Delhi High Court
Commissioner Of Income Tax Central-Ii, ... vs D.C.M. Limited on 10 March, 2011
Author: Rajiv Shakdher
Bench: Sanjay Kishan Kaul, Rajiv Shakdher
IN THE HIGH COURT OF DELHI AT NEW DELHI
%
Judgment reserved on : 14.02.2011
Judgment delivered on: 10.03.2011
ITR Nos.87-89/1992
COMMISSIONER OF INCOME TAX ..... PETITIONER
CENTRAL-II, NEW DELHI
Vs
D.C.M. LIMITED .... RESPONDENT
Advocates who appeared in this case:
For the Appellant : Ms. Prem Lata Bansal, Sr. Advocate
with Mr. Deepak Anand, Advocate
For the Respondent : Mr. S.K. Aggarwal, Advocate
CORAM :-
HON‟BLE MR. JUSTICE SANJAY KISHAN KAUL
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may Yes
be allowed to see the judgment ?
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
RAJIV SHAKDHER, J
1. The captioned references arise out of the orders passed
in ITC No.95-97/1990. We were informed that only question
of law which was to be answered is as follows :-
"Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding that
no tax was to be deducted at source under the Act on
payment of 38750 pounds, 77500 pounds, 23250
pounds and 15500 pounds to M/s. Tate and Lyle
ITA No. 87-89/1992 Page 1 of 18
Industries Ltd., London under the Technical
Collaboration Agreement, dated 12.10.1983?"
1.1. As a matter of fact, we had recorded the same, after
confabulation with the counsels for parties, in our order
dated 10.02.2011.
2. The question of law detailed out above arises in the
background of the following facts as culled out from the
orders of the authorities below:-
2.1 The assessee which is in the business of manufacture
of sugar had entered into an agreement dated 12.10.1983 (in
short „agreement‟) for transfer of comprehensive technical
information, know-how and supply of equipment with one
Tate & Lyle Process Technology; a division of Tate & Lyle
Industries Limited, London (hereinafter referred to as „Tate‟).
2.2 The said agreement envisaged payment of a sum
of £1,55,000 in four (4) instalments towards supply of
documents concerning, what was known as "TALO
processes".
2.3 It appears that Tate being a pioneer in sugar
technology; was not only engaged in the manufacture of
specialized equipment but was also in possession of know-
how required for installation and operation of specialized
equipment, processes and use of essential specialty chemical
products, which assisted in elimination of use of lime stone
and hard coke while, greatly conserving energy bringing
ITA No. 87-89/1992 Page 2 of 18
about reduction in pollution as well as loss of sugar during
manufacture of plantation white sugar.
2.4 The assessee wanting to adopt the "TALO processes"
for its factory at Daurala, in India entered into the
aforementioned agreement.
2.5 The first, of the four (4) instalments, was to be remitted
to Tate on the execution of the aforementioned agreement.
Accordingly, the assessee, in its capacity as a representative
assessee for Tate, applied to the Inspecting Assistant
Commissioner (in short, „IAC‟) for permission to remit the first
instalment in the sum of £ 38750. The IAC accorded its no
objection vide certificate dated 27.03.1984 albeit with a
caveat that the assessee would have to deduct tax at source
at the rate of 20% towards tax on the gross amount of
remittance. Resultantly, the assessee could remit to Tate the
amount only after deduction of tax at source. A similar no
objection certificate was issued by the IAC vide its certificate
dated 17.05.1984 in respect of the second remittance in the
sum of £1,16,250.
2.6 It is pertinent to note that, in the two certificates issued
by the IAC, no reasons were supplied as to why the assessee
had been called upon to deduct tax at source at the rate of
20%.
2.7 The assessee being aggrieved by the said action of the
IAC preferred an appeal to the Commissioner of Income Tax
(Appeals) [in short, CIT(A)]. Several grounds were raised in
ITA No. 87-89/1992 Page 3 of 18
the appeal by the assessee. The principle ground being that
the remittance to Tate was not in the nature of royalty; the
remittances in the hand of Tate constituted industrial or
commercial profits and since Article VIII of the Double
Taxation Avoidance Agreement (in short „DTAA‟) obtaining
between India and the United Kingdom was applicable, the
said remittances could be taxed only if Tate was shown to
have a permanent establishment in India.
