TMI Blog2001 (8) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there was no dispute over the fact that the provision of the Double Tax Avoidance Agreement between India and Federal Republic of Germany would override the provision of s. 9 of the IT Act and merely because the payment was a lump sum payment, it cannot be said that it was made for transfer of technology. It was further argued by her that the CIT(A) at page 4 of the impugned order had not discussed the critical portion of the agreement by which the technology was conveyed and the relief had been granted by him by placing reliance only upon the decision of the Delhi Bench of the Tribunal in the case of DCM Ltd. vs. ITO (1989) 29 ITD 123 (Del). It was her contention that the facts of the said case were distinguishable from this case and as such not applicable to the issue at hand. It was argued by her that the assessee says that cl. III of the agreement between the assessee and M/s Apollo Domain Computers,GmbH,Germany, is for the right to user. Hence, the amount was taxable inIndia. 4. Our attention was invited by the learned Departmental Representative to the paper book p. No. 1 for the contention that the approval is obtained by the assessee from the Govt. of India where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... watch on the factory premises, the watch on the production schedule etc., kept by the Apollo Domain clearly shows that it was not intended to be a case of ourright sale or purchase. It was argued by her that the word, transfer, implies ownership rights to the assessee which a reading of this document shows have not been conveyed to the assessee. Our attention was invited to paper book page No. 16 on the basis of which it was argued that cl. 6.1 shows that the rights were granted only for the user of technology and nowhere is there any implication that there was any permanent handing over of design etc., to the assessee and in fact, it was argued that this limited handing over for the user can also be taken away by the Apollo Domain Company. Thus, it was argued that on reading the entire agreement it was evident that the transfer is limited to user of technology. Merely because the word 'granted' has been used in cl. 6.1, it does not mean that a permanent right is acquired by the assessee. It was again reiterated by her that at the time of seeking the approval of the Government of India the assessee does not use the words payment for transfer or purchase and specifically uses the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty under the IT Act, 1961 and this truncated definition does not hold in its scope that transfer of technology is royalty. 10. Thus, after adverting to the various articles and clauses of the DTAA agreement betweenIndiaand the Federal Republic of Germany, it was contended by the authorised representative of the assessee that the assessee's case is of transfer of technology which goes back to art. III of the DTAA and is governed by it on the basis of permanent establishment inIndia. It was contended by him that it has been disputed that Apollo Domain does not have a permanent establishment inIndia. Accordingly, this lump sum fee was not taxable. Reliance was placed on the following decisions for the proposition that this a case of outright transfer of technology and as such business profit; Citizen Watch Co. Ltd. vs. IAC Ors. (1984) 148 ITR 774 (Kar), CIT vs. Davy Eshmore India Ltd. (1991) 190 ITR 626 (Cal), Graphite Vicarb India Ltd. vs. ITO (1992) 43 ITD 28 (Cal) (SB), DCM Ltd. vs. ITO, Swadeshi Polytex Ltd. vs. ITO (1991) 38 ITD 328 (Del); and Modern Threads (I) Ltd. vs. Dy. CIT (1999) 63 TTJ (Jp) (TM) 601 : (1999) 69 ITD 115 (Jp) (TM). 11. It was also submitted by him tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are part of the same composite agreement. Our attention was further invited to art. 8 of this agreement which deals with the rights relating to the software programmes. The limitation imposed upon the parties in art. 8.6, 8.7, 8.8, 8.9 etc., on which a separate consideration has been paid which has been included in the definition of royalty and subjected to tax. Thus art. 12 was not related to technology and in fact is related to licensing and royalty on the licensed products manufactured was subjected to tax. Thus, dealing with the several issues etc., of the grant of licence of software programmes, etc., the payment made have been taxed and only in respect of the payment for transfer of technology the assessee is claiming exemption from royalty. 13. Coming to the arguments of the learned Departmental Representative pertaining to the letter issued to the assessee by the Government of India where the term lump sum fee has been used, it was argued that the use of word 'fee' does not connote royalty. What is relevant here is that what is assessee getting from Apollo Domain and the nomenclature cannot determine the nature of this agreement and thus, the rights acquired by virtue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is limitation of 5 years beyond which the Indian company cannot even use the technology. After 5 years, art. 14 dealing with the duration and termination would come into effect and by virtue of art. 14.4, sub-cl. (a), all rights granted under this agreement would revert back to Apollo. 20. We have heard the rival submissions and perused the material placed on our files. The decisions cited before us have also been considered. 21. Right at the outset, it would be pertinent to state certain undisputed facts of the case. There is no dispute over the issue that M/s Apollo Domain Computers,West Germanyentered into agreement of technical collaboration with M/s HCL Ltd. The said agreement was executed on11th May, 1987. There is also no dispute over the Act that the definition of royalty as enumerated in the DTAA betweenIndiaand Federal Republic of Germany is a truncated one and is not pari materia with the definition of royalty under s. 9(vi) of the Indian IT Act, 1961. There is also no dispute over the issue that by virtue of the existence of the DTAA between theIndiaand Federal Republic of Germany. The provisions of the DTAA shall prevail over provisions of the IT Act, 1961. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable in relation to the subject-matter or contract will not help in coming to a different conclusion." 25. Aggrieved by this, the assessee went in appeal before the CIT(A). The CIT(A) after hearing the submissions of the assessee and examining the provisions of the DTAA as well as the relevant provisions of IT Act and also relying upon the decision of the Delhi Bench of the Tribunal in the case of M/s DCM Ltd. came to the following conclusion: "I have gone through the submissions of the learned representative for the appellant and also the order of the AO. There is a lot of force in the submissions of the learned representative for the appellant. The definition of royalty under the said DTAA is narrower than the definition under the Act. Where such an agreement exists, it has to be given preference over the provisions of the Act. A comparative look at the two definitions shows that certain part of the definition which occurs in Expln. 2 to s. 9(1) does not figure under art. VIIIA of DTAA. The know-how is an intellectual property and falls within cls. (i) and (ii) of the aforesaid Explanation. The things for the transfer of which the assessee agreed to pay to M/s ADC as such sq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veyed, Technical Information and Technical assistance to be provided under art. 3.1 by way of lump sum in the net sum of US $ 1.1 million free of all Indian taxes. (ii) In respect of the royalty payable for the Licensed Products manufactured by HCL inIndia, a fixed royalty of eight hundred US dollars (US $ 800) shall be paid on each unit of the licensed product manufactured by HCL inIndiaand sold or leased. (iii) In respect of licensing of Apollo Software Programs under art. 9 thereof, the applicable license fees for each Apollo Software Program reproduced and sub-licensed to India end users together with the licensed product, under the then current Apollo Software Program Price List under Ext. 4 of the Agreement which be as per Apollo is prevailing distributor price list. It is agreed that the price for the operating system, AEGIS and DOMAIN/IX, will, during the term of this agreement, not exceed seven hundred US dollars (US $ 700) as stated in Ext. 4. (iv) In respect of the documentation under article hereof, the applicable licence fees for each copy of the documentation reproduced under the List of Documentation under Ext. 6, will be five US Dollars (US $ 5) per copy." 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Property Rights, Warranties and Quality Control" were adverted to in support of the contention that the rights transfer were limited rights. Art. 5.9 of it reads as under: "5.9 HCL shall use its best efforts to maintain a standard of quality and workmanship in its manufacture of the licensed products equal to that of Apollo and shall manufacture the licensed products out of materials supplied by parties to be mutually agreed between HCL and Apollo. HCL shall permit representatives of Apollo, upon reasonable advance notice and during normal business hours, to inspect the manufacturing facilities of HCL used for the manufacture of the licensed products. In particular, Apollo's representative shall be permitted to inspect and monitor the quality control procedures to be used by HCL, as well as to inspect samples of the licensed products and the compliance by HCL, with the quality standards for the licensed products contained in the technology." 31. Article headed "Licensing Software Programs" the conditions therein specially art. 8.4 pertaining to records was also adverted to by her. The same is being reproduced hereunder: "8.4 HCL agrees to use its best efforts to ensure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e make available any Software Program in any form to any person other than HCL's and Apollo employees, and end-user customers of HCL as provided for therein, without the express written consent of Apollo except, when any such person is on HCL's premises with HCL permission for purposes specifically related to HCL's permitted use of the Software Program or Test Aid. HCL agrees to take appropriate action by instruction, agreement or otherwise with HCL's employees, or other person permitted access hereunder to a Software Program or Test Aid to satisfy its obligations under this agreement with respect to the use, copying, modification, protection and security of a Software Program or Test Aid. HCL will not make any copies of a Software Program or Test Aid without the express written consent of Apollo; (c) HCL shall, at its own cost and expenses, protect and defend Apollo's ownership of the Software Programs and Test Aids against all claims, liens and legal program or Test Aid free and clear from all such claims, liens and processes; (d) Apollo reserves the right to alter the designation of any software program in order to reflect modifications of changes in policy or support requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without the obligation of paying any additional consideration to Apollo, including the right to manufacture, use and sell under any patents included in the technology covering the licensed products, provided that HCL shall make no claims against Apollo with respect to the licensed products." 32. All in conclusive terms according to the arguments addressed by the learned Departmental Representative amount to hedging/restricting the transfer and user of technology and not a case of outright sale/transfer of technology. Apart from relying upon the various clauses of this agreement, reliance has been placed upon the assessment order, the decision cited before us and the letter addressed by the Under Secretary of the Government of India Shri S.H. Keshwani to M/s HCL foreign collaboration with M/s Apollo Computers Incorporation USA which is placed at paper book page No. 1 and 2 before us. A perusal of the same is also necessary to the issue, hence for ready reference it is also reproduced hereunder: REGISTERED POST No. FC: 71(87)-Comp./SCS. Government ofIndia Ministry of Industry Department of Industrial Development Secretariat for Industrial Approvals Special cases se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e therewith, Apollo hereby convey and grants to HCL exclusive right to manufacture, maintain, use and sell the licensed product inIndiain accordance with pursuant to and under the Technology. Said technology relating to the manufacture of the licensed products inIndiawhich is owned by Apollo as of the effective date of this agreement. 