TMI Blog1987 (7) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... um 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 which was entered into bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 present case, including those items which may have been specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 was placed by the authorities below could not be called in aid by the Revenue for considering whether any of the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maximum, only such type of payments could be brought to tax in India which in terms of the relevant agreement fell within the general meaning of the term royalty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral 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, the learned counsel submitted that since the terms of the D.T.A. Agreement now under consideration were the subject-matter of interpretation by one of the High Courts, viz., the High Court of And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 its ambit, consideration paid, for the outright transfer of all or any rights in patents, trade marks, etc., also. The definition also took within its purview amounts paid for rendering of any services in conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount of ₹ 3,79,375 did not partake of the nature of royalty. 24. The payment to B.H.E.L. of ₹ 19,227 was made in terms of article 5 of the said agreement and again the payment for personn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 not be royalty. 27. Next the lump sum payment of ₹ 90,009 paid to Siemens India Ltd. in terms of agreement dated 27-7-1978 was referred to. This payment was made in terms of the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 artificial splitting up of the consideration payable in terms of the agreement should be ignored and each part of the entire payment, by whatever name it was described in each of the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the learned departmental representative submitted that the basis of taxability under such agreements was the territorial nexus. If income was derived in India by the assessee by exploitation of its know-how, etc., it stood to reason that such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 expression laws in force appearing in Article II(2) was concerned, it was stated that Article XVI of the D.T.A. Agreement provided that expressions in taxation laws were to have the same meaning, when there was nothing in the agreement to the contrary, and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 not to say that every definition in the new Act whenever it is introduced by way of amendment, or otherwise, will operate as a definition for considering the import of a term used in the D.T.A. Agreement. The learned counsel for the assessee had stressed on the point tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. 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 s. 90. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Govt. of India. Therefore, the income arising or accruing to a foreign company through or from any 'business connection' in India which is deemed to arise or accrue in India, being par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 prevailing in one of the contracting States, is to be interpreted. Therefore, in deciding the present case we have to go only by the general meaning of the term royalty as it is understood. 45. The case before the Calcutta High Court in the case of Stanton Stavely (Overseas) Ltd. (supra) related to the assessment years 1965-66, 1966-67, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 foreign patent owners in excess of a certain maximum fixed by the Government. Some governments also reserve the right to approve the entire licence contract concluded between their nationals and aliens. Royalty payments may be in excess for something in addition to the mere use of the invention. The most common example is that wherein the licensor not onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 High Court and approved of by the Calcutta High Court in the judgments referred to requires limited application or, in other words, the observations of the Andhra Pradesh High Court, relied on by the learned counsel for the assessee limit the application of the term royalty to what is provided for in Article IX of the D.T.A. Agreement. We have already referred to the judgment of the Andhra Pradesh High Court in Visakhapatnam Port T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly 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 attributed to the term royalty as occurring in Article III(3) of the D.T.A. Agreement requires to be limited to royalties derived from mines, quarries, or any other extraction of natural resources, and the present items fall outside its purview. Therefore, we will have to examine each of the agreements with reference to the general meaning of the term royalty as set out earlier, i.e., as understood by the Gujarat and Calcutta High Courts. The source from which the royalty is derived if the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 529(Bom.) and D.M. Neterwalla v. CIT [1980] 122 ITR 880(Bom.). In one case the respondent happened to be the assessee. In the other, the respondent was the department. The power of the Tribunal to dispose of an appeal on a new plea raised by a respondent was upheld in both these cases. The other decision is from Delhi, reported as CIT v. Edward Keventer (Successors) (P.) Ltd. [1980] 123 ITR 200. The Delhi High Court in their judgment observed that a new plea from a respondent must be entertained by the Tribunal as a matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 to find out if any given group of people are to be regarded as a BOI or not. Having regard to the note of caution, far be it for us to attempt, in the present case, therefore, any definition of the term royalty as appearing in Article III(3) of the D.T.A. Agreement under consideration, which term, the high contracting parties had thought fit to leave undefined. It is only for us to see whether the payments made, and which are now under adjudication by us, fall within the term royalty in Article III(3), i.e. whether each such item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 different executions of mechanical construction or complete changes in dies or tools and manufacturing processes, insofar as such new developments will either be successfully incorporated in or will form part of the manufacturing or engineering technique of Siemens and will be applicable to the operations of Siemens India. From the extracts set out above it is clear that what is described as fee is for supply of technical know-how with regard to contract products as well as technical know-how for new developments. That, this know-how may not be subject to protection by patents in many cases, would not make any difference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 training of personnel by the assessee that would fall outside the scope of the term royalty and would not be taxable in India. Here, we may add, that both the parties left it to us to estimate the portion that may be attributed to training of personnel. 51. Coming to the agreement dated 15-3-1967 with B.E.L. the relevant clause is item 11.1 in the said agreement (page 179 of the paper book No. I). The payment clause reads as under: 11.1.1. For services rendered and to be rendered in Germany, a technical assistance fee of 1% of the total aggregate of the net selling prices of the CONTRACT TUBES and CONTRACT SHIELDS produced and sold by BEL redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipments 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 was the subject of consideration by the Tribunal in the earlier year also in paragraphs 30 to 32 of its order and the Tribunal came to the conclusion that these were in the nature of technical fees. Independently applying the criteria which we have applied this year for determining whether the payments are of the nature of royalty or not, we have no hesitation in coming to the conclusion that none of the payments of ₹ 3,79,375, ₹ 19,227 or ₹ 2,68,059 partake of the nature of royalty. Reading closely the relevant clauses enumerated above, we get the impression that they are by way of reimbursement of expenses to be incurred or payment for specific ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. There is another amount of ₹ 1,00,000 payable to Khandelwal Hermann. This is in terms of the agreement dated 17-2-1976 (page 42D of paper book No. II). The payment was to be made in terms of article 8.11 of the preliminary agreement. This was the agreement dated 17-2-1976 and in terms of article 8 technical assistance comprising supply of information as well as training of personnel was involved. Here again, that portion relating to supply of information would be for know-how and would partake of the nature of royalty. That relating to training of personnel would, of course, not relate to payment of royalty. We consider that apportionment has to be made here also and 50% of the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure is to be allowed as a deduction. For the purposes of section 44D, royalty was to have the same meaning as in section 9(1)(vi). In the present case, we have determined what is royalty within the meaning of Article III(3) of the D.T.A. agreement. The concept differs from the definition referred to. It is of course clear that only income in a commercial sense can be brought to tax. Therefore, the plea of the assessee that some deduction should be allowed for expenses is entitled to weight where the agreements have been entered into before 1-4-1976 or after that date. Lump sum royalties in respect of agreements prior to 1-4-1976 were exempt by virtue of the proviso to section 9(1)(vi) and Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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 directions are, therefore, necessary on our part. 58. The last ground urged is that the dividend income should be assessed by applying the provisions of Rule 114 of the Income-tax Rules, 1962. This point had also come up for consideration before the Tribunal in the earlier year and following the decision of the Special Bench of the Tribunal in the case of Allied Chemical Corpn. v. IAC [1983] 3 ITD 418(Bom.) the Tribunal declined to accept the contention. The same decision would hold good for this year also. 59. Before we take leave of this order, we feel it our pleasant duty to place on record our deep sense of appreciation for the able assistance provided to us by Shri Dastur on behalf of the assessee and by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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