TMI Blog2007 (12) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... Technical Assistance Agreement. Referring to the preamble of the Engineering Technical Know-how Supply Agreement the ld. D/R pointed out that SAPL, the Buyer had decided to build and operate in India an industrial plant for commercial production of high viscous polyester, bottle grade chips having capacity of 400 M/Ts per day, employing the continuous poly condensation process. The said manufacturing process was developed and owned by the assessee. The assessee used to dispose off operating processes and know-how as it had the knowledge and experience in the design, delivery, erection and operation of such commercial plants. The Indian Buyer was desirous of availing assessee s said technical experience and expertise for setting up of the production plant in India. According to ld. D/R the preamble of the agreement categorically indicated that the assessee has in its possession the requisite know-how, technology and process with the help of which the Indian Company was able to set up manufacturing plant at Haldia for manufacture of pet resins. He further submitted that under the Engineering know-how agreement the assessee had supplied technical know-how to an Indian company for a lu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and Indian Co. from whom assessee had received fees for engineering and technical know-how. There being direct business connection of the assessee with said Indian Co., the income was taxable under section 9(1) itself and, therefore, the CIT(A) was not justified in holding that no income chargeable to tax accrued in India. The ld. CIT D/R relying on the decisions of the Calcutta High Court in the case of N.V. Philips Gloeilempenfabrieken v. CIT [1988] 172 ITR 541 and N.V. Philips Gloeilempenfabrieken Eindhoven v. CIT [1988] 172 ITR 521 argued that even the lump sum amounts paid for transfer of technical know-how or right to use secret formula, process, etc., was taxable in India as royalty. The ld. CIT D/R submitted that under the Engineering and know-how supply agreement the assessee had granted limited right to use the processes of manufacture of PET resins to an Indian company after retaining the intellectual property rights therein and therefore, the amount received by the assessee from SAPL was rightly taxed by the Assessing Officer as assessee s income from royalty under section 9(1)( vi ) of the Income-tax Act, 1961. 5. Sri D.S. Damle, the ld. A/R for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The engineering information and documentation was supplied by the assessee to SAPL on outright basis and transfer of ownership and title in such documentation took place at Frankfurt, Main, Germany. 6. The A/R argued that engineering documentation; drawings and designs were delivered to the representatives of the SAPL at Germany and thereafter SAPL imported the engineering documentation in physical form for its use in India. Referring to Bills of Entry for home consumption issued by Indian Customs the A/R pointed out that SAPL was described therein as Importer of the goods. The Country and Port of Origin of goods imported was described as Frankfurt, Germany and the goods were invoiced in favour of SAPL by Zimmer AG i.e., the assessee. The bills of entry described the goods imported as Documents (plant, drawings and designs). The A/R also produced before us some bound files containing drawings, designs imported by SAPL, to explain that after the assessee handed over engineering documentation, these were physically brought into India by SAPL through Customs in the like and same manner in which plant and equipments supplied by the assessee were also imported. It was not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r then such engineering information, drawings, designs; forms integral part of the plant and machinery and does not constitute royalty either within the meaning of section 9(1)( vi ) of the Income-tax Act, 1961 or within Article 12 of the DTAA. In the present case the assessee, a foreign company, supplied Engineering and Technical designs and drawings concerning plant and equipments sold to SAPL. The technical documentation was sold on outright basis and ownership and risk in the documents were transferred in favour of SAPL in Germany and, therefore, no part of the income arising from payment of DM 7.2 million accrued in India. The Engineering documentation sold by the assessee related to plant and equipments which was supplied by the assessee. There was no transfer of secret formula, processes, engineering know-how etc., in favour of SAPL. The intent and purpose was limited only to enable SAPL to set up, operate and maintain its manufacturing plant at Haldia with the assistance of the said drawings. The intention of the parties was not to enable SAPL to start manufacture of plant and equipments capable of manufacturing petrochemical products. He, therefore, submitted that the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply Agreement. ( c )Article 2.1 defined the Scope of the Agreement for supply of engineering as follows : Seller hereby agrees to supply to Buyer, and Buyer agrees to purchase from Seller the Engineering necessary to enable Buyer to design, engineer, erect and set up as well as to commission, operate, test and maintain the Plant and to manufacture the Products in the Plant, and Seller hereby grants Buyer, and Buyer acquires from Seller the right for the use of the Engineering in the Plant, all subject to the terms and conditions of the Agreement, particularly subject to the payment of the Purchase Price. ( d )Article 2.4 provided as follows : The Engineering that shall be supplied by Seller under Article 2.1 herebefore in accordance with Article 3.2 will include the documents and information being by itself sufficient to enable Buyer s Detail Engineering Contractor (Lurgi India, as referred to in Article 7.2 and which is to be understood as an experienced company in the field of chemical and spinning plants) to perform the Detail Engineering, to procure machinery, equipment, etc., and subject to such engineering and procurement having been performed in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding and lodging etc., shall be borne by the Buyer. The purchase price as defined in Article 5.1 was only for supply of engineering to be paid by SAPL in lump sum." 11. From perusal of the above Articles, we find that under the Engineering and Know-how Agreement the assessee agreed to supply engineering, necessary for SAPL to design, erect, set up as well as commission, operate, test and maintain the plant for manufacture of bottle grade PET resins. Article 2.4 clarified that the engineering supplied by the assessee to SAPL included the documents and information which was sufficient to enable the buyer to erect, start up, operate and maintain the plant for manufacture of pet resins. It, therefore, appeared that the engineering contemplated to be provided by the assessee under the agreement pertained only to the plant and equipments supplied by the assessee to SAPL under the Equipment Supply Agreement. 