2.8 In support of the aforesaid stand, it was argued that
Tate had no permanent establishment in India. It appears, in
this regard, a reference was made to a certificate dated
02.03.1984 to establish that Tate had no establishment in
India in terms of Article V of the DTAA
2.9 The CIT(A), however, came to the conclusion that the
remittances made to Tate by the assessee fell within the
purview of the expression "payments of any kind" appearing
in Article XIII (3) of the DTAA The CIT (A), however, accepted
the position that the provisions of Section 9(1)(vi) of the
Income Tax Act, 1961 (in short, „I.T. Act‟) would be
overridden in view of the provisions of Article XIII (3) of the
DTAA. The CIT (A) was of the view that the term „technical
know-how‟ was wide enough to include not only outright
sales of design or know-how but also any other provision of
technical assistance. He also went on to hold that for a
payment to be construed as royalty under the provisions of
Article XIII(3) of the DTAA, it made little difference whether
ITA No. 87-89/1992 Page 4 of 18
the payments made were lump-sum or, were made
periodically or, even on a recurring basis. For these reasons,
the CIT(A) concluded by holding that: "in the present case, it
is clear that technical know how was provided by the foreign
enterprise including lending of services of foreign
technicians. The payment was clearly in the nature of royalty
and it could not be said that payment had to be treated as
commercial or industrial profits."
2.10 Consequently, the CIT (A) sustained the order of the IAC
even while noting that there was no reasoning contained in
the certificate issued by the IAC mandating the deduction of
tax at source at the rate of 20% in respect of the remittances
in issue. The CIT(A) was of the view that a reading of the
order would show that the impugned certificate issued by the
IAC was otherwise in accordance with law.
3. Aggrieved by the order of the CIT (A), the assessee
carried the matter in appeal to the Income Tax Appellate
Tribunal (hereinafter referred to as the „Tribunal‟). The
Tribunal, in the impugned judgment, noted the difference in
the definition of royalty as contained in Article XIII(3) of the
DTAA and that which obtained in explanation 2 to Section
9(1)(vi) of the I.T. Act. The Tribunal opined that the definition
of royalty as appearing in the DTAA was narrower than that
under the Income Tax Act. The Tribunal also noted the fact
that the CIT(A) had correctly construed the position in law,
which is that, the provisions of DTAA would override those of
ITA No. 87-89/1992 Page 5 of 18
the I.T. Act. In these circumstances, the Tribunal examined
the agreement dated 12.10.1983 in the light of the provisions
as contained in the DTAA. On examination of the
aforementioned agreement, the Tribunal observed as
follows:-
"A perusal of the Technical Collaboration Agreement
shows that the amount of £1,55,000 was to be paid
by DCM to TL once for all as consideration for the
grant of licence and the disclosure of the know-how.
Para 2 of the said Agreement provided that TL was to
grant DCM the right and full but non-transferable
licence to practice the TALO Processes at its existing
factories. The DCM could sub-licence its rights to
another Indian party with the consent of TL and with
the approval of the Government of India. Para 3 of
the said agreement provides for the disclosure of the
know-how, of which the details appear from paras 3.1
to 3.9. We find that the definition of „royalty‟ under
Explanation 2 to section 9(1)(vi) of the Income Tax
Act, 1961 is not the same as the definition of the
term under Article XIII(3) of the double taxation
avoidance agreement. As rightly submitted on behalf
of the assessee, the definition under the double
taxation avoidance agreement is a truncated one i.e.,
it is narrower than the definition under the Income
Tax Act. A comparative look at the two definitions
shows that the following part of the definition which
occurs in Explanation 2 to section 9(I)(vi) of the
Income Tax Act, 1961 does not figure under Article
XIII(3) of the double taxation avoidance agreement :-
(i). The transfer of all or any rights (including the
granting of the licence) in respect of a patent,
ITA No. 87-89/1992 Page 6 of 18
invention, model, design, secret formula or process
or trade mark or similar property; &
(ii). The imparting of any information concerning
the working of, