9911796707
TMI Blog1987 (7) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... ems as royalties; 3 items as lump sum fees 2 items as service charges for delegation of personnel; and 1 item as additional assistance. The details of the 14 different items giving reference to the grounds of appeal before the Tribunal, as also to the articles/clauses in the relevant agreements, and indicating wherever such agreements had been the subject of consideration in the assessment order for the year 1979-80 are given in Annexure-1 to this order. 4. Annexure-II is a reconciliation made out between the amounts as stated in the different grounds before the Tribunal as set out in Annexure-I and the break-up of the same wherever necessary as dealt with by the Commissioner of Income-tax (Appeals) with reference to the paragraphs in his appellate order. 5. The submission before the Tribunal in substance was that though the nomenclature assigned to the various payments made (of which we have given details earlier) in terms of the different agreements, differed, in essence, none of the payments partook of the nature of 'royalty' within the meaning of the said term as used in the Agreement for Avoidance of Double Taxation notified under G.S.R. No. 1090 dated 13-9-1960 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be read down, and only that type of royalty which was described in Article IX which reads as under could be brought to tax: "Article IX-Income from immovable property may be taxed in the territory in which the property is situated. For this purpose any rent or royalty or other income derived from the operation of a mine, quarry or any other extraction of natural resources shall be regarded as income from immovable property." [Emphasis supplied] To support this proposition, it was submitted that in Article V and subsequent Articles of the D.T.A. Agreement, the species of income out of the types of income which were enumerated in Article III(3) which alone fell within the ambit of taxation were spelt out. Unless such types of income referred to in Article III(3) fell within the species specified in Article V or any of the subsequent Articles of the D.T.A. Agreement, such amount, it was contended, would not be taxable in India. In this regard reliance was placed on the decision of the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146. 8. According to the assessee none of the items received in terms of the different agreements in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal had come to the conclusion that the payments thereunder were "royalty" but nevertheless the said amounts were not taxable because such income was not of the species set out in Article IX of the D.T.A. Agreement. The Division Bench referred to the contentions of the assessee to which we have adverted, and was of the view in particular that the observations in the appellate order of the Tribunal for the assessment year 1979-80 that all items which stood excluded from the expression "industrial or commercial profits" as appearing in Article III(3) to become taxable in India should be only of a non-business character, required re-consideration. There are certain other subsidiary points also in respect of which the Division Bench considered the issues required fuller examination. The Division Bench therefore made a reference to the President of the Tribunal under section 255(3) of the Income-tax Act, 1961 and this appeal has come up for hearing before us in pursuance of the directions of the President. 11. Mr. Dastur, the learned counsel for the assessee, went on to elaborate that Explanation 2 to sec. 9(1) of the Income-tax Act, 1961 on which reliance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y could not come within the general meaning of the term "royalty". For, e.g., technical assistance fee was an entirely new concept which was introduced into the deemed definition and fell outside the purview of the general meaning of the term "royalty" as was clear from the observations of the Karnataka High Court in the case of Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774and in particular the observations at pages 786 and 787 thereof. 15. Even if in terms of Article 1(2) (reproduced below) "Article 1(2) The present Agreement shall also apply to any other taxes of a substantially similar character imposed in India or the Federal Republic of Germany subsequent to the date of signature of the present Agreement." the Income-tax Act, 1961 would be a statute which would be governed by the Agreement, the definitions in the said Act when enacted originally or introduced subsequently, could be invoked only if such definition was a general one extending to the whole Act and not a definition restricted to particular clauses or particular sections of the Act. 16. In view of the aforesaid position even if the case of the Revenue was to be put up at the max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Income-tax Act, 1961. 2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961 also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. 3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income." that the provisions of D.T.A. Agreement will prevail over the general provisions contained in the Income-tax Act. After placing reliance on the observations of the Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were (1) only for user of property in contradistinction to the price paid for properties which have been sold outright. He stated that if such was not the case even purchase price paid outright could be termed to be royalty which was a proposition totally foreign to law; (2) payments made periodically as distinct from payments made in lump sum could alone be considered as royalty. Lump sum payments, it was stated, would therefore be excluded from the concept of 'royalty' and in this regard reliance was placed on the decision of the House of Lords in the case of Rolls-Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580in particular observations at page 586; (3) only amounts payable for the user of property which was statutorily protected, such as patents, trade marks, copy rights, etc., would fall within the scope of the term "royalty". 