TMI Blog1992 (9) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... a collaboration agreement with M/s. Vicarb S.A., France on 10-8-1981. Under that agreement the foreign Company was to transfer outside India technical know-how for the manufacture of impervious graphite equipments. Clause 2 of the agreement provided for the delivery of the related documents. Clause 8 granted to the assessee the exclusive right to use the said know-how. Clause 11 provided that for the transfer of the know-how under clause 2, the assessee should pay a lump sum consideration of Rs. 1 million (subject to tax) in three equal instalments, the first instalment after the agreement has been taken on record, the second instalment at the time of delivery of documentation and the third instalment after 48 months of the date of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. 4. When the second instalment became payable, the assessee again deducted tax at source and claimed exemption. Since this was denied, the assessee appealed. The CIT (Appeals) followed the appellate order made on the earlier occasion and held that the payment should be considered as royalty as defined in section 9(1)(vi) and, therefore, it was liable to tax. 5. When this appeal was taken up, the Revenue did not press the question of maintainability of the appeal because that issue has since been decided by the Supreme Court in the case of CIT v. Wesman Engg. Co. (P.) Ltd. (1991) 188 ITR 327. It was held that section 195(2) is a special provision for determining the chargeability of any sum remitted to a non-resident and consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouble Taxation Avoidance Agreement. In the alternative, it was submitted that part of the amount could be regarded as technical fee and taxable in terms of the agreement. Reliance was placed on the decision of the Calcutta High Court in the case of N.V. Philips v. CIT [1988] 172 ITR 521. 7. We have considered the submissions of both the sides and have perused the Collaboration Agreement and the provisions of the Income-tax Act and the Agreement for Avoidance of Double Taxation. Section 9 of the Income-tax Act provides that income by way of royalty shall be deemed to accrue or arise in India where it is payable to a non-resident. The Explanation 2 to section 9(1) (vi) defines 'royalty' to mean the consideration for the transfer of all or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties to the collaboration agreement have clearly bifurcated the consideration by stating that the lump sum consideration for transfer of technical know-how abroad will be an outright sale and will be independent of the royalty at 3 per cent payable for the right to use that know-how. It must be remembered that this bifurcation has been approved by the Govt. of India. The Calcutta High Court has held in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) that where there is an outright sale or purchase, the consideration is for the transfer of know-how and cannot be treated as royalty for the purposes of the Agreement. The High Court has specifically noted this conclusion as being contrary to the provisions of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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