Income Tax Appellate Tribunal - Kolkata
Graphite Vicarb India Ltd. vs Income-Tax Officer on 12 September, 1992
Equivalent citations: [1992]43ITD28(KOL)
ORDER
T.N.C. Rangarajan, (Vice President (S. Z.)
1. This case was referred to the Special Bench of the Tribunal under Section 255(3) because of a conflict of opinion among the Benches of the Tribunal on the question whether an appeal lies against an order made under Section 195(2) of the Income-tax Act, 1961.
2. The admitted facts are as follows :
The assessee is an Indian company which had entered into a collaboration agreement with Messrs. Vicarb S. A., France, on August 10, 1981. Under that agreement the foreign company was to transfer outside India technical know-how for the manufacture of impervious graphite equipment. 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 agreement. Clause 12 provided for a royalty of 3 per cent. (subject to tax) for the right to use the know how granted under Clause 8. This agreement was approved by the Government of India by order dated May 31, 1980, with reference to-
Royalty. -- 3 (three) per cent, subject to taxes for a period of 5 (five) years, during the period of the agreement, and Lump sum know-how. -- Rs. 10 lakhs ( rupees ten lakhs only ) subject to taxes.
3. It was taken on record on September 21, 1981.
4. At the time of the first remittance, the assessee deducted tax at source under Section 195(2) at 20 per cent, and sought a no objection certificate from the Income-tax Officer. It claimed that the lump sum fee was not taxable under the terms of the Double Taxation Avoidance Agreement between India and France. However, the Income-tax Officer passed an order dated December 5, 1981, rejecting the claim for exemption. The assessee appealed. By order dated December 16, 1983, the Commissioner of Income-tax (Appeals) also held that the amount was taxable both in terms of the agreement as well as the provisions of the Income-tax Act. The assessee filed a further appeal to the Appellate Tribunal. By an order dated April 21, 1986, the Appellate Tribunal held that Section 195(2) has no application in a case where the assessee totally denies the liability to deduct tax and, therefore, the subsequent appeals were not maintainable. A reference has been made in R. A. No. 913/(Cal) of 1986 to the High Court regarding the question of maintainability of the appeal and it is still pending.
5. When the second instalment became payable, the assessee again deducted tax at source and claimed exemption. Since this was denied, the assessee appealed. The Commissioner of Income tax (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(l)(vi) and, therefore, it was liable to tax.
6. 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 therein that Section 195(2) is a special provision for determining the chargeability of any sum remitted to a non-resident and consequently the Appellate Assistant Commissioner was competent to entertain an appeal under Section 248. It was further observed that the right to appeal under Section 248 is not restricted to total denial but covers even a partial denial with reference to a part of the payment subjected to deduction of tax at source and the language of Section 248 was wide enough to cover any order passed under Section 195. We, therefore, proceeded to hear the appeal on the merits.
7. It was contended on behalf of the assessee that, in purporting to follow the appellate order made on the earlier occasion, the Commissioner of Income-tax (Appeals) had referred to certain Clauses in the agreement for which separate consideration had been provided and overlooked the fact that the payment under Clause 11 was confined only to the transfer of know how. It was submitted that, under the agreement for avoidance of double taxation, the definition of royalty was restricted and did not cover the transfer of know-how which was exempt if it occurred outside India. It was submitted that, in the circumstances, the lump sum payment should be considered to be exempt under the agreement.
8. On the other hand, it was contended on behalf of the Revenue that, on a proper interpretation of the collaboration agreement, it should be inferred that only a limited interest in the know-how was transferred and, on a reading of all the Clauses together, there was no independent and outright sale of know-how which fell outside the definition of royalty in the double 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.
9. 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. Explanation 2 to Section 9(1)(vi) defines "royalty" to mean the consideration for the transfer of all or any rights in respect of technical know-how. It would follow that the payment made by the assessee would fall within this definition of royalty and would be liable to tax.
10. The question then arises is whether it would be exempt under the ambit of the Agreement for Avoidance of Double Taxation between India and France. Under article III of that agreement, the industrial or commercial profits of an enterprise of one of the Contracting States shall not be subjected to tax in the other Contracting State, unless the enterprise has a permanent establishment situated in that other Contracting State. Clause 5 of that article states that the term " industrial or commercial profits " shall not include income from royalties. Article VII provides that royalties derived by a resident of one of the Contracting States from sources in the other Contracting State may be taxed in both the Contracting States. Clause (2) of article VII of that agreement defines " royalties " to mean payment of any kind received as consideration for the use of or for the right to use any copyrights, designs, plans, etc. In other words, the consideration for the right to use technical know-how will be royalty which is subjected to tax in both the countries whereas the consideration for acquisition of the know-how would not be a royalty and consequently it would be a commercial profit exempt under article III as the foreign company has no permanent establishment in India. Taking advantage of this differentiation, 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 Government of India. The Calcutta High Court has held in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 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 Income-tax Act and held that such a deviation must be given effect. The High Court also noted that the Department itself has taken that stand by issuing Circular No. 333, dated April 2, 1982 ( see [1982] 137 ITR (St.) 1), to that effect. In view of this binding decision of the jurisdictional High Court, we are unable to entertain the plea of the Revenue that, in spite of such a bifurcation, the consideration separately paid for the transfer of technical know-how should still be regarded as royalty, as on the ground that it was subjected to controlled use by the assessee. The alternative contention that part of the consideration should be regarded as fee for technical services is also untenable because there is a clear bifurcation of the consideration in this agreement and the question of apportionment arises only when there is a composite payment. In the circumstances, we are of the considered opinion that the second instalment paid under Clause 11 of the collaboration agreement was commercial profit within the meaning of article III of the Agreement for Avoidance of Double Taxation between India and France and since, admittedly, the foreign company has no permanent establishment in India, it was not liable to be taxed in India. The Income-tax Officer is, therefore, directed to refund the tax deducted at source.
11. In the result, the appeal is allowed.