TMI Blog2014 (11) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount is to be treated as royalty, it stands covered by the DTA convention dated 16-04-1981 and thereby the amount is not liable to taxation in India – Decided against revenue. Liability to pay interest u/s 139(8) - Whether the Tribunal is justified in holding that the agent of non-resident is not responsible for discharge of statutory obligation anterior to grant of recognition of such agency – Held that:- It is only on 19.11.1990, that an order came to be passed under Section 163(2) of the Act treating the respondent as an agent of non- resident - The time for filing returns for assessment year 1988-89 was to expire by November, 1987 and for assessment year 1989-90, in November, 1989 - Since it is only after 19.11.1990, the respondent was treated as the agent of a non-resident, there was no obligation on the respondent to file a return for 1988-89 and 1989-90 for which the time for filing return had expired in November, 1987 and November, 1989 itself - there was no obligation on the part of the respondent to discharge the statutory obligation prior to 19.11.1990 - as there was no obligation on the part of the respondent to file a return prior to the date of its being tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1988-89. Thereafter, he passed an order of assessment on 11-04-1991, with reference to the payments made to the foreign company, by treating the same as income. Similar order was passed for the assessment year 1989-90. As regards the assessment year 1992-93, the assessing officer refused to issue no objection certificate for remittance of the amount to the foreign company. Feeling aggrieved by the three orders referable to the assessment years mentioned above, the respondent filed Appeal Nos. 208, 209 and 205/1995-96 before the Commissioner of Income Tax (Appeals-V), Hyderabad. Through a common order dated 27-12-1995, the Commissioner partly allowed the appeals referable to the assessment years 1988-89 and 1989-90 and dismissed the appeal pertaining to the assessment year 1992-93. The respondent filed ITA Nos.721 and 722/Hyd/1996 feeling aggrieved by the order passed by the Commissioner in respect of the assessment years 1988-89 and 1989-90, before the Tribunal. Through its order dated 11-04-2002, the Tribunal allowed the appeals holding that the amounts paid to the foreign country cannot be treated as royalty and thereby cannot be taxed. Hence these appeals are filed by ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement between the respondent and the foreign company, the relevant clauses of DTA Agreement and certain precedents. Sri Dastoor, learned Senior Counsel for the respondent, submits that the amount paid to the foreign company was nothing but the consideration for the part of a comprehensive contract, which involves supply of machinery, erection and transfer of know-how, which was for a limited purpose. He submits that the entire agreement is covered by the regime under the DTA, and there was absolutely no basis for the assessing officer to levy income tax on the component of the alleged royalty. He submits that even where a foreign agency is otherwise liable to pay tax under the Act, different considerations altogether ensue, in case the contract is governed by a DTA, treaty or arrangement. He has placed reliance upon several precedents, including those in M.V.S. Kathirvelu Nadar vs. Commissioner of Agricultural Income Tax , Commissioner of Income Tax vs. Nayveli Lignite Corporation Ltd , both rendered by the Madras High Court; Commissioner of Income Tax vs. D.C.M. Ltd , rendered by the Delhi High Court, Commissioner of Income Tax vs. Hindustan Shipyard Ltd , Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other Indian Contractor acceptable to both DML and APL) to render certain services in connection with the engineering, procurement of equipment, supervision of erection, start-up and commissioning of the said plant. (C) DML has right in certain processes as hereinafter defined and has patent and licensing rights and confidential technical and commercial information and confidential know-how in relation to such processes. (D) In consideration of the mutual covenants hereinafter set forth DML and APL have agreed that DML shall grant and APL shall accept certain rights in certain processes as hereinafter more particularly defined, and DML shall supply to APL know-how and front-end engineering package for the said plant. Clauses (A) and (B) are almost common for the other two agreements. Clause (C) of the other two agreements reads DML and APL have entered into an Agreement (hereinafter called the Licence, Know-How and Engineering Agreement) dated the 30th day of October 1986, whereby DML undertakes to supply know-how, licence and front-end engineering package for the design, erection and operation of the said Plant and guarantees its performance on the terms therein appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntaining materials nor to information and know-how relating to production of synthesis gas) and other useful technical information and know-how and improvements thereto and patents granted and patent applications filed in India, thereon, which have been used in the commercial practice of the DAVY PROCESS, and which are relevant to the PLANT. The respondent took shelter under the portion but not information and know-how relating to the manufacture, recovery or refining rhodium-containing materials nor to information and know-how relating to production of synthesis gas; and pleaded that the know-how was for the limited purpose of erection and installation of the machinery and