TMI Blog2010 (10) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice, therefore, taxable under Article 12 of the Double Taxation Avoidance Agreement (DTAA) - there was a transfer of technical know how in favour of Indian Company, therefore what was received by the Italy-company is a business receipt - Since admittedly there is no permanent establishment in India, the same is not liable to be taxed in India - In the result, appeal of the assessee stands allowed - 491 (HYD.) of 2000 - - - Dated:- 29-10-2010 - N.R.S. GANESAN, CHANDRA POOJARI, JJ. A.V. Sadasiva for the Appellant. Smt. Vasundhara Sinha for the Respondent ORDER N.R.S. Ganesan, Judicial Member. This appeal preferred by the assessee is directed against the order passed by the CIT(A)-IV, Hyderabad dated 11-5-2000 and pertains to the assessment year 1991-92. The only issue arises for consideration is the taxability of US $ 7.50 lakhs paid by the assessee to M/s Vesil SPA, Italy. 2. Shri A.V. Sadha Siva, the learned representative for the assessee submitted that the assessee company is engaged in the business of manufacture of Ophthalmic Lenses. In the course of its business activity, the assessee company entered into an agreement with M/s Vesil SPA, Italy. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has no permanent establishment in India, the receipt of sale of technical know-how being a business profit cannot be taxed in India. The learned counsel placed reliance on the judgment of the Apex Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7061 and submitted that the Apex Court while considering the DTAA between the Government of India and Government of Mauritius, found that a Treaty between two sovereign countries takes into account only the person who are liable to taxation in the contracting State. The very purpose of DTAA is to ensure that benefits under the agreement are available even if they are inconsistent with provisions of the Income-tax Act of the respective countries. Therefore, whenever a benefit was conferred under the DTAA between the two sovereign countries, the benefits available under the agreement has to be provided to the citizens of the respective countries even though such benefits are contrary to the Income-tax Act of the respective countries. 4. The learned representative further submitted that in this case the assessee has paid the 1st instalment of 1/3 amount of the lump sum payment to the extent of Rs. 30,59,441 equiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of India and France and found that the lump sum payment made by the assessee for transfer of technical know-how by France Company was a business receipt and the France Company has no permanent establishment in India, therefore it is not taxable in India. In view of this decision of the Special Bench, according to the learned representative, the 1st instalment paid by the assessee towards lump sum payment for outright purchase of technical know-how cannot be considered to be taxable income of the foreign company in India. The learned representative further placed reliance on the decision of the Delhi Bench of this Tribunal in the case of Munjal Showa Ltd. v. ITO [2001] 117 Taxman 185 (Mag.). 7. The learned representative further placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Swadeshi Polytyex Ltd. v. ITO [1991] 38 ITD 328 and also the 3rd Member decision of ITAT, Jaipur Bench of in the case of Modern Threads (I) Ltd. v. Dy. CIT [1999] 69 ITD 115. 8. Referring to the judgment of the House of Lords in Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580 the learned representative submitted that the issue before the House of Lords ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the DTAA it will definitely fall under the Article 23 of the DTAA. Placing reliance on the Authority for Advance Ruling in IMT Labs. India (P.) Ltd. In re [2006] 287 ITR 4502 (AAR - New Delhi), the learned representative submitted in the case before the authority for advance ruling a license was given to Indian resident company to use software developed by a non-resident company on its server flat form and the Indian company paid licence fee to the non-resident. The authority for advance ruling held that the payment made by the resident company for using the software in India amounts to Royalty and fee for technical service. Therefore it is taxable in India. In view of this decision of authority for advance ruling, according to the learned representative the fee paid by the assessee for use of the technical know-how in manufacturing of ophthalmic lenses is also a Royalty and fee paid for use of technical service in India therefore it is taxable in India. 10. The learned DR again referred to Article 23 of the DTAA and submitted that this is a residuary clause and applicable in all cases where the other clauses of the article may not be attracted. Referring to clause D of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n option to renew the same for another period of 5 years. Referring to article 5.9 of the agreement the learned representative pointed out that after termination of this agreement, right of the licensee will be expired immediately. Referring to page 18 of the paper book the learned DR pointed out that capital goods are not part of the agreement. The agreement between the parties is exclusively as licensor and licensee so as to permit the Indian company to use the technical know how in their manufacturing activity. Learned representative placed her reliance on the decision of the Authority for Advanced Ruling in Airports Authority of India, In re [2008] 304 ITR 2163 (AAR - New Delhi) and submitted that the Authority for Advanced Ruling examined an identical DTAA between India and USA and felt that payment made for the right to use the software and documentation was royalty income both under the Income-tax Act, 1961 and under Article 12 of DTAA. Therefore, it was taxable in India. The decision of Authority for Advanced Ruling is squarely applicable to the facts of this case. Referring to Article 13 of DTAA learned Representative submitted that the royalty was defined in Article 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any to use the technical know-how and the technical know-how cannot be disclosed to any other persons. There was a prohibition to sub-license the technical know-how. There was a prohibition even to disclose the employees of the Indian Company. Therefore, in view of this confidentiality clause in the agreement, the department contends that what was paid by the assessee is for technical services rendered by a foreign company, therefore, it is taxable in India. The department has also found that even if the payment is treated as royalty the same is liable for tax in India even though there was no permanent establishment of the foreign company in India. 15. The first question arise for consideration is, whether the payment made by the assessee is for purchase of technical know-how or it is a payment for technical services provided by the assessee ? It is not in dispute that if it is purchase of technical know-how then the amount paid by the Indian company to foreign company is not taxable in India since it would be of business receipt in the hands of the foreign company. Let us examine the agreement between the parties. Article 4.1.1 of the agreement requires the foreign company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the parties. The very fact that the assessee was free to transfer and assign the agreement in favour of other company or association or organization, it cannot be said that the assessee was given the exclusive right to use the technical know-how transferred by the foreign company. One more important thing to be noted is that after expiry of this agreement the Indian Company has a right to use the very same technical know-how for their manufacturing activity. If it is not outright sale the foreign company would not have permitted the Indian company to use the technical know-how supplied by them after the expiry of the agreement. Article 5.9 of the agreement specifically says that after expiry of the agreement or its termination, the Indian company shall continue to use the very same technical know-how for its business and other information supplied by the foreign company. This is obvious under Article 5.9.3 of the agreement. If the intention of the parties is not to sale the technical know-how out rightly the foreign company would have restricted the usage of the Indian company after the expiry of the agreement period or on termination of the agreement. Since, the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f well known antibiotic penicillin. In order to increase the yield of penicillin, the assessee entered into an agreement with Japan Company for supply of technical know-how so as to increase substantially higher level of performance or production. As per the agreement the assessee has to pay US $ 50,000 as one time payment for supply of technical know-how to the Japan Company. The assessee-company claimed the payment made to the Japan Company as revenue expenditure exclusively laid out for the purpose of business. The Assessing Officer however, found that the expenditure incurred by the assessee for acquiring the technical know-how is an advantage or enduring benefit to the assessee therefore, it was to be treated as capital expenditure. The Tribunal also confirmed the view of the Assessing Officer. At the instance of the assessee a reference was made to the Gujarat High Court. The Gujarat High Court found that the expenditure was incurred for the purpose of setting up of a new plant and a new process. Therefore, the expenditure incurred for introducing a new process of manufacturing with a view to installing a new plant has to be considered only as a capital expenditure and not as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how inclined towards the inference that the right pertain more to the use of the know how than to its exclusive acquisition. Therefore, this may be one of the inference. In the case before us, the Indian Company was permitted to transfer/assign the agreement. Moreover, a right was given to the Indian to register the patent right in its names. 21. As we have observed earlier, when the right was given to the Indian Company to register the patent right in its name to transfer and assign the agreement in favour of other company clearly shows that the intention of the party was for exclusive sale of the know how and not a mere right to use. If we read the agreement harmoniously, giving reflect to all the clauses of the agreement, it clearly shows that there was an acquisition of the technical know-how by the Indian company. Therefore, in our opinion, the Judgment of the Apex Court in the case of Alembic Chemical Works Co. Ltd. (supra) may not be of any assistance to the Revenue. The matter would stand on entirely different footing, in case the right of the Indian company to register the patent in its name as provided in Article 2.7 and the right to transfer and assign the agreement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into an agreement with an Indian company to furnish technical information relating to manufacture and sale of vitamin-D. The Indian company has to pay 5 per cent of the net selling price to the foreign company as consideration. The assessee contended before the Assessing Officer that the amount received from Indian company was by way of technical assistance fees. The Assessing Officer accepted the contention of the assessee and held that only 10 per cent of the receipt of the foreign company would be treated as taxable income as the same was towards technical assistance fees. However, the Administrative Commissioner in exercise of his power under section 263 of the Income-tax Act, 1961 found that the payment received by the foreign company was in the nature of royalty . The Tribunal also confirmed the view of the Administrative Commissioner. In the re-assessment proceeding pursuant to order under section 263 of the I.T. Act, the Assessing Officer found that the payment received by the foreign company is nothing but royalty. In those factual situation the Calcutta High Court found that the entire payment received by the foreign company for supply of data, assistance for manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the Indian company was not given any right to register the patent right in their name. There was no clause in the agreement to transfer/assign agreement in favour of any other company or organization and no right was given to the Indian company to continue to use the technical know how after termination or expiry of the agreement. In view of this distinctive features in our opinion, this decision of the Chandigarh Bench of this Tribunal may not be of any assistance to the Revenue. 27. We have also carefully gone through the decision of Mumbai Bench of this Tribunal in the case of G.U.J. Jaeger GmbH (supra). In the case before the Mumbai Bench an Indian company entered into an agreement with the foreign company for supply of technical know how. The Mumbai Bench found that the agreement is for improvement the method of manufacture pursuant to research and development carried on by the assessee. The agreement also provided for training to the employees of the Indian company. Under these circumstances, it was opined that very negligible part of consideration was shown for training. Accordingly, it was estimated at 20 per cent and the balance amount was found to be for providing re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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