TMI Blog1990 (7) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... nce guarantee test on the plant. CLECIM would be responsible for the supply of design and engineering, supply of FOB equipments. Art. 3 gives the scope of supplies and service to be done by CLECIM. Art. 3.3.6 says that the " design and engineering including documentations to be supplied by foreign contractor including major foreign subcontractor shall be delivered in France and shall be received by Principal Contractor/Purchasers Engineer deputed to CLECIM office in France or at the request of the purchaser delivered on FOB port of Shipment basis or sent by first class airmail/air--freight at foreign contractor's cost." It would be seen from this Article that designs and documentations would be received in France by the engineers of the assessee deputed for that purpose. 3. Both MECON and CLECIM should provide supervisory service for erection and commissioning and, while NECON should provide Indian supervisory services for 900 man-days, CLECIM should provide services partly for erection and fully for commissioning of works. For this purpose, the foreign supervisory personnel of CLECIM could be deputed for a ceiling of 450 man-days. The assistance for this purpose should be at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tandon, for the Department, referred to Article VII of the DTA agreement which states that royalties derived by a resident of one of the contracting States from sources in the other contracting State may be taxed in both the contracting States. He further pointed out that the term " Royalties " defined in Article VII(2) means the payment of any kind received as consideration for the use of or for the right to use any copy-rights of literary, artistic or scientific work, design, plans, script, processes or formula or for the use of industrial, commercial, scientific equipment or for information concerning industrial, commercial or scientific experience. Thus, he submitted that the definition is very wide and can include the documentation and designs for which the assessee is to make the payment. Shri Tandan then submitted that the CIT(Appeals) had treated the subject-matter as if it was an appeal by the French Company itself. He had misconceived the scope of the appeal. The only issue before him was, whether, prima facie, tax has to be deducted at source or not. That does not mean that the liability has to be finally adjudicated. He took exception to the Commissioner's remark that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven then we feel that the real issue is, whether the French Company has any income accruing or deemed to accrue in India. Therefore, it is very necessary to consider all the aspects of the case, as if the French Company itself is in appeal. 11. The assessee, as a matter of fact, is the French Company and since there is an agreement in existence between India and France for avoidance of the double taxation, it is necessary first of all to see, whether any income accruing or arising to the French Company can be brought to tax. As per Article 3 of this Agreement, the industrial or commercial profits or an enterprise of one of the Contracting States would not be subject to tax in the other Contracting State unless the enterprise has a permanent establishment situated in the other Contracting State. It is undisputed that CLECIM, the French Company, does not have a permanent establishment in India. Therefore, the industrial or commercial profits cannot be brought to tax. The term " Industrial and commercial profits " however, is defined in Article III(5). It says that the industrial and commercial profits would not include income in the form of dividends, interest, rent, royalty and si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant of Continuous Galvanising Line -- the contractors MECON and CLECIM are entirely responsible for putting up this plant. The process of putting up the plant has several steps and the agreement deals with each step and fixes responsibility thereof. Article 2, therefore, specifies the design and technology. Article 3 says that what is the scope of the service and equipment. Design is for the plant to be erected and the equipment would go into the erection of the plant. As part of the design for the plant, CLECIM has to furnish the documentation. These documentations were to be delivered in France to the principal contractor, i.e., MECON and not the assessee. No doubt, MECON would take delivery of these designs and documentations at the request of the assessee. But what is to be noticed is that the interest of the Indian Company is not in acquiring any documents for its own sake. They are not even given to them. It would be delivered to MECON as part of the process for setting up of the plant. 14. Article 4.1.2 deals with the contract price for the design and engineering including documentation. The payment we are concerned with, is a payment for this documentation. On a common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Agreement, there is a case to hold that the payments are revenue receipts taxable in India. The CIT(Appeals) has further given a finding that the information to be supplied was not such that can be used repetitively. Perhaps the requirement of repetitive use is expected in the grammatical meaning of the word " royalty ". But when Article VII(2) defines royalty, in our opinion, it is not necessary to see, whether it is repetitive. What is to be seen, is whether any payment has been made for " information" gathered by the French Company in industrial, commercial or scientific experience over the years. As a fact, we have found it to be so. The CIT(Appeals) also had stated that the payments covered a number of services. We may state here that, at present, we are only concerned with the payment made for the transfer of documents. There are certainly other services rendered. But separate payments are to be made for these services. That issue has not come before him except in over-all context, which we discuss later below. So, for the payment for documentation, these were not relevant. 18. We would now consider the submissions made by Shri Ganesan. These submissions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to that. They had, no doubt, referred to Article II, which gives the definitions, Article III, which refers to the requirement of permanent establishment before profit could be taxed in India and Article VIII. Therefore, the finding given therein would not be relevant for understanding the Agreement between India and France. Apart from that, the High Court was mainly considering, whether there was a business connection under section 9(1)(i) of the Income-tax Act. That issue does not arise here. They further found that there was no permanent establishment. Ultimately, they found that the income was industrial or commercial income of the foreign enterprise and since there was no permanent establishment, it could not be brought to tax. 21. The second decision relied upon was that of Madhya Pradesh High Court in the case of Hindusthan Electrographites Ltd. This is also distinguishable on facts. In that case, the Indian Company wanted to adopt the improved technique by a foreign company, known as SERS. Since the furnace of the Indian Company was different detailed engineering was required to be carried out before SERS could draw modified designs suited to the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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