not in absolute terms. It has also placed emphasis upon the following sub-clauses: (a) Non-resident granting licences for using DML process with specific condition against sub-licensing, assigning, mortgaging etc., without written consent of non-resident; (b) Licence is non-exclusive and the APCL has not acquired any exclusive right over the patent of it; (c) DML was free to supply and grant licences over the same technical know-how and patent through out the world; (d) DML has not transferred tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il the facility in a limited or absolute manner on payment of royalty. On cessation of the arrangement, the user loses the right and the owner of the facility gets full and absolute control over it. A note of caution need to be added here. Through the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum. However, a lumpsum payment would answer the description of royalty, if only it is referable to a fixed period for which the facility can be utilised. A lumpsum payment, without mentioning the period is prone to take away such amount from the definition of royalty. In the Law Lexicon by Sri P. Ramanatha Aiyar the following meaning is ascribed to the word royalty. ROYALTY. Has several meanings: (1) percentages or dues payable to landowners for mining rights; (2) sums paid for the use of a patent; (3) percentages paid to an author by a publisher on the sales of a book. OTHER DEFINITIONS: A royalty is a tax or duty paid to the owner of a patent for the privilege of manufacturing or using the patented article; Royalty is a tax or duty paid to the owner of a patent for the privi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Secondly, though there is a possibility to interpret the clauses in such a way that, (a) the foreign company retained with it the ultimate patent but permitted the respondent in a related manner, that too by prohibiting the sub-lease or other unauthorised uses, thereby bringing the act nearer to the one of the royalty, and (b) the transfer was not on payment of any periodical royalty, but was only to the extent which is necessary for installation and thereby treating it as a concomitant part of the comprehensive agreement; the predominant factors are suggestive of the fact that the consideration paid by the respondent, even under the licence know-how, and engineering agreement or against the DTA Agreement being treated not as royalty. Another reason is that it is not a mere licence know-how, but is coupled with engineering. Assuming that the amount deserves to be treated as royalty, there is one strong circumstance that militates against the department. Section 90 of the Act provides for the relief against double taxation. The provision reads as under: Agreement with foreign countries or specified territories. 90. 1[(1)] The Central Government may enter into an agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. (5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2. For the purpose of this section, specified territory means any area outside India which may be notified as such by the Central Government. Explanation 3. For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force. It is not dispute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitions or descriptions of the word royalty under Explanation 2 of Section 9(1)(vi) of the Income Tax Act, on the one hand, and the one, under Clause 13(3) of the DTA Convention, on the other hand, discloses that the amount, even if called as royalty, paid by the respondent, to the foreign company gets attracted by the DTA Convention. The scope and ambit of similar clauses in double tax avoidance conventions was dealt with by various High Courts in several cases. In COMMISSIONER OF INCOME TAX vs. NAYVELI LIGNITE CORPORATION LTD (2 supra), the Madras High Court dealt with a clause, which is similar to the one, incorporated under the contract between the respondent therein, a foreign company. It has already been mentioned that the transfer of know-how was for a limited purpose of recovery of the machinery, etc., that was supplied, and not in general terms. The Madras High Court took the view that it was covered under the DTA regime. Similarly in COMMISSIONER OF INCOME TAX vs. D.C.M. LTD (3 supra), the Delhi High Court held: The know-how is intellectual property and excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, a) the amount paid by the respondent to the foreign company is part of lumpsum consideration for supply of technical know-how, machinery installation and erection and the same cannot be treated as royalty and b) even if the amount is to be treated as royalty, it stands covered by the DTA convention dated 16-04-1981 and thereby the amount is not liable to taxation in India. Therefore, questions 1 to 3 are answered against the Revenue. So far as question Nos.4 and 5 are concerned, certain facts need to be noticed. It is not in dispute that it is only on 19.11.1990, that an order came to be passed under Section 163(2) of the Act treating the respondent as an agent of non- resident. The time for filing returns for assessment year 1988-89 was to expire by November, 1987 and for assessment year 1989-90, in November, 1989. Since it is only after 19.11.1990, the respondent was treated as the agent of a non-resident, there was no obligation on the respondent to file a return for 1988-89 and 1989-90 for which the time for filing return had expired in November, 1987 and November, 1989 itself. In that view of the matter, there was no obligation on the part of the respondent t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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