TMI Blog2004 (9) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of this case, is to be treated as 'royalty' or not. 3. The aforesaid neatly identified legal issue is set out in a narrow compass of undisputed material facts. The assessee, a Russian company, possessing knowledge and experience in the field of manufacturing technique of a product termed as "UR 9168 Polyurethane Wire Enamel", entered into agreement dated 8th March, 1994, with an Indian company, by the name of Intec Polymer Ltd. (IPL, in short). Under this agreement, the assessee-company was to provide to IPL a "non-exclusive right to use the 'know-how' for the purpose of realisation of the process and the technical process and the special process in the territory and sell the licensed product and the special product in the territory and zone of non-exclusive right". Under this arrangement, the assessee was, upon a request from the IPL, to render "technical assistance". The terms of rendering the technical assistance were set out in article 3 of the agreement which is reproduced below for ready reference: "The technical documentation shall be drawn up in conformity with the norms and standards of the licensor's country in Russian (1 copy) with translation into English (3 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se contentions, however, found any favour with the Assessing Officer. The Assessing Officer was of the view that the transaction in question was not a case of outright sale of know-how and that provisions of article 12 of applicable DTAA are applicable. It was, thus, concluded that the receipt in question is taxable at the rate of 20 per cent as royalty. The Assessing Officer was further of the view that there is nothing on record to demonstrate that the conditions set out in section 10(6A) are satisfied. Aggrieved by these actions of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Learned CIT(A) was of the view that in the light of the principles laid down by the Hon'ble Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626, in the case of 'an outright sale', the consideration for the transfer of such design, secret formulae, etc., cannot be treated as royalty. It was further observed that since the present case is a case of outright sale of technical know-how, the consideration received by the assessee-company cannot be treated as 'royalty' exigible to tax under article 12 of the India Russia DTAA. The CIT(A) thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment. In such case the provisions of article 7 shall apply. 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a sub-division, a local authority or a resident of that State Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties or fees for technical services was incurred and such royalties or fees for technical services are borne by such permanent establishment, then such royalties or fees for technical services shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: "Having regard to the facts and circumstances of this case, it must be held in the present case that the present case is not a case where the non-resident is retaining the property in designs and drawings. Such designs and drawings are imported under the import policy with the approval of the Reserve Bank of India and on the basis of the letter of intent. The importation of the designs and drawings postulates an out and out transfer or sale of such designs and drawings and non-resident company does not retain any property in them leaving the grantee to use or exploit them...." It was in this backdrop that Their Lordships concluded that the consideration for such 'out and out transfer or sale' of designs and drawings cannot be treated as 'royalty'. 8. It is thus clear that Davy Ashmore India Ltd.'s case merely lays down the proposition that in the case of an outright sale or transfer of designs and drawings and in a situation where non-resident does not retain any property in such drawings and designs, the consideration for such an outright sale and transfer cannot be regarded as in the nature of payment for use of, or right to use of, such patents, designs or models, ..... 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