TMI Blog1989 (4) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... ? (4) The CIT(A) erred in directing the ITO to exclude the sum of Rs. 94,77,784 from the total income ? It would be necessary to set out the facts of the case in brief detail. The assessee is a foreign company incorporated in France and had entered into an agreement with M/s. Mahindra Mahindra Ltd. for supply of technical data in the manufacture of diesel engine XDP 4.90. The agreement was dated 6-11-1977 and there was also a supplementary agreement dt. 6-3-1980. A sum of 15 million French Francs were to be paid to the assessee in terms of this agreement. The agreement was to remain in force for a period of five years and the period has to be reckoned from the date of agreement itself. The payment under the agreement was to be made in three instalments : (i) on the agreement being recognised by the Govt. of India ; (ii) on supply of the technology ; and (iii) on expiry of 48 months from the date of agreement or actual commencement of production whichever were early. Before the Income-tax Officer, the claim was that the payment received from the Indian company was totally exempt from tax having regard to the terms of the agreement and also having regard to the Treaty for Av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld to be taxable by the ITO represented fees for technical services and not royalty or industrial or commercial profits. 2. It is contended by the learned Departmental Representative that the view taken by the CIT(A) is erroneous inviting our attention to Article III of the Treaty, it is contended that the industrial or commercial profits of an enterprise of one of the Contracting States shall not be subject to tax in the other Contracting State unless the enterprise has permanent establishment situated in that other contracting State. Article III(5) defines 'industrial or commercial profits' and specifically excludes royalties and similar payments as referred to in para 2 of Article VII of the Treaty, wherein 'royalties' have been defined as payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific works, cinematograph films, patents, models, designs, plans, secret processes or formulae, and trademarks. It would be clear from the above definition that the payment made by the Indian company to the assessee could but only be in the nature of royalty and therefore it would not be in the nature of industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd several other clauses as embodied it in part C of the agreement under the title 'Modifications, Quality, Industrial Property, Secrecy' would clearly show that there has to be a continuous dialogue on technical matters between the assessee and the Indian company and the assessee was contract-bound to bring to the notice of the Indian company all the developments in the field of manufacture of the engine. This would clearly dispel any doubts should there be any that the user was of technology which was taken off the shelf. It is further submitted that the agreement further envisages usage of technology only in India and prohibits production of more than 25,000 units per annum. A reading of the agreement would clearly go to show that what was contemplated was the user of the technology and not the outright transfer. Since the user is in India, the payment to be received has to be considered as income accrued in India and such income would be exigible to Indian income-tax. The CIT(A) was led away by certain extraneous and irrelevant considerations like the absence of clauses in the Treaty like the one which existed in the Belgium Treaty under which income was to be deemed in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has highlighted the relevant clauses in the Belgium Treaty, as contained in Article XII(2). In the said clause, it has been spelt out that royalties shall be deemed to arise in a Contracting State when the payer is in that State. There is no such clause in the French Treaty and therefore one has to go only by the source. There is a similar provision in the Japanese Treaty. Article X(e) of the Japanese Treaty lays down that Royalties and similar payments paid as consideration for the use of, or for the right to use, in one of the Contracting States, any copyrights, artistic or scientific works or equipments, patents, designs, secret processes and formulae, trade marks, cinematograph films and other like properties and fees for technical services rendered in that connection, shall be treated as income from sources within that Contracting State. The Treaty with Japan was entered on 13th June, 1960 and the Treaty with Belgium was entered in 1975. The date of notification of the French Treaty was in the year 1970. It would therefore appear that the omission to have similar provision in the French Treaty was a conscious one and was to tax royalties only on the basis of the situs of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Bombay High Court held that the decree resulted in a transaction in which the right of the assessee to get maintenance from her ex-husband was recognised and given effect to. It was the decree that was the definite source of the income. All these cases, according to the assessee, would clearly go to show that the source in this case could only be the agreement or the technology that was parted with. And since this had happened at Paris, the source should be deemed to be situated in Paris. Even the payment has been received in Paris. In these circumstances, the income or no part thereof is exigible to tax in India. 4. We have heard the parties to the dispute and in our opinion, the order passed by the CIT(A) deserves to be reversed. In the first instance, there has been no transfer of technology as has been alleged by the learned counsel for the assessee. It would be evident from the agreement between the assessee and the Indian company that under the agreement only a right to use and exploit the technology has been granted to the Indian company. The agreement, as per its terms has prohibited the Indian company from furnishing the technology to any person outside the territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or for getting designs, secret processes and formulae. This would clearly be covered by the definition given to the term 'royalty' under Article VII(2) of the Treaty. The last limb of the argument of the assessee is that it is not the accrual that matters, but the source which was relevant in the matter of taxability of the royalty. The assessee no doubt has canvassed in support of its arguments certain provisions in the Treaties with Belgium and Japan. We however feel the absence of provision in the Treaty between India and France similar to provisions in the Belgium and Japan Treaties is not very relevant. We have to decide whether having regard to the facts of the case, it could be said that the source of the receipt from Indian company was in India or was a source outside India. We are not impressed by the arguments of the assessee that the source in this case could either be the agreement or the technology, as the technology was parted with in Paris and as the agreement was signed. The agreement or for that matter, the technology by itself cannot give rise to any income. Unless the same is transferred to a party for exploitation in India, no income could accrue to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Calcutta High Court in the case of Performing Right Society Ltd. v. CIT [1974] 93 ITR 44. This decision has been affirmed by the Supreme Court in Performing Right Society Ltd.'s case. That was a case, where the assessee had an agent in India and through its agent entered into an agreement with All India Radio for broadcasting of musical works belonging to him. The question before the Court was whether the broadcasting fees paid to the society in England accrued in India. While dealing with this issue, the Court opined that the source of income was the broadcasting of music in India. The facts can be said to be analogous. In this case, the source of income could be said to be the exploitation of technology in India. We shall further refer to the decision of the Allahabad High Court in the case of Seth Shiv Prasad v. CIT [1972] 84 ITR 15. There, the Court has reproduced the observation of the Privy Council regarding the meaning of the word 'source'. 'Source' means not a legal concept but something which a practical man would regard as a real source of income. At p. 18 the Court has further observed : "A source of income, therefore, may be described as the spring or f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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