9911796707
TMI Blog2010 (4) TMI 1205X X X X Extracts X X X X X X X X Extracts X X X X ..... Company are not in the nature of royalty and no tax needs to be deducted u/s 195 of the Income Tax Act." 2. The facts, in brief, are that the assessee company is a manufacturer of dydroelectric and turbo-generators for hydel and turbo projects and selling the same in India and abroad. The assessee is a 100% subsidiary of VA TECH HYDRO GmbH Austria from 1.4.2001. VA TECH Hydro is an established name in the world in the field of manufacturing and erection of Hydro and Turbo projects since last about 100 years. The Assessing Officer, on scrutiny of books of accounts of the assessee company and Form No. 27 for the assessment years, in question, found that though the assessee company has spent huge amounts as expenditure on technical drawings and designs on account of payments to parent company, neither the tax was deducted at source, nor the assessee company obtained no deduction certificate from the Assessing Officer. The Assessing Officer, called for the explanations of the assessee and after considering the same, made the following observations :- "6.1 Arguments of the assessee are hovering around incorrect reasoning that a) it has purchased the design on out right basis as com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor is same and both the companies are known for their specific designs of generators. It has specifically been mentioned on the designs that it is the property of the parent Austrian Company. The assessee had right to use a particular design for single time. The assessee has been barred to sale the design as such to another manufacturer by the specific condition and warning printed on the design. When the design cannot be sold as above how it can be termed as outright purchase as claimed by the assessee. Thus, the assessee has only been given the right to use the design. 6.5. The designs are not purchased through open tender or bid because assessee is manufacturing generators with a unique technology which is possessed by the parent Austrian company only hence the designs are specific to the parent company. Because of this special relationship assessee is bound to purchase the design from its parent Austrian company only. The design is first received through Internet and its hard copy along with bill is received through Customs to justify the payments made to the parent company from the angle of allowability of expenditure. 6.6. There is no agreement/terms and conditions in pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accessories i.e. only the electrical part of the complete Turn key Project for generation of electricity. Turbine is manufactured by the VATECH ESCHER VYAS Floval Ltd., Faridabad, which is again Austria 100% subsidiary company of Austria in India. International orders for supply of generators are received through its parent company in Austria for which the assessee company supplies generator and its accessories to its parent Austrian company. Turbine and erection infrastructure is supplied by the Austrian company in such projects. Projects in India are completed by the assessee company with the Turbine supplied by the another 100% subsidiary company i.e. VATECH ESCHER VYAS FLOVAL Ltd., Faridabad. In all the cases design of generator is supplied by the parent Austria company only. 6.13. The 'V Austria Tech India' has stated that its Parent Austrian Company does not have Austria permanent establishment. In fact, there is no need for the Austrian company to have another permanent establishment in India, as they have their 100% subsidiary company in India (VA Tech India') which is acting on their behalf for procuring orders etc. Further the 'VA Tech India' is manufacturing every gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signs prepared by the assessee 'VA Tech India' with 'VA Tech India' itself. Thus it is clear that there are two sets of designs, one prepared by the Parent Austrian company for which assessee makes payment and another in house detailed design prepared by 'VA Tech India' based on the original design. 6.16. From the discussion, it is clear that with the design and other parameters supplied by the parent Austrian company, the assessee cannot create another output in Austria different case or even Austria similar case. From all the discussion and case laws cited above, it is beyond doubt that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and are squarely covered by the decision of Royalty both in the DTAA and IT Act, 1961. I hold that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and that the assessee 'VA Tech India' having failed to deduct tax has committed default within the meaning of sec.195(1) read with DTAA between Austria and India and read with sec.9(1)(vi) of the Income Tax Act, 1961." The Assessing Officer, for the reasons mentioned above, finalised the proceedings initiated earlier culminating in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-resident company from the sale of the drawings and designs from outside country to the appellant company is chargeable to tax in India, when the non resident company is not having any permanent establishment in India, is taxable in India and, therefore, in the absence of any concrete finding that such payments are chargeable to tax in India, section 195 has no application. Having regard to the detailed and exhaustive submission and the case laws relied upon by the appellant, I hold that the payments made for the purchase of drawings and designs do not give rise to any income in India and no tax needs to be deducted u/s 295 of the IT Act. The said payments are also not in the nature of royalty as defined in the DTAA entered into between India and Austria. In any case, it is not a case of the