TMI Blog2010 (4) TMI 1205X X X X Extracts X X X X X X X X Extracts X X X X ..... pany by the Indian assessee Company are not in the nature of royalty and no tax needs to be deducted u/s 195 of the Income Tax Act. 2. The facts, in brief, are that the assessee company is a manufacturer of dydroelectric and turbo-generators for hydel and turbo projects and selling the same in India and abroad. The assessee is a 100% subsidiary of VA TECH HYDRO GmbH Austria from 1.4.2001. VA TECH Hydro is an established name in the world in the field of manufacturing and erection of Hydro and Turbo projects since last about 100 years. The Assessing Officer, on scrutiny of books of accounts of the assessee company and Form No. 27 for the assessment years, in question, found that though the assessee company has spent huge amounts as expenditure on technical drawings and designs on account of payments to parent company, neither the tax was deducted at source, nor the assessee company obtained no deduction certificate from the Assessing Officer. The Assessing Officer, called for the explanations of the assessee and after considering the same, made the following observations :- 6.1 Arguments of the assessee are hovering around incorrect reasoning that a) it has pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -resident Austrian Company are manufacturing and selling the generator is same and both the companies are known for their specific designs of generators. It has specifically been mentioned on the designs that it is the property of the parent Austrian Company. The assessee had right to use a particular design for single time. The assessee has been barred to sale the design as such to another manufacturer by the specific condition and warning printed on the design. When the design cannot be sold as above how it can be termed as outright purchase as claimed by the assessee. Thus, the assessee has only been given the right to use the design. 6.5. The designs are not purchased through open tender or bid because assessee is manufacturing generators with a unique technology which is possessed by the parent Austrian company only hence the designs are specific to the parent company. Because of this special relationship assessee is bound to purchase the design from its parent Austrian company only. The design is first received through Internet and its hard copy along with bill is received through Customs to justify the payments made to the parent company from the angle of allowabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A between India and Austria. 6.12. Assessee company is manufacturing Generator and its accessories i.e. only the electrical part of the complete Turn key Project for generation of electricity. Turbine is manufactured by the VATECH ESCHER VYAS Floval Ltd., Faridabad, which is again Austria 100% subsidiary company of Austria in India. International orders for supply of generators are received through its parent company in Austria for which the assessee company supplies generator and its accessories to its parent Austrian company. Turbine and erection infrastructure is supplied by the Austrian company in such projects. Projects in India are completed by the assessee company with the Turbine supplied by the another 100% subsidiary company i.e. VATECH ESCHER VYAS FLOVAL Ltd., Faridabad. In all the cases design of generator is supplied by the parent Austria company only. 6.13. The V Austria Tech India has stated that its Parent Austrian Company does not have Austria permanent establishment. In fact, there is no need for the Austrian company to have another permanent establishment in India, as they have their 100% subsidiary company in India (VA Tech India ) which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led designs on the basis of the parameters and designs provided by its parent company. The rights over these detailed designs prepared by the assessee VA Tech India with VA Tech India itself. Thus it is clear that there are two sets of designs, one prepared by the Parent Austrian company for which assessee makes payment and another in house detailed design prepared by VA Tech India based on the original design. 6.16. From the discussion, it is clear that with the design and other parameters supplied by the parent Austrian company, the assessee cannot create another output in Austria different case or even Austria similar case. From all the discussion and case laws cited above, it is beyond doubt that the payments made by the assessee VA Tech India are in the nature of Royalty and are squarely covered by the decision of Royalty both in the DTAA and IT Act, 1961. I hold that the payments made by the assessee VA Tech India are in the nature of Royalty and that the assessee VA Tech India having failed to deduct tax has committed default within the meaning of sec.195(1) read with DTAA between Austria and India and read with sec.9(1)(vi) of the Income Tax Act, 1961. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being sold against the price. In the sale bills issued by the non-resident Austrian company, there is no mention that despite the sale of drawings and designs against the price, they have retained the ownership in the drawings and designs. The A.O. has failed to establish as to how the income arising to the non-resident company from the sale of the drawings and designs from outside country to the appellant company is chargeable to tax in India, when the non resident company is not having any permanent establishment in India, is taxable in India and, therefore, in the absence of any concrete finding that such payments are chargeable to tax in India, section 195 has no application. Having regard to the detailed and exhaustive submission and the case laws relied upon by the appellant, I hold that the payments made for the purchase of drawings and designs do not give rise to any income in India and no tax needs to be deducted u/s 295 of the IT Act. The said payments are also not in the nature of royalty as defined in the DTAA entered into between India and Austria. In any case, it is not a case of the A.O. that there is a transfer of copyright by the Austrian company in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by a non-resident manufacturer along with a computer or compute-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Trading, 1986 of the Government of India. Explanation 2.