TMI Blog1990 (12) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was to arrange for the import of concept designs and drawings enabling it to prepare the detailed manufacturing drawings for purposes of manufacture of the terminal equipments which were required to be supplied by the assessee as per the letter of intent of LMI. The secondhand rolling mill was to be imported by LMI from Davy Makes (Pools) Ltd., U. K. On receipt of the purchase order and the letter of intent from LMI, the assessee placed an order with Davy Makes (Pools) Limited, U. K., for the supply of one print each of concept designs and drawings for the terminal equipment. In paragraph 2 of the letter of intent, it specifically mentions that the remittance of the purchase consideration as aforesaid was to be made by telegraphic transfer/demand draft in favour of Davy Makes (Pools) Limited, U. K. (hereinafter referred to as "DMPL") subject to the approval of the Reserve Bank of India. Paragraph 6 of the letter mentions that "the concept designs and drawings shall be imported by us in terms of the approval letter dated April 10, 1984, issued by the Secretariat for Industrial Approval, FCI, Department of Industrial Development, Ministry of Industries, and the delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term "royalty" has been provided and it is different from the meaning given to the term "royalty" in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. Therefore, in terms of the Circular No. 333 of the Central Board of Direct Taxes dated April 2, 1982 the provisions contained in clause 3 of article XIII of the Avoidance of Double Taxation Agreement between India and the U.K. would prevail. Since there was an outright sale of designs by the foreign company to the assessee-company, the payment of C36,470 cannot be taxed by reference to Explanation 2 to section 9 (1) (vi) of the Income-tax Act, 1961. The short question which falls for determination is whether, on a construction of the collaboration agreement, by and between the assesseecompany and the non-resident company, i.e., Davy Makes (Pools) Limited, U. K., in the light of the Avoidance of Double Taxation Agreement between India and the U. K., there was an outright transfer of the drawings and designs by the non-resident company to the assessee-company. It has been contended on behalf of the Revenue that the Income-tax Officer was justified in holding that sale of designs and drawings by the foreign company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required by their respective laws, as required by article 27 of the said Convention. Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), and section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India. The Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland ; Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains : Have agreed as follows." The intention is clear. All provisions of the said Convention shall be given effect to notwithstanding the provisions contained in relevant Act or Acts. Our attention has been drawn to a decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146. There, the Andhra Pradesh High Court, while considering the Indo-German Double Taxation Avoidance Agreement, held that in cases of inconsistency between the Agreement and the Act, the Agreement will prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the general principles of taxation applicable to the Contracting States ; otherwise, the double taxation avoidance agreement will have no meaning at all. "Royalty" has been defined in the Agreement for Avoidance of Double Taxation between India and the U. K., as follows: "XIII(3) The term 'royalties' as used in this article means payments of any kind including rentals received as consideration for the use of, or the right to use: (a) any patent, trademark, design or model, plan, secret formula or process (b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience ; (c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting ; but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources." It appears, therefore, that the term "royalty" has been defined in the agreement to mean, inter alia, the payment of any kind inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be in exchange for something in addition to the mere use of the invention. The most common example is that wherein the licensor not only grants the right to use the invention but also undertakes to supply the licensee with technical "know-how", that is to say, information from his own experience on the most efficient and economical way of working the patent. It is estimated that more than 50% of licence contracts include "know-how" provisions. When applied to industrial designs, the meaning of the word "royalty" is roughly the same as in the case of patented inventions. Designs, depending on their nature or the various national laws, may be protected by patents, copyright or registration. The form of legal protection, however, does little to change the system of royalty payment as described in regard to patents. It is thus clear that in the case of secret processes, patents, special inventions, when right of exploitation is given by the owner of the inventions, patents, etc., to a third party, instead of outright sale, then for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be co-related to the extent of exploitation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture and production of a particular produce to acquire specialised knowledge in respect of such manufacture and production which is not generally available. A person having such specialised knowledge can claim exclusive right to the same as long as he chooses not to make such specialised knowledge public. It is also conceivable that such person can exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited user of such specialised knowledge to others in confidence against payment. There is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as royalty or in the nature of royalty." Having regard to the facts and circumstances of this case, it must be held that the present case is not a case where the non-resident is retaining the property in the designs and drawings. Such designs and drawings are imported under the import policy and with the approval of the Reserve Bank of India on the basis of the letter of intent. The importation of the designs and drawings postulates an out and out ..... X X X X Extracts X X X X X X X X Extracts X X X X
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