12. This interpretation stands fortified from Article 2.4 of the Equipment Supply Agreement which reads as follows : "Seller warrants that the Equipment to be supplied by Seller under the Agreement together with the scope of equipment to be provided for by Buyer including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL. The description of imported goods was Documents (plant, drawings and designs) . As in case of import of plant and machinery; SAPL also imported engineering documents and designs in physical form in the same manner and in the same mode. We, therefore, agree with the submissions of the A/R that under Engineering and Know-how Agreement SAPL purchased on out right basis; engineering documents relating to plant and machinery which was supplied by the assessee under equipment supply agreement. 16. From cumulative reading of various clauses and articles of the agreements we find that, the engineering supplied by the assessee were limited to designs of plant, machinery and equipments supplied by the assessee and which was erected and set up by SAPL at Haldia, West Bengal for manufacture of bottle grade PET resins. We find force in submissions of the A/R that the assessee did not supply any secret formula, processes, patent; engineering know-how developed by the assessee which would enable SAPL to start business of manufacture of plant and machinery or any other product. Supply of engineering, drawings and designs was incidental to sell of plant and equipment which was tailor-made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made to acquire technical know-how to facilitate operations and process amounted to acquisition of capital asset and technical drawings, designs, charts; processing data and other literature fell within the definition of plant . Viewed from this position we agree with the submissions of the A/R that the engineering drawings, designs along with plant and equipments together constituted plant which was the depreciable asset; which SAPL acquired from the assessee; outside India and, therefore, income could not be charged as royalty in India. 19. In his submissions ld. D/R had placed strong reliance on the decisions of the Calcutta High Court in the case of N.V. Philips Gloeilempenfabrieken [1988] 172 ITR 541 and N.V. Philips Gloeilempenfabrieken Eindhoven v. CIT [1988] 172 ITR 521 . We however find that on the facts of the case the decisions cited by the ld. D/R were not applicable. In both the cases decided by Calcutta High Court foreign companies; registered in Netherlands; entered into agreements on 8-7-1964 with Crooks Interfran Ltd., an Indian company, under which the foreign companies agreed to furnish information to the Indian company in respect of worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The consideration paid for transfer of design documentation was, therefore, held not to be in the nature of royalty as defined in Article 12 of DTAA with Germany or in section 9(1)( vi ) of the Income-tax Act. 21. Similar view was also taken by Visakhapatnam Bench of ITAT in the case of Skoda Export Co. Ltd. ( supra ) to which one of us was party. In this case an Indian Company entered into 3 agreements with a Czechoslova-kian Co. under which the foreign company was to manufacture and deliver outside India equipments for manufacture of steel products. The foreign company was also to provide technical assistance for supervision of erection, commissioning of the plant and the said foreign company supplied, design and engineering of such plant and machinery for which payments were made outside India. It was claimed that the payments made for purchase of drawings and designs was not payment of royalty and, therefore, no tax was deductible at source under section 195 of the Act. On these facts the Tribunal held that in their opinion the receipt for import of drawings and designs and technical documents were in the nature of plant and machinery and, therefore, could not be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) 283 held that such lump sum payment did not constitute royalty under section 9(1)( vi ) of the Act. According to the Tribunal the consideration was paid for construction and installation of Kiln and was not paid for imparting any information concerning manu-facture or use of a patent, invention, model, design etc. The High Court considered the fact that the foreign company had supplied, erected and commissioned a Kiln in India and only service rendered in India was supervision by an expert deputed by the foreign company. The remuneration for supervision was separately paid and its tax liability was not in dispute. There had been supply of plant and machinery, materials and know-how which had all been despatched from abroad. There had been no hire of any patent, right or technical know-how on the part of foreign company in India and, therefore, the entire payment was to be considered as cost of the Kiln in hands of Indian Company and, therefore, was not taxable as income in India. The High Court accordingly upheld the order of the Tribunal that payment made for supply of technical drawings and designs was not taxable as royalty. 24. Similar view was also taken by Madras High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d drawings pertained to plant and equipments supplied by the assessee. Both plant and machinery and engineering documentation were taken delivery by SAPL outside India and payments, therefore, were also made outside India. Supply of plant and machinery along with its drawings and designs represented one composite supply and, therefore, the payment of DM 7.2 Million could not be considered separately. We are also unable to appreciate submissions of the CIT D/R that merely because assessee was one of the shareholders of SAPL; the payment received could be brought to tax as income in India under section 9(1). In fact at no stage up to filing of appeal the revenue has taken such stand and even in ground of appeal revenue has claimed that the payment received by assessee under engineering know-how agreement should be taxed as royalty. On the facts as discussed above, we however, find that the payment received under the engineering know-how agreement was for purchase of engineering designs and drawings in respect of equipments supplied and the same having been acquired on outright basis outside India no income chargeable to tax accrued in India. Having regard to totality of the facts of ..... 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