TMI Blog2014 (10) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... ent assessee outside India would not be taxable in India. The entire amount paid including the periodical payments were treated as royalty, ignoring Article VII of the DTAA and the relevant clauses of the Agreement - Ignorance and nescience was not due to lack of awareness, but attributable to failure to understand and deal with the issue inspite of the submission/contention - It was propelled with the desire to ensure 100% taxation of the entire consideration - No attempt was made to elucidate, and painstakingly answer the objections with facts and to bifurcate and divide the consideration in a reasonable manner between right to use technical information or know-how etc. and the consideration paid for services - in respect of services, differentiation regarding services rendered in the source state, i.e. India, the amount attributable to the activities actually performed in India and expenses incurred, was not undertaken - Consideration paid for technical services outside India had to be examined and excluded - the payments received were offered for taxation as ‘royalty’ under Article VI of the DTAA - the findings/division of the appellate authorities may not be in terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Double Taxation Avoidance Agreement (DTAA) between India and Austria dated 24th September, 1963 and notified on 5th April, 1965. The said Articles are reproduced below:- ARTICLE VI 1. Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory. 2. In this article, the term royalty means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plans, secret processes or formulae, trade marks and other like property or rights. ARTICLE VII Amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the first-mentioned territory except insofar as such amounts are attributable to activities actually performed in the first-mentioned territory. In computing the income so subject to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned territory in connection with the activities performed in that territory. 3. Articles VI and VII delineate that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) design manuals, standard and representative drawings and including input and output data and computation formulae for typical cases ii) process specifications iii) materials specifications iv) performance specifications including model test performance charts of runners v) purchasing specifications vi) test data (for inspection) vii) apparatus instructions books viii) written or otherwise recorded technical assistance ix) drawings for testing equipment, tools, dies, jigs and fixtures employed in the manufacture of Products. x) Typical foundation drawings (including forces) xi) any other data generally known as engineering and manufacturing information; and xii) information furnished under Article III below 7. Clause 1.4 of the Agreement, referred to the term patents , that it meant letters patents, utility models, licences, rights and privileges to or under letters patent and utility models in connection with the product etc. Article II of the Agreement in clause 2.1 stipulated that PPGML, during and after the Agreement, was entitled to use the information in the territory of India, Nepal, Bhutan, Bangladesh and Sri Lanka. Further, PPGML wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o deputed by VA and the duration and date of such deputation shall be as may be mutually agreed by and between VA and PPGML. PPGML shall reimburse VA all expenses including travelling and living expenses of its technical experts visiting India on such deputation which shall be mutually agreed and subject to the Reserve Bank of India. VA will permit a reasonable number and not to exceed total of ten (10) man-months in the first year and thereafter, one man month per year of collaboration Agreement of vising representatives of PPGML at PPGMLs expense to visit such plants of VA in Austria as may be designated by VA from time to time, and for such periods as may be necessary; in order to study the design techniques and the method used by VA in its manufacture of Products. VA shall make best efforts to make available to such visiting representatives of PPGML all information relating to the method [sic, methods] of manufacturing, inspection and performance testing engineering and design techniques in respect of Products. There were certain stipulations on the total manpower, the time period, the visitations etc. Clause 3.3 was a general provision and for the sake of completeness i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or services or otherwise transferred to such customer or (c) at the time of transfer thereof for use anywhere within PPGML. 4.4 The payment of royalty shall be made bi-annually within ninety (90) days counting from the last day of each semester, i.e. within ninety (90) days from June 30th and within ninety (90) days from December 31st respectively. As to the last royalty payment, PPGML shall make this payment within ninety (90) days from the termination of this Agreement. 4.5 Royalty shall be paid by PPGML on the total annual sales upto the maximum of licenced capacity of Products plus twenty-five percent (25%) thereof as allowed by the Government of India. In case of sales in excess of the aforesaid aggregate of annual licenced capacity and the aforesaid 25%, prior approval of the Government of India and Reserve Bank of India will have to be abtained [sic, obtained] for payment of fee on such excess sales. 4.6 All amounts which shall become due and payable by PPGML pursuant to any provisions of the Agreement shall be paid promptly when due and payable after obtaining the approval of Reserve Bank of India. 11. A reading of the aforesaid Article of the agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rew out attention to the assessment order dated 19th January, 1993 which records that payments under Article 4.2 of ₹ 1,54,623/- were treated as royalty and therefore, was taxable income in India. We assume that in the subsequent assessment years when the production commenced and increased, the payments received under clause 4.2 of the Agreement were taxed in India as royalty in the hands of respondent-assessee. 14. The Commissioner of Income Tax (Appeals) deleted the said addition, observing that the Agreement between the respondent-assessee and PPGML was a composite one, wherein royalty as well as technical services had to be paid for. The lump-sum fee payable under clause 4.1 was for technical services furnished in Austria and covered under Article VII of the DTAA, whereas payments made under clause 4.2 would be covered under Article VI of the DTAA. Thus, he was of the opinion that the Assessing Officer was not right in treating ₹ 41,61,083/- and ₹ 30,07,889/- as royalty. 