TMI Blog2000 (12) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... such the sums received therefor could be treated as royalty for the purpose of the Indo-German Double Taxation Agreement and liable to Indian Income-tax ? 3. Whether, the sum received by the assessee for the supply of designs, drawings and technical services constituted 'industrial and commercial profits' for the purpose of the Indo-German agreement for double taxation and, as such, the same is assessable under the Indian Income-tax Act, having regard to the admitted position that the assessee has no permanent establishment in India within the meaning of the said agreement ? 4. Whether even assuming though not admitting that the sums received by the assessee constitutes royalty, the agreement dated April 18, 1980, can be treated as a continuation of the agreement dated July 19, 1974, which had been duly approved by the Central Government and as such the said sum is liable to be assessed under the Indian Income-tax Act, in view of the proviso to section 9(1)(vi) of the Income-tax Act ? 5. Whether, in any event, the sum received by the assessee for the supply of designs, drawings and technical services constituted 'fees for technical services' for the purpose of the double taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The assessee approached the Tribunal. The learned Tribunal also upheld the decision of the Commissioner of Income-tax (Appeals) by holding : "As such, we agree with the lower authorities that the agreement dated April 18, 1980, is a new agreement. Therefore, the proviso to section 9(1)(vi) of the Act is not applicable to the instant case And the assessee cannot claim that the amounts receivable under this agreement are not to be treated as income of the assessee. On a careful consideration of the materials on record, facts and circumstances of the case, we hold that the assessee is not entitled to the benefit of the proviso to section 9(1)(vi) of the Act." The assessee-company made an application to the Tribunal for reference under section 256(1) of the Income-tax Act, 1961, and the Tribunal having been satisfied that the points involved substantial questions of law made the reference as above. All the points are interlinked and stem from the same question whether the remittances should be treated as royalty or fees for technical services. It cannot be disputed that by virtue of the last agreement of 1980 between the assessee-company and the HRBC the role of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indo-German Double Taxation Agreement, the said sum is not assessable in India, in view of the admitted position that the assessee has no permanent establishment in India within the meaning of the said agreement. It was further contended that the term "royalty" is to be understood in its ordinary sense, in the absence of any definition under the double taxation agreement and the definition of "royalty" appearing in Explanation 2 to section 9(1)(vi) of the Income-tax Act cannot be applied for interpreting the said expression. In paragraph 4.3 of the agreement dated April 18, 1980, it is stated, "All original documents prepared by LuA in connection with the works are the property and copy rights of LuA and HRBC shall not be entitled, either directly or indirectly to make use of such documents for the carrying out of any work beyond the works to which this contract relates, without the prior consent of LuA which consent however shall not be unreasonably withheld." In Explanation 2 to section 9(1)(vi) royalty has been defined so as to include the following, "(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that, in order that a payment may be treated as royalty for the purposes of article XIII of the Agreement for Avoidance of Double Taxation between India and the U. K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc., and allows the use of such right, the consideration received for such user is in the nature of royalty. where, however, there is an outright sale or purchase, as in the present case, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty." Their Lordships further held that the definition of royalty as provided in clause 3 of article XIII of the Double Taxation Avoidance Agreement between India and the U. K. a different meaning to the term the royalty has been provided and it is different from the meaning given to term royalty in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. In such a case it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived for such user is in the nature of royalty. Where, however, there is an outright sale or purchase, as in the present case, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty." Their Lordships further held that the definition of royalty as provided in clause 3 of article XIII of the Double Taxation Avoidance Agreement between India and the U. K. a different meaning to the term the royalty has been provided and it is different from the meaning given to term royalty in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. In such a case it was held that in determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act ; otherwise, there was no point in entering into any agreement for avoidance of double taxation. The facts of that case stand distinguished from the present case inasmuch as royalty was not defined in the Agreement for Avoidance of Double Taxation between India and Germany and as such the statutory provision will prevai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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