- For the purpose of this clause. royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for (i) the transfer of all or any rights (including the granting of a license) in respect of a paten, invention, model, design, secret formula or process or trade mark or similar property. (ii) the imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property. (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of royalty and not a case of out-right purchase thereof. The learned CIT DR placed heavy reliance on the conclusions drawn by the Assessing Officer which have already been reproduced hereinbefore. The learned CIT DR, thereafter, contended that the parent company was not selling the designs in the open market i.e. to any other party other than its subsidiaries. Hence, it was not a case of sale of copy righted articles. The learned CIT DR further emphasized on the fact that it was used by the assessee in manufacturing of the turbine/generator and was not sold as such in the open market like purchase and sale of a copy righted book or software, etc. The learned CIR DR further emphasized on the fact that if the view of the assessee was accepted then every transaction would become a case of sale and in that case, provisions relating to royalty would become redundant. At this stage, a question was posed to him that if the view of the revenue is accepted, then every transaction would become a case of royalty, to which the learned CIT DR could not give any effective reply. The learned CIR DR thereafter placed reliance on the order of the Assessing Officer. 7. The learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be of the nature of purchases, both in the course of proceedings under section 144A as well as under section 92CA of the Act. Hence, for this reason also, the action of the Assessing Officer was not justified. The learned counsel for the assessee thereafter contended that it was a settled law that the sale transaction did not result in royalty and in this regard again submitted that the transfer of such designs by the assessee to the buyers of generators in an unbridled manner established this fact. The learned counsel for the assessee further reiterated the submissions made before the learned Commissioner of Incometax (Appeals), particularly in respect of drawings being goods and the acquisition of drawings on out-right purchase basis could not be considered as a transaction of the nature of royalty. The learned counsel for the assessee further submitted that the provisions of DTAA were to supercede the provisions of the Income Tax Act and for this proposition the learned CIT DR also did not disagree. The learned counsel for the assessee thereafter placed reliance on the decision of the Hon ble Calcutta High Court in the case of Davy Ashmore India Limited v. CIT; 190 ITR 626, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the assessee s transaction with the non-resident company was for the purchase of integrated equipment which consisted hardware as well as software and it was inseparable and having regard to the nature of agreement, what the assessee had purchased was a copy righted article and not copy right of the rights and similar was the position here, hence, this decision of the Tribunal also supported the claim of the assessee. The learned counsel for the assessee thereafter referred to the decision of the Tribunal in the case of Indian Hotels Co. Ltd. v. ITO in ITA No.553/Mum/00 (refer pages 163 to 167 of the paper book),wherein Indian Oil had obtained the services of a foreign company to prepare the interior design which had to be used by the Indian company for the purpose of re-designing or renovating the interiors of Taj Mahal Hotel at Mumbai and the design supplied by the foreign company became the property of Indian Hotel Company Limited (assessee) and in that background, the Tribunal held that the assessee company had purchased and acquired interior design on a principal to principal basis i.e. as a buyer and in that view of the matter, the payment by that company did not amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design was given to the buyer of the turbine/generator and not basic design, as contended by the learned counsel for the assessed. 9. We have considered the submissions made by both the sides, material on record and the orders of the authorities below. It is noted that the assessee is engaged in manufacturing of turbine/generator as per the specifications/requirements of its customers. For this purpose, the assessee procures basic design from its parent company and accordingly manufactures such plant and machinery. It is also noted that such basic design is also given to the buyer of plant and machinery by the assessee company. The dispute before us is regarding the nature of payment made by the assessee company to its parent nonresident company for obtaining such designs. The conclusions of the Assessing Officer as well as the findings of the learned Commissioner of Incometax (Appeals) have already been reproduced which contain details of judicial decisions relied upon by both the sides. In our opinion, if the view of the Assessing Officer is accepted, then there will not be any transaction of sale and purchase in such situations and every transaction would come within t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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