34. On the basis of which it was submitted that the intention of the contracting parties is clearly borne out that M/s ADC intended to convey and grant to M/s HCL the exclusive rights to maintain, use and sell the licensed products in India. Art. 3 of this agreement which is titled transfer of Technology and Technical Assistance, art. 3.1.1 reads as under: "Apollo shall deliver the tangible technical information constituting the technology, in accordance with Ext. 3 be prepaid air mail or air freight C.I.F. or by such other means which are reasonable and obtain from HCL acknowledgement of such delivery to HCL's registered office inIndiaor to such other location inIndiawhich HCL will designate. Apollo shall provide two copies of said technical information in a form capable of being copies in the English language. HCL may, at their own expense, tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This statement does not advance the case of the assessee as art. III, cl. 7 of the DTAA stated as under: "Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article." 37. Thus cl. 7 of art. III of DTAA specially makes out a case that the items of income which are dealt with separately in other articles of this agreement then the provisions of those articles shall not be affected by the provisions of art. III. In such a situation art. VIII-A steps into the picture and comes into play. At this juncture, it is pertinent to reproduce the relevant provisions: "Art. VIII-A (1) Royalties and fees for technical services arising in aContractingStateand paid to a resident of the otherContractingStatemay be taxed in that other State. (2) However, such royalties and fees for technical services may also be taxed in theContractingStatein which they arise, and according to the laws of that State. But insofar as the fees for technical services are concerned, the tax so charged shall not exceed 20 per cent of the gross amount of such fees. (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of eachContractingState, due regard being had to the other provisions of this agreement." 38. We have given our utmost consideration to the agreement entered into between M/s ADC and M/s HCL and it is our considered opinion that clear interpretation of the various clauses placing restrictions, limitations, controls, checks, overall control clearly makes out a case that this is not a case of transfer of technology and is merely the case of transfer of user of technology. Perusal of the various judgments relied upon before us further fortifies this view. 39. The first and the foremost case which needs to be discussed is the decision of the Bombay High Court in Aziende C.N.A. Italy which lays down the principle that the agreement has to be construed as a whole and that the different clauses in the agreement cannot be considered separately. After examining the facts of the case, their Lordships of the Bombay High Court came to the conclusion: "The recitals in the agreement as also the provisions contained in cl. (6) thereof showed that the obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratified on10th July, 1985. The situation where user of technology is concerned, it is clearly envisaged in the definition of royalty. As such, the user of technology is clearly within the purview of royalty and thus, clearly taxable inIndiaby virtue of art. VIII-A, cl. 3 r/w art. III cl. 7 of DTAA. Accordingly, despite the fact that in this case, the interpretation of DTAA vis-a-vis the IT Act was not an issue but the issue of transfer of technology or user of technology was within the ambit and as such it also supports the case of the Revenue. 42. The CIT(A), on the other hand, places reliance on the decision of the Delhi Bench of the Tribunal in the case of DCM Ltd. vs. ITO on which the learned authorised representative places strong reliance. The learned authorised representative has submitted that this case is fully applicable to the issue at hand because it involves the interpretation of the DTAA betweenIndiaand U.K. Learned Departmental Representative, on the other hand, has argued that the facts are fully distinguishable. A perusal of this decision shows that there was no prohibition, control or monitoring of the nature as brought out in the perusal of the transfer agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein fully supports the view taken by us. Similarly, Atlas Copco AB ofSwedenvs. Dy. CIT relied upon by the Departmental Representative further fortifies this view. It is seen that the assessee therein a non-resident company entered into an agreement with an Indian company for supply of technical know-how for manufacture of air compressors and rendering technical assistance for the said manufacture against a lump sum consideration. The assessee in its return did not include the receipt of the first two instalments of the consideration amount on the ground that it was a case of outright transfer of the know-how by virtue of which it could not be termed as royalty and thus, was not taxable inIndiaas per art. III of the DTAA since the assessee did not have any permanent establishment inIndia. It was also contended by the assessee there that the disputed amount was a capital receipt and not liable to tax since the amount was a consideration against the outright transfer of know-how. The Tribunal after considering the terms of the DTAA as a whole and the transfer agreement came to the conclusion that there was no outright transfer of know-how by the assessee-company to theIndiacompany ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement thereof inIndia. The payment made to foreign company was royalty for exclusive right