A.O. that there is a transfer of copyright by the Austrian company in favour of the appellant company but its is a case of sale of copyrighted articles and therefore also the payments made by the Indian company to non resident company are not in the nature of royalty. Hence the demands raised u/s 201(1A) for interest payable from the date of default in not deducting the tax at source till pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a license) in respect of a paten, invention, model, design, secret formula or process or trade mark or similar property. (ii) the imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property. (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipments but not including the amount referred to in section 44AB (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phasized on the fact that it was used by the assessee in manufacturing of the turbine/generator and was not sold as such in the open market like purchase and sale of a copy righted book or software, etc. The learned CIR DR further emphasized on the fact that if the view of the assessee was accepted then every transaction would become a case of sale and in that case, provisions relating to royalty would become redundant. At this stage, a question was posed to him that if the view of the revenue is accepted, then every transaction would become a case of royalty, to which the learned CIT DR could not give any effective reply. The learned CIR DR thereafter placed reliance on the order of the Assessing Officer. 7. The learned counsel for the assessee submitted additional evidence as regards the treatment of such transactions in the books of non-resident parent company which was admitted as the learned CIT DR did not object for admission of the same. The learned counsel for the assessee submitted that as per this information, it was abundantly clear that such transactions were treated as transactions of sale and purchase in the books of parent company and had been taxed as business pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unbridled manner established this fact. The learned counsel for the assessee further reiterated the submissions made before the learned Commissioner of Incometax (Appeals), particularly in respect of drawings being goods and the acquisition of drawings on out-right purchase basis could not be considered as a transaction of the nature of royalty. The learned counsel for the assessee further submitted that the provisions of DTAA were to supercede the provisions of the Income Tax Act and for this proposition the learned CIT DR also did not disagree. The learned counsel for the assessee thereafter placed reliance on the decision of the Hon'ble Calcutta High Court in the case of Davy Ashmore India Limited v. CIT; 190 ITR 626, wherein the Hon'ble High Court had pointed out that the transferor retained the proprietary right in the designs and allowed the use of such rights, the consideration received for such user was in the nature of royalty. However, in the present case, the assessee company was not allowed to use such right i.e. to make similar designs at its level and to sell the same to third parties and to pay consideration out of such sales to the parent company as it was an undisp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e thereafter referred to the decision of the Tribunal in the case of Indian Hotels Co. Ltd. v. ITO in ITA No.553/Mum/00 (refer pages 163 to 167 of the paper book),wherein Indian Oil had obtained the services of a foreign company to prepare the interior design which had to be used by the Indian company for the purpose of re-designing or renovating the interiors of Taj Mahal Hotel at Mumbai and the design supplied by the foreign company became the property of Indian Hotel Company Limited (assessee) and in that background, the Tribunal held that the assessee company had purchased and acquired interior design on a principal to principal basis i.e. as a buyer and in that view of the matter, the payment by that company did not amount to royalty. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Wipro Limited v. ITO as reported in 94 ITD 9 for the proposition that where the payment was for obtaining the data and use it the way the assessee wanted to use it, it was the use of a copy-righted article and not a case of transfer of right in the copy-right of that article and similar was the case here wherein the assessee company got the right to use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly manufactures such plant and machinery. It is also noted that such basic design is also given to the buyer of plant and machinery by the assessee company. The dispute before us is regarding the nature of payment made by the assessee company to its parent nonresident company for obtaining such designs. The conclusions of the Assessing Officer as well as the findings of the learned Commissioner of Incometax (Appeals) have already been reproduced which contain details of judicial decisions relied upon by both the sides. In our opinion, if the view of the Assessing Officer is accepted, then there will not be any transaction of sale and purchase in such situations and every transaction would come within the meaning of term 'royalty'. Further, in our opinion, the basic distinction between a transaction of 'royalty' and of out-right sale and purchase is transfer of ownership to the buyer and this distinction has been maintained even in the provisions of section 9(1)(vi) as well as of DTAA. We have also perused the note on the hard copy of such designs. In our opinion, substance of such note is nothing but an indication that such product is sold only for specific use and no right ..... X X X X Extracts X X X X X X X X Extracts X X X X
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