2007 (12) TMI 311 - AT - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 10,19,89,429 as 'fees for Technical Know-How' constitutes 'Royalty'.
2. Validity of reassessment under section 147 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Whether the payment of Rs. 10,19,89,429 as 'fees for Technical Know-How' constitutes 'Royalty':

The revenue contended that the payment made to the German company for technical know-how should be classified as 'royalty' under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the Double Taxation Avoidance Agreement (DTAA) between India and Germany. The revenue argued that the technical know-how, designs, and processes provided were not sold outright but merely allowed for use, thus constituting royalty.

The assessee countered that the technical know-how, designs, and processes were sold outright, with ownership and title transferred in Germany. The assessee emphasized that the engineering documentation was integral to the plant and machinery supplied and was necessary for SAPL to erect, operate, and maintain the plant. The documentation was imported into India in physical form, similar to the plant and machinery, and thus did not constitute royalty.

The tribunal examined the agreements and found that the engineering documentation was indeed sold outright, with ownership and risk transferred in Germany. The tribunal noted that the documentation was necessary for SAPL to set up and operate the plant and was not merely a right to use. Consequently, the tribunal held that the payment did not constitute royalty under section 9(1)(vi) of the Income-tax Act or Article 12 of the DTAA.

2. Validity of reassessment under section 147 of the Income-tax Act:

The assessee challenged the reassessment, arguing that all material facts were disclosed in the original return, which was processed under section 143(1) without issuing a statutory notice under section 143(2). The reassessment was initiated based on the same information available in the original return, and not on any new information.

The tribunal referred to the Supreme Court's judgment in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd., which upheld the validity of reassessment even if the original return was processed under section 143(1). Therefore, the tribunal dismissed the cross-objection by the assessee and upheld the validity of the reassessment.

Conclusion:

The tribunal concluded that the payment of Rs. 10,19,89,429 for technical know-how did not constitute royalty and was not taxable in India. The reassessment under section 147 was valid. Hence, both the revenue's appeal and the assessee's cross-objection were dismissed.