to manufacture products. A perusal of the decision shows that firstly this was the case where the overriding effect of DTAA was not an issue. It is also seen that the decision was against the stand taken by the Revenue there as the Revenue there had tried to make out a case before the Gujarat High Court that the disputed payment was "research contribution" and as such covered by residuary cl. 2(v) under Part II of the First Schedule to the Finance (No. 2) Act, 1971. The Tribunal held that having regard to cl. 17 of the agreement between the companies the payments were royalty payments and as such were liable to deduction at source at the lower rate of 50 per cent. This finding of the Tribunal was upheld by their Lordships of the Gujarat High Court in the following terms: "Held, that, firstly, the agreement between the assessee and the foreign company was for a period of ten years only. Secondly, it was in respect of certain secret or patent formulations owned or controlled by the foreign company. The payment, though called 'Research contribution' in the agreement, was nothing but the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation fee, technical assistance fee. The royalty under the DTAA betweenIndiaandJapanfees for technical services were to be treated as income from sources within theContractingStatein which the services were rendered. Their lordships of the Karnataka High Court held that the agreement between the Government company and the assessee showed that the documentation fee, technical assistance fee and royalty could not be treated as being of the same character. The documentation fee and technical assistance fee were separate fees and were not royalty or a similar payment dealt within the art. x(e) of the DTAA betweenJapanandIndia. Thus, it cannot be said that this decision advances the case of the assessee before us. 51. The learned authorised representative has also placed reliance on Davy Ashmore India Ltd. It was argued by the learned authorised representative that this was the case which involved the DTAA between India and U.K. and the consideration for transfer of designs and drawings was held to be not a case of royalty and hence not assessable to tax. The amount paid for import of drawings and designs, therein was with the approval of the Reserve Bank. It was also submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir Lordships held as under: "Held, that the non-resident did no retain the property in the designs and drawings. The designs and drawings were imported under the import policy with the approval of the RBI on the basis of the letter of intent. The import of the designs and drawings postulated an out an out transfer or sale of such designs and drawings. The consideration paid for the transfer was not assessable as royalty." 53. Their Lordships although did consider the earlier decision in the case of N.V. Phillips but have categorically held thereafter that: "Having regard to the facts and circumstances of this case is must be held that the present case is not a case where a non-resident is retaining the property in the drawings and designs......." 54. Thus, it is seen that M.V. Phillips on the facts of its case very much holds sway and the subsequent decision by the same High Court in fact lays down the same principle and fortifies our view. Accordingly, the case of the assessee does not get any assistance from it. The learned authorised representative also placed reliance on the Graphite Bicarb India Ltd. vs. ITO. The study of this decision shows that the facts therein ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough the above mentioned decisions, it is seen that material facts are distinguishable, it is seen that after examining the issue at length the Tribunal came to the conclusion therein that the payment made by the assessee therein to the foreign company did not fall within the definition of term royalty under the DTAA between India and Federal Republic of Germany. The foreign company therein had transferred the technical know-how to the assessee in consideration of the amount in question and such a transfer was held to not merely a right to its use and as such since the foreign company did not have a permanent establishment inIndia, the same was not assessable to tax even as a business receipt. It is seen that in the arguments addressed by the learned Departmental Representative therein at p. 332 reliance has been placed upon the Special Bench decision of the Tribunal in Siemens Aktiengellschaft Anr. unreported decision of the Delhi Bench of the Tribunal and the DTAA. A perusal of this decision shows that although there was a secrecy clause in the transfer agreement but there were no restrictions, conditions, controls etc., as has been placed in the recitals of the transfer agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement at length we are of the opinion that the nature of the said payment is clearly a case of royalty, and thus exigible to tax under s. art. VIII-A of the DTAA. In the earlier part of this order, we have discussed and analysed the transfer agreement and after going through the recitals which make out a strong case of prohibition, controls etc., we are of the opinion that by no stretch of imagination the transfer can be held to be a case of transfer of technology and it in fact is case of transfer of user of technology. Thus, this decision also does not advance the arguments of the assessee. 59. Both the assessee and the Revenue came in cross-appeal before the Tribunal who after examining the issue at length held that the receipts of the assessee fell in the definition of royalty and that being so they were exempt under art. III of the DTAA and therefore taxable inIndia. Accordingly, the appeal of the Revenue was allowed and theCOsfiled by the assessee were rejected. 60. Thus, a perusal of the plethora of judgments for and against the issue and the impugned order before us, it is seen that the learned CIT has derived support strongly from the principle/proposition that the D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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