TMI Blog2016 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia and the payment was also made outside India. Therefore, in our opinion, the assessee was not liable for deducting tax at source for the said payment. The agreements cannot be treated a part of a composite agreement-one agreement is for supply of basic designing to set up a plant and others are for use of property-rights. Reversing the order of the FAA, we hold that payment in question was neither royalty nor FTS. - Decided in favour of assessee - ITA No. 7678, 7679, 7680&7681/Mum/2007 - - - Dated:- 30-3-2016 - Sh. Rajendra, Accountant Member And Ram Lal Negi, Judicial Member For the Petitioner : Ajay Modi For the Respondent : Ms. Arti Sathe ORDER Per Rajendra, AM Challenging the orders dated 17. 09. 2007, of CIT(A)-XXXIII, Mumbai, the assessee has filed the above mentioned appeals, originating from the orders, of the AO. s, passed u/s. 195(2)of the Act. ITA No. /7678/Mum/2007-Brief facts: 2. The assessee had entered into license and engineering agreement dated 13. 12. 04 with M/s. UOP, USA(UOP)for CCR platforming processing unit at Vishakpatanam. As per the agreement following sums were payable towards various services and purchase of Basic Engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. The assessee referred to certain case laws and contended that purchase of technology was purchase of capital asset and plant. It referred to the order of the CIT(A)-XXXIII dt. 25. 10. 02, wherein similar payment made by the assessee to Kinetic Technology International PV Holland was not considered as FIS, that in that case the FAA had held that payment was for sale of BEDS and that same was not taxable as royalty/FTS. With regard to education cess, the assessee referred to section 2(37A)(iii) wherein the rate or rates enforced had been defined for the purposes of TDS u/s. 195. The assessee referred to Cir. No. 333of CBDT dt. 24. 4. 1982 as well as Circular No. 728 dt. 30. 10. 95 wherein it was directed that education cess would not be applicable where the provisions of DTAA were applicable. After considering the submissions of the assessee and the order passed by AO u/s. 195(2), the FAA held that the assessee had entered into foreign technical collaboration with UOP for getting technology, that it had entered into two agreements on the same day(i. e. on 13. 12. 2004), that one was for getting license processed and the other was for getting technical information with regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35, 43, 48, 113-153 of the paper book. She relied upon the cases of Indian oil Corporation Ltd. (33 SOT 243), Modern Thread(I). Ltd. (69 ITD 115), Scientific Engineering House(P. )Ltd. (329 ITR 442), Finoarm Sheets Ltd. (152 ITD 77). The Departmental Representative (DR)contended that the agreement was tailor-made agreement, that it was not outright purchase of technical knowledge, that even if it was outright purchase the payment fell within the meaning of royalty, that non-resident entity had supplied commercial information, that the information was covered by provisions of article 12 (3) (a) of the tax treaty, that article 12 (4) (b) dealt with development and transfer of technology, that the tax treaty did not define transfer, that the provisions of section 2(47) defined the word transfer, that the transaction entered into by the assessee was hit by Article 12(4)(b), that engineering and license agreement were part of the same transaction, that they represented unified and composite agreement, that assessee was governed by Article12 and not by Article 13 of the DTAA. 5. We have heard the rival submissions and perused the material before us. We find that the assessee had enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore the payment in question was for use of process in India and that same was royalty liable to be taxed, that the FAA upheld the order of the AO. Deciding the appeal, the Tribunal held that agreement between the assessee and the Austrian company gave details of the BEDP, that the terms revealed that it consisted of various drawings, designs, that based on those documents the assessee was to set up its plants by using those lines through its own workforce, that the Austrian company was only to supervise installation and was to commission the start-up plant, that the taxability of consideration relating to those services was not in dispute, that the BEDP package was nothing but a know how supplied along with a license to use the know-how by the assessee without any limitation for its own use, that the assessee did not have any other right, that in order that a payment qualified as a royalty under the Indo Austria treaty it had to be in nature of royalty or like royalty, that royalty was paid towards right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plans, secret process or formulae, trade - marks and other like property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taxes, that it made an application u/s. 195(2) for grant of no objection to the payment of the first instalment, that the AO considered various articles of the contract agreement and held that amount payable was royalty, that the FAA upheld the finding of the AO. There was difference of opinion between the members of the Tribunal, so, it was referred to the third member. Finally, the Tribunal held as that the payment to be made in instalments to the sublicensee for supply of technical know-how and also for supply of basic process engineering documentation for designing construction and operation of the plant related not to the use of any process secret formula or patents for production of any commodity but for creating an asset in the shape of a plant design, constructed and operated as per the technical know-how developed by the licensor and basic process engineering documentation provided by the sublicensee and this plant for production of PTA, that such payment, thus, made to the sublicensee as per the contract agreement did not fall within the term royalty, that the payment made for supply of technical know-how was also subject to the liability of the sublicense on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee was granted a permanent right to use and exploit the designing, that to that extent agreement in question and research payment for obtaining plant know-how i. e. designing, characterisation of plant and machinery could not be considered as payments falling within the purview of royalty, that the technical and processed know-how services provided under the agreement were clearly covered by definition of royalty under the Act. 5. 2. An analysis of the above three cases clearly lead to the conclusion that if an assessee makes payment for basic engineering program or basic design to a non-resident entity and the supplier does not have a PE in India, such payments would not be taxed in India. If the assessee purchases BEDP out rightly it would amount to purchase of capital asset. But, if the payment is made for use of property rights the payments has to be taxed as Royalty. There is conceptually difference in payment made for use of certain rights for a certain period and payment made for acquiring basic designing. In the case under consideration, it is clear that the assessee had treated other two payments as Royalty and had deducted tax at source, that the American-c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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