this contention our attention was invited to certain papers forming part of the paper book filed by the assessee. At page 3 of the paper book is a photostat copy of the letter dt. 15th March, 1982 from the Indian party intimating that the aforesaid amount was remitted to the assessee company towards the pay and allowance of Mr. Yesteboe. It is further stated in this letter that the said amount was paid persuant to s. (1)(c) of the agreement. A photostat copy of a certificate from Mr. Yesteboe is at page 11. It confirms that the said engineer/technician received from the assessee company Norwegian Kr. 8697.50 covering daily allowance for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly not a royalty. In the case of Siemans Aaktiengesellschaft vs. ITO, similar payments were considered by the Special Bench in Para 52 of its order and it was held that they are exempt from taxation and cannot be brought to tax. 23. We are now left with the payment of Rs. 2,77,557 relating to the asst. yr. 1981-82 (equivalent to Norwegian kr. 1,81,800) received by the assessee company from Maharastra Electrosmelt Ltd., under the agreement executed in July, 1979. Under s. 1 of this agreement, the assessee company undertook; (a) to deliver drawings, specifications and data according to Schedule No. 1 of the agreement and (b) to inform the purchaser relating to the operation of the furnace in production of ferromanganese in order that the Purchaser may obtain the maximum benefit of the equipment supplied under the agreement. The payments received by the assessee company from the Indian party represented price for supplying drawings, specifications, data and information to the Indian party. According to the contention advanced on behalf of the assessee under this agreement the supply made to the assessee company of drawings, etc., amounted to an out-right sale and, therefore, the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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