15. The Tribunal in the impugned order examined clauses 4.1 and 4.2 and Articles of the DTAA to hold that the payments made under clause 4.1 were for technical service covered by Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for right to use copyrights, artistic or scientific works, patents, models, designs, secret processes and formulae, trademarks and other property and like. Reference and contextual significance was accorded on the expression right to use technical know-how, patents, technical information, and also copyright, trademark etc. Consideration paid for grant of right to use the stipulated intellectual property/asset by a resident of one State to a resident of the other State would squarely fall within the ambit of Article VI of DTAA. Grant of right to use such intellectual property/asset could be taxed in the source State. Making available and permission to use technical know-how, information etc. as such would conceptually fall within the four corners of the expression right to use . Contra, in the expression technical service preeminence was on the word service and this, we believe was the substantial and essential difference between Articles VI and VII of the DTAA. Article VII would apply if there was obligation to render and provide technical services . 19. The word technical could mean and would include scientific work, patents, designs or secret processes etc. exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the progress of technique.' In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of paragraph 2. Such payments generally fall under Article 7 or Article 14. In business practice, contracts are encountered which cover both' know-how and the provision of technical assistance. One example, amongst others, of contracts of this kind is that of franchising, where the fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how . Various specialist bodies and authors have formulated definitions of know-how. The words payments ... for information concerning industrial, commercial or scientific experience are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to undivulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer. 11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation (a payment for the confidential list of customers to which the payee has provided a particular product or service would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers), payments for an opinion given by an engineer, an advocate or an accountant, and payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently. 11.5 In the particular case of a contract involving the provision, by the supplier, of information concerning computer programming, as a general rule the payment will only be considered to be made in consideration for the provision of such information so as to constitute know-how where it is made to acquire information constituting ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques, where this information is provided under the condition that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborately dealt with the different parts of the Agreement with PPGML. The said Agreement would fall in the category of contract involving supply of technical know-how etc. as well as technical services. Thus, Articles VI and VII of the DTAA would both be applicable. The respondent-assessee provided tangible/intangible property in the form of know-how like design manuals, data, computation formula, process specification, material specification etc. But, obligation of the respondent-assessee was not restricted to make the said technical information available. The service element was equally significant and given due importance. Implementation and rendering of service was an integral and significant obligation of the respondent-assessee. Implementation and help in adopting, habituating and converting the know-how/information, was a crucial contractual term. The respondent-assessee was to furnish services such as rendering advice and information on manufacturing, engineering and other aspects, even when the information or technology was not in use in the respondent-assessee s commercial manufacturing operations. These were to be specifically prepared at the request of PPGML. The Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. under the Agreement would be taxable in India as royalty under Article VI and consideration paid for technical services would be taxable in India to the extent of such amounts were attributable to the activities actually performed in the country of source, after allowing deduction of expenditure incurred in India. However, payments made for technical services furnished by the non-resident assessee outside India would not be taxable in India. 27. Now comes the difficult part, not interpretative or legal but equitable, virtuous and just i.e. bifurcation of the consideration into non-exempt under Article VI and VII and exempt under Article VII of the DTAA. To some extent, it refers to the principle of good governance. The assessment order has been critically disapproved for failure to refer and examine Article VII of the DTAA. The entire amount paid including the periodical payments were treated as royalty, ignoring Article VII of the DTAA and the relevant clauses of the Agreement. Ignorance and nescience was not due to lack of awareness, but attributable to failure to understand and deal with the issue inspite of the submission/contention. It was propelled with the desire to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in India only if they were attributable to activities actually performed in India, after deducting expenditure. It does appear that the respondent-assessee stands taxed on payments under clause 4.2 in India and therefore, has paid tax in India. 28. In view of the aforesaid position, we are not inclined to pass an order of remand for fresh determination. 29. Accordingly, the questions of law mentioned above, are answered in the following manner:- a) Consideration paid for technical services would be taxable under Article VII of the DTAA, to the extent the amounts were attributable to the activities performed by the respondent-assessee in India. Deduction of expenses would be made. b) Consideration paid for right to use technical information and know-how would be taxable under Article VI of the DTAA. c) The consideration paid for furnishing technical services outside India, shall not be taxable in India. 30. Before we close, two caveats and a note of caution; firstly, we have not examined or interpreted the expression the right to use in the present decision as the said aspect was not raised before the authorities, including the Tribunal and there was no appear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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