20. The learned counsel then took us through the provisions of Explanation 2 to section 9(1) and submitted that the Explanation which defined the term "royalty" only for the purposes of clause (1) of section 9 went considerably beyond the acceptable general meaning of the term 'royalty' and took within it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreements with Siemens and B.E.L. had been the subject of consideration by the Tribunal for the assessment year 1979-80 in paragraphs 26 to 29 of its order dated 30-4-1986 in ITA No. 1424/85 and the eventual finding was that in any event the payments could not be taxed in India. 23. The learned counsel next took up the items which were described as service charges paid, for delegation of personnel, which were made in terms of the agreement with C.C.I. Ltd. dt. 6-6-1977 (Rs. 3,79,375) (at page 6 of the paper book No. II) and the agreement with B.H.E.L. dated 28-10-1975 (Rs. 19,227) (page 54 of the paper book No. 1). The submission was that these payments were exclusively for delegation of personnel by the assessee and such remuneration paid to the assessee was not royalty. The payments in question as far as the payments to C.C.I. Ltd. was in pursuance of Article 4.1 and 4.2 of the agreement which provided for the delegation of Siemens' technical personnel to India: on the terms and conditions and for the periods to be mutually agreed upon. The learned counsel stated that separate consideration was payable for other items as provided in the agreement and, therefore, the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal, it was stated, had also referred to an order of the Delhi Bench in ITA Nos. 4259 & 4260/DEL/80 dt. 7-11-1981 where the Delhi Bench had accepted the contentions of BHEL that no tax need be deducted at source on payments made in terms of the article. 26. Coming to amounts paid as lump sum fees made in terms of agreement dated 6-6-1977 with C.C.I. Ltd. (Rs. 1,96,968) the contention was that these payments were made in terms of Article 8 (page 9 of the paper book No. II). The payment, it was stated according to article 8.1 was in consideration of documentation prepared and transmitted in Germany and technical assistance rendered in Germany comprising the training of C.C.I. personnel. The entire lump sum payment was to be of DM 1,30,000 to be paid in three equal instalments. The submission was that the payment being in lump sum could not partake the nature of royalty and in any event even if it was held that any portion thereof could pertain to royalty an apportionment had to be made so that payment attributable to technical assistance would be excluded from taxation because the payment was a composite one and payment for technical assistance in any view of the matter could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, though it considered that some of the payments would partake the nature of royalty, held that in view of the provisions of D.T.A. Agreement which prevails over the statute the royalty was not of such a type as would fall within the pale of taxation in India and was, therefore, exempt from taxation. 30. The learned Departmental Representative, Shri Prashant Ray started by pressing into service the ratio of the judgment of the Bombay High Court in the case of Aziende Colori Nazionali Affini v. CIT [1977] 110 ITR 145. He submitted that this judgment is clear authority for the proposition that every agreement had to be read as a whole. If each of the agreements in the present case was read as a whole, he submitted that it would be clear that the assessee was exploiting the special knowledge it possessed, by Imparting the same to the Indian parties for fee variously described. This was an Instance where the know-how, which is clearly property, was parted with, for an amount. The bifurcation of the amount into different items, such as fees, amounts relating to services, etc., was only a clever arrangement. The submission of the learned Departmental Representative was that such art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, to outsiders and, therefore, by virtue of the contract with the Indian parties the assessee had ensured the protection of the rights granted. The contractual protection which the assessee reserved to itself, he stated, was adequate to hold that even where right to patents was not transmitted payments made for the right to use the know-how which was exclusively in the knowledge of the assessee would amount to royalty. 32. The learned departmental representative submitted that the Calcutta High Court in the latter case had also referred to the various definitions of the term "royalty" in law books as well as the write up as to the concept of 'royalty' from the Encyclopaedia Britannica and had come to the same conclusion as to the general concept of the term 'royalty' to which the Gujarat High Court had come to earlier. If the meanings attributed to the term "royalty' by the Gujarat and Calcutta High Courts were applied, the learned departmental representative submitted that the payments under the present agreements, reading the agreements as a whole in each case, would be nothing but royalty. 33. Adverting to the D.T.A. Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts executed before 1976 all payments were taxable by virtue of section 5 read with section 9(1) because there was clearly a business connection between the assessee and the Indian parties. In short, the argument was that since the application of sections 5 and 9(1) to the agreements executed prior to 1-4-1976 had not been examined by the authorities below who had proceeded only on the basis of Explanation 2(vi) to section 9(1), the present assessment should be set aside to be re-done in the light of the effect of section 5 read with sec. 9(1) of the Income-tax Act, 1961. 36. Another point made by the learned departmental representative was that in some D.T.A. Agreements entered into with some other countries prior to the D.T.A. Agreement now under consideration, there was a definition of the term 'royalty'. This aspect was taken due note of by the Gujarat High Court. As India was one of the high contracting parties in the case of all the agreements the learned departmental representative submitted that it should be presumed that in using the term "royalty" the earlier meanings assigned to it were kept in view during the negotiations with Germany. As far as the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the payments were royalty, or not, and whether the approach of the Revenue in coming to the conclusion that they did, was correct. 40. We have carefully considered the rival submissions. Article I of the D.T.A. Agreement states as under: "Article 1.-(1) The taxes which are the subject of the present Agreement are: (a) in India: the income-tax, the super-tax, the surcharge, imposed under the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter referred to as "Indian-tax") (b) in the Federal Republic of Germany the Einkommensteuer (income-tax), the Korperschaftsteuer (corporation tax), the Notopfar Berlin (Berlin emergency aid tax), (hereinafter referred to as "Federal Republic tax"). (2) The present Agreement shall also apply to any other taxes of a substantially similar character imposed in India or the Federal Republic of Germany subsequent to the date of signature of the present Agreement." By virtue of Article I(2), taxes imposed under the Income-tax Act, 1961 would also be governed by the terms of the agreement, because, the Act of 1961 was enacted subsequent to the date of signature of the aforesaid agreement. But this is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect of Article XVI of the Agreement on sec. 9(1) of the Income-tax Act. Article XVI reads as under: "The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Agreement." Thereafter, after examining the scope of Article III(1), the Court stated at page 159 as under: "It is true that under sec. 9(1)(i) of the Act all income accruing or arising whether directly or indirectly through or from any 'business connection' in India, or other income mentioned in that section shall be deemed to accrue or arise in India. But the charging provision, s. 3, as well as s. 5 of the Act defining the 'total income' of either a resident or a non-resident are expressly made 'subject to the provisions of the Act', including agreements made under s. 90." and finally concluded: "Therefore, the legal position on the second point may be summarised as follows: The provisions of ss. 4 and 5 of the Act are expressly made subject to the provisions of the Act which means that they are subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the Explanation starts with the words "For the purposes of this clause 'royalty' means . . . .". The definition, therefore, explains the meaning and intendment of items which come within the purview of sec. 9(1). The Explanation cannot take away a right which a person has already been clothed with under the statute, nor can it become an hinderance in the interpretation of the same. The Andhra Pradesh High Court has, as we have observed, categorically held that in effect industrial or commercial profits of the German company are not liable to tax u/s 9 except to the extent permitted by Article III of the D.T.A. Agreement. They have also stated that the terms of Article III of the agreement prevail over section 9 of the Act. Therefore, a definition Introduced in the Act of 1961, solely as an Explanation to sec. 9(1), cannot have any impact in interpreting the scope of terms used in Article III of the D.T.A. Agreement as it stood in this assessment year. This conclusion that we have arrived at, is not because this is a case of legislation by incorporation, but because of the manner in which the provisions of the D.T.A. Agreement vis-a-vis the taxing statutes pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he wishes. The granting of licence and the payment of royalties thereunder are purely a matter of contract between licensor and licensee. It is essential that all relevant matters be provided for in the contract, especially the amount of royalties, and the precise method of computing them. A licence may be limited or not, according to the intentions of the parties. It may be limited to certain purposes or to geographical areas or in any other way permissible under the national laws having jurisdiction over the transaction. It will normally be for the full term of the patent. A royalty may be a single payment covering the whole use of the patent for the term, but the more usual practice is to make periodic payments and to relate the amounts of those payments to the actual use of the patent by the licensee. It is common to charge royalties on the basis of a percentage of the price for which the licensee sells the articles or on the basis of the number of the articles made under the patent. Although the amount of royalties is generally a matter of free bargaining between the licensor and the licensee, in some countries governments preclude their nationals from paying royalties to for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; does not rule out "lump sum payments" being considered as "royalty" as well as payments made for know-how. The mere fact that a particular knowledge which is imparted may not be statutorily protected as in the case of a patent or trade mark would not take it outside the purview of the term "royalty". It may be that the knowledge imparted is only contractually protected. It may even be that there is no protection for the knowledge so granted. Even so the observations which we have set out above clearly show that the form of legal protection has no conclusive impact in determining whether payment is "royalty" or not, nor the nature and mode of payment whether lump sums, single, or periodic, nor the question that it does not cover know-how. The Dictionary meanings of the term "royalty" relied on by the learned counsel for the assessee and adverted to in paragraph 18 of our order are only indicative of circumstances to which payments can be considered to be royalty and are not exhaustive as to the content of the term. 46. The next point which arises is whether the general concept of "royalty" as enunciated by the Gujarat H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VII, VIII etc. Article VIII refers to the taxability of interest in India." Article IX of the D.T.A, agreement, to repeat, reads as under "Article IX.-Income from immovable property may be taxed in the territory in which the property is situated. For this purpose any rent or royalty or other income derived from the operation of a mine, quarry or any other extraction of natural resources shall be regarded as income from immovable property." Article IX only speaks of the taxability of immovable property. For that limited purpose the article deems 'royalty' derived from mine, quarry or any other extraction of natural resources as "income from immovable property" along with rent or other income. This article only classifies (a) that the nature of receipt derived from that particular source as "royalty" and then states that, that receipt designated as royalty should be taxed as income of immovable property. Article IX does not spell out as Article VIII does in respect of interest, the types of royalty which are taxable. Therefore, we hold that nothing in Article IX can lead to the interpretation that the general meaning which is to be attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal preferred by the assessee. The Supreme Court rejected this contention as well. They observed that the Appellate Tribunal Rules were not exhaustive, and the full plenitude of the Tribunal's jurisdiction can by no means be spelled out from their own Rules. In that view, the Supreme Court upheld the decision of the Tribunal based on the new plea raised for the first time by the department as a respondent in the assessee's appeal. We regard this decision of the Supreme Court as an authoritative ruling on the scope of the Tribunal's appellate jurisdiction generally and more particularly as an enunciation of the power of the Tribunal to entertain a new plea put forward by the respondent to an appeal." and then at pages 23 and 24 the Court went on to state as under: "Three more examples from the law reports were cited before us on the point by the learned standing counsel for the department. There were also cases where courts had upheld the Tribunal's action in entertaining a new plea which happened to be urged by a respondent to the appeal. Two of the cases cited are from the Bombay High Court. They are CIT v. Gilbert & Barker Mfg. Co. [1978] 111 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts are taxable or not by applying the provisions of Article III of the D.T.A. agreement. It has been accepted at the stage of assessment that the assessee does not have a permanent establishment in India in this assessment year. This being the case, industrial or commercial profits of the assessee in India would not be taxable unless such industrial or commercial profits are of the nature of income which falls under Article III(3). The Madras High Court in the case of N.P. Saraswathi Ammal (supra) had observed at page 26, after considering a catena of decisions as to what would be the scope of the term "Body of Individuals": "It is not our intention to lay down what we mean by a BOI and lay it down in an authoritative or definitive fashion. Parliament has not attempted a definition. And, if we may adopt a saying of Lord Reid, judges should not rush in where the Legislature has feared to tread. All we have attempted here is to mark the distinction between an AOP and a BOI, by reference to certain broad features of each. It is needless to say that it would be a matter for the IT authorities as well as the Tribunal and the courts to consider the facts in each case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this agreement as defined in Article 9.1 hereof. With regard to this Agreement, Contract Products shall be considered as "sold" when invoiced, by Siemens India to the purchaser; or if not invoiced, when delivered, dispatched or set apart for the own use of Siemens India." The payment is for the supply of technical know-how, the training of Siemens India personnel as also for the supply of technical know-how on new developments for contract products. Contract products are those products which have been set out in Annexure 'A' to each of the relevant agreements. In the present agreement they are motors, low voltage switchgear, switchboards, high voltage switchgear, etc. The term "new developments" has also been defined. This definition comes in para 1.5 at page 126 of paper book No. I and reads as under: "1.5. The term "New Development" means changes in the electrical design of Contract Products involving different executions of electrical technology, or innovations in electrical layouts, or substitution of materials used in electrical or magnetic circuits, or changes in the mechanical design of Contract Products involving differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. That portion which pertains to the supply of technical know-how including technical know-how for new developments would definitely partake of the nature of royalty, as it comes within the ambit and scope of the said term, the understanding of which according to us we have elaborated upon earlier. We consider that an apportionment would be called for, because part of the payment is towards training of Siemens India personnel and the personnel of other like companies by the assessee. That part of the payment would not consititute royalty. An apportionment has to be made on an estimated basis. Since we consider that a larger part of the components could be attributed to the supply of technical know-how because it includes the continued supply of know-how for new developments, we are of the view that 60% of the amount in each case would constitute royalty within the meaning of the term to which we have referred. 60% of each of the amounts of ₹ 9,431, ₹ 4,29,013 and ₹ 2,62,536 will, therefore, clearly be liable to tax in India. As far as the balance of 40% is concerned, since we have attributed to it nature of reimbursement for the imparting of traini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (Appeals). The reasons for sustaining the additions were the reasons adduced in the earlier year which were apparently with reference to the definition of section 9(1)(vi) only. If we go through the relevant clauses the payments made were to be, on terms and conditions, and for periods to be mutually agreed upon, and was for the purpose of sending suitable specialists to India in order to train personnel in the factories of respective Indian parties and for providing general technical assistance by active participation in establishing production, quality control etc. In some of the agreements the personnel were to be delegated for the erection of manufacturing equipments also. The common thread which runs through all the clauses for which payments were made was that these payments were made towards deputation of personnel which would be in the nature of payment, other than, for royalty. In the agreement with B.H.E.L. dated 28-7-1975 the additional assistance was to be for assisting B.H.E.L. in the layout of shop facilities procurement of special jigs, tools etc. and vetting designs made by B.H.E.L. These payments are all for specific services to be rendered. The last agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r training the personnel of the companies are concerned, such payments would clearly not be taxable because it would not partake of the nature of royalty. For various types of information supplied, services rendered etc. different payments are payable in terms of the agreement. However, we consider that payments made for the use of documentation would partake of the nature of royalty. In the agreement with C.C.I. Ltd. there is also a secrecy clause that such matter is to be kept confidential and such obligation is to survive even after the termination of the agreement. These are, therefore, to be considered as contractually protected also. In our view, an apportionment has to be made between payments which would partake of the nature of royalty and other payments. Considering that part of the payment is only for documentation supplied and the other part for technical assistance, we would consider that 50% of the amount would partake of the nature of royalty and the other 50 % would not fall within the meaning of the term "royalty" as set out by us. Thus, 50 % of the amount of ₹ 1,96,968 and 50% of the amount of ₹ 90,009 would both be taxable in India. 54. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act for which payment was made is not determinative in coming to a finding as to whether the payment is royalty or not. The parties to the agreement have clearly referred to the payments in question as royalty and the payment is based on percentage of the net selling price. This payment is over and above specific payments in the contracts for other types of services rendered etc. We have, therefore, no hesitation in agreeing with the learned departmental representative that each of the aforesaid payments constitutes royalty and the full amount in each such case would, therefore, be taxable in India by virtue of the provisions of Article III(3) of the D.T.A. agreement. 56. Another ground raised is that if any amount is held to be taxable in India, then appropriate deduction should be allowed for the expenditure incurred by the assessee for earning such income. In this regard it was submitted that in terms of section 44D it had been provided that a deduction not exceeding 20% could be allowed of the gross amount of royalty or fees, as reduced by lump sum consideration, for transfer outside India in respect of agreements entered Into before the first day of April, 1976. Thereafter no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in taxing the same income twice, once on the accrual basis and again on the receipt basis. 30. In the assessment order, the ITO has computed the appellant's income from royalty at ₹ 1,14,15,222. This income is in respect of DM 25,11,349. Out of this a sum of DM 924,902 has been included by the ITO on accrual basis and the remaining sum of DM 15,86,447 on receipt basis. In para 15 of the draft assessment order, which is a part of the assessment order, the ITO has observed that the amounts actually received are taken as part of the appellant's total income on a protective basis and as and when the assessments in which these amounts have been assessed on accrual basis become final the amounts assessed on protective basis will be deleted. 31. I agree with the appellant's counsel that the amounts which were assessed in earlier years on accrual basis cannot be assessed again as the income of this year on receipt basis. It is well settled that the same income cannot be assessed twice by the ITO. I, therefore, direct the ITO to exclude such of the amounts included by him on receipt basis as were assessed in earlier years on accrual basis." No further direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
