TMI Blog1991 (5) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of M/s. Zimmer in view of Double Taxation Avoidance Agreement with West Germany. Since the Assessing Officer rejected the application of the assessee vide order dated 30th July, 1987, assessee deposited a sum of Rs. 29,06,545 on 8-8-1987 by way of tax deducted at source and filed an appeal under section 248 of the Income-tax Act, 1961 to the CIT(A)-VIII, New Delhi. Though the CIT(A) confirmed the view of the Assessing Officer that the payments made to the German company were taxable in India yet it was held that the liability of the assessee to deduct tax would not exceed beyond 20% of the gross payments. Assessee is aggrieved. 2. It was contended on behalf of the assessee that the agreement between the assessee and the German company executed outside India at Frankfurt was for the outright purchase of technical know-how etc., and not for its mere use. Shri Kharbanda, the learned counsel for the assessee contended that the Double Taxation Avoidance Agreement between India and Federal Republic of Germany has overriding effect over the provisions of the Income-tax Act, 1961. As per the Double Taxation Avoidance Agreement profits in the case of a non-resident company wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that similar payment has been held to be not taxable in India. 3. The learned D.R. Shri Sandeep Tandon, on the other hand, vehemently argued that the payment made by the assessee to the German company was assessable in India as payment of royalty for the use of technical know-how by the assessee. Shri Tandon relied upon the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.)(SB) in support of the contention that payment of the nature as in this case would amount to payment of royalty and accordingly liable to tax in India. Shri Tandon explained that in the hands of company the payment made may be for acquiring of an asset but in the case of payee company the payment is by way of royalty. Shri Tandon referred to the decision of this Tribunal in the case of ITO v. Munak Galva Sheets Ltd. [IT Appeal No. 2508 (Delhi) of 1987] wherein under identical circumstances the issue is stated to have been decided in favour of the revenue. According to Shri Tandon the agreement between the assessee and the German company is for use of technology and not for outright sale. Shri Tandon conceded that the provisions of Double Taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. " As is evident from section 5(2) above, income which accrues or arises or is due to accrue or arise to a non-resident Indian is includible as his income assessable to tax. Section 9 of the Act describes the income which is deemed to accrue or arise in India. Sub-section (1) of section 9 of the Income-tax Act provides that all income accruing or arising whether directly or indirectly through or from any business connection in India or through or for any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India. 6. Since it is admitted case of parties that M/s Zimmer the German company did not have any business connection in India or property in India, the payment made to such company by the assessee-company would not fall within clause (i) of sub-section (1) of section 9. Sub-clause (vi) of section 9(1) also deems to accrue or arise in India the income by way of royally payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income also operates "subject to the provisions of the Act". Reading these sections harmoniously with section 90 of the Act, there is no doubt that section 90 has overriding effect over the provisions of sections 4, 5 9 of the Act. Thus where the Government of India has entered into an agreement with a foreign country for avoidance of double taxation, the terms and conditions of the Double Taxation Avoidance Agreement shall have to be implemented in preference to the provisions of the Act wherever there is a conflict. The CBDT have also vide Circular No. 333 dated 2nd April, 1982 issued instructions to the officers of the Department that in case of conflict between the provisions of the Income-tax Act, and the provisions contained in the Double Taxation Avoidance Agreement, assessment should be made in accordance with the Double Taxation Avoidance Agreement. 8. In this case the non-resident company has business establishment in West Germany and there is an agreement between India and Federal Republic of Germany for avoidance of double taxation signed on 18th March, 1959. The terms of the agreement have been amended and amendments notified vide Notification No. GSR 680(E) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the definition under the Double Taxation Agreement shall have preference over the definition of the word 'royalty' under section 9 of the Income-tax Act, 1961. The distinguishing features in two definitions are that whereas under the Income-tax Act any consideration for the transfer of all or any rights in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property falls within its definition, under the Double Taxation Agreement, the payment for the use of such assets would fall within the definition of royalty. 10. Thus we shall have to examine the payment made by the assessee company to the German company in the light of the definition under the Double Taxation Agreement. We have to consider as to whether the payment made by the appellant company to the German company falls within the definition of the term 'royalty' as per Article IX of the Double Taxation Avoidance Agreement. If it falls within the definition of term 'royalty' as per the agreement then amount is permissible to be taxed in accordance with the provisions of the Income-tax Act, 1961 subject to maximum of 20% of the gross amount. In order to determine the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airmail or hand over in Frankfurt/Main to an air carrier and addressed to Buyer. On the technical know-how being disclosed, imparted and delivered/transferred, the same shall become the property of Buyer but for use and exploitation only in the plant in India. The technical know-how, based on German standards (DIN. VDE etc.) shall be furnished in triplicate in the English language and in metric units of measurement. " 11. A perusal of various clauses of the agreement referred to above between the appellant company and the German company weigh heavily in favour of the assessee that the payment made was for outright sale and not for mere user of technology. Lumpsum payment may not be a decisive factor for considering the payment towards royalty or towards outright sale. The important factor, in our view, is to consider as to whether the payment made by the assessee is dependent upon the user of technology or is independent of it. If the payment is dependent on the user of the technology for a particular period, such payment even if it is a lump sum payment shall have to be treated as royalty within the definition as contained in the Double Taxation Agreement. In this case, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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