TMI Blog1996 (5) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... to 'B' as a consideration for granting the licence and right to 'IC', a company in which 'CM' has 51% equity holding, to use the trade-mark in India is liable to Indian tax ? The relevant details of these agreements may now be referred to in order to appreciate the factual background against which the above question arises for consideration. 2. It seems that the Swedish company 'A' is the proprietor in India of the trade-mark. As already mentioned, 'B' is a wholly owned subsidiary of 'A'. It seems to have acquired, at some stage, which is not clear, the proprietary interest in the above trade-mark. It would seem that in pursuance of a microwave technical assistant agreement followed up by a registered user agreement between 'B' and 'IC', the latter had been granted the right to use the trade-mark in India in carrying on its business in refrigerators and other articles, subject to the payment of certain royalties by 'IC' to 'B'. This situation underwent a change with a Trade-mark Usage and Purchase Agreement , entered into on 15th Aug., 1994, between 'C', 'A' and 'B'. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. The royalty for the licence to 'IC' to continue to use the trade-mark and the trade name in India during the phase-out period was paid by 'C' to 'B', and the purchase price of the shares acquired by 'CM' was also paid by 'C' to 'B'. 3. The parties also entered into certain subsequent supplemental agreements, the broad terms of which may now be referred to : (i) A Share Sale and Purchase Agreement was entered into on 29th Dec., 1994 between 'CM', 'C and 'B' which refers to the purchase of the shares by 'CM' as well as the payment of the royalty by it. (ii) A second agreement, also dt. 29th Dec., 1994 was entered into between 'B' and 'C' called a Trade-mark Licence Agreement . The preamble to this document refers to the agreement of 15th Aug., 1994 and the desire of 'C' to use the trade-mark in India, through its majority-owned affiliated company, 'IC'''' . Under art. 1 of the agreement 'B' grants to 'C' the royalty-bearing and non-transferable right, licence and privilege to use the trade-mark in the territory (of India) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been undertaken by 'C' which is an American company. 5. For considering the question that has been posed, it is necessary to refer to a statutory provision contained in the Act and two paragraphs of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income (DTAA) entered into between India and the United States of America which came into force on the 18th Dec., 1990. [published at (1991) 91 CTR (St) 6] 6. The statutory provision is s. 9(1)(vi) of the Act, the relevant portion of which reads as under : 9. Income deemed to accrue or arise in India.'(1) The following incomes shall be deemed to accrue or arise in India' xxxxxxxxxxxxxxx (iv) income by way of royalty payable by' (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that contracting State. xxxxxxxxxxxxxxx 8. The argument urged on behalf of the applicant is very simple. It proceeds on the assumption (it was, indeed, even conceded) that the royalty in question would be one deemed to accrue or arise in India under art. 12(7)(b) of the DTAA. It was, however, contended that income by way of royalty payable by a person who is a non-resident could, under s. 9(1)(vi)(c) of the Act, be deemed to accrue or arise in India only if it is payable in respect of any right, property or information used for the purposes of a business, profession or vocation carried on by such person in India. So, it is said, if 'C' had paid the royalty in respect of its utilisation of trade-mark in any business carried on by it in India, it could have been said that the royalty accrues or arises in India to 'B' and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to grant an additional license to 'IC . By agreement of 15th Aug., 1994, the rights granted earlier by 'B' to 'IC' to use the trade-mark in India have been terminated. There are recitals in the agreement which show that 'C' is anxious to come into the Indian market with like products and wants to take over the mantle of the 'IC' as a step-in aid to introduce its own brands in the Indian market. These recitals have not been extracted here but they show beyond doubt that it is with a view to achieve the above end that 'C'; had acquired shares in 'IC' and was planning to introduce its products in the Indian market by making use of 'IC' and the TM also in a limited manner during the phase-out period. Thus, it cannot be said that 'C' had nothing to gain as a result of the agreement and the royalty amount was paid gratuitously on behalf of 'IC'. 11. But the Authority is of opinion that the applicant's case is bound to fail even on the language of cl. (c) of s. 9(1)(vi). The applicant's contention misses the second part of that clause which deems royalty to accrue or arise in India where it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision is this. In the present case, applying the provisions of sub-para. (a), it is seen that the royalties in question accrue in the United States because the payer of the royalties is resident there and do not arise in India because the payer has no permanent establishment or fixed base in India. In other words, under sub-para. (a), the royalties do not arise in India, i.e., one of the Contracting States. Again the royalties relate to the use of or the right to use, the trade-mark in one of the Contracting States (namely, in India). Both the conditions mentioned in sub-para. (b) are, therefore, fulfilled and the royalties must be taken or deemed to arise in India by virtue of sub-para. (b) even though they may arise in the United States on the criteria of sub-para. (a). 14. It is not easy to decide which one of these interpretations is correct. However, after considerable thought, the Authority has come to the conclusion that the second of the above interpretations should be preferred for a number of reasons : (i) The first of the above interpretations leads to the result that sub-para. (b) will be attracted only where the payer of the royalties is neither resident n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, no doubt, they will prevail and even if there is a contrary provision in the statute the assessee can opt for the beneficial provision in the agreement. But where there is an ambiguity as in the present case in the provisions of the treaty and the terms of the treaty are susceptible to both interpretations, the interpretation which is harmonious with the provisions of the statute should be adopted. 15. For the reasons above stated, in the opinion of the Authority, the two sub-paragraphs of para 12(7) are not mutually exclusive. Sub-para (b) says that where under sub-para. (a) the royalties do not arise in one of the Contracting States (i.e. India), they can be deemed under sub-para. (b) to arise in India because that is the State where the right giving rise to the royalties is used or exercised. In other words, the combined effect of sub-paras (a) and (b) is to deem royalty to arise in a State' (a) if the person paying the royalty is a resident of that State; or (b) if the person paying the royalty has a permanent establishment or a fixed base there in connection with which the liability to pay royalty is incurred and the liability is borne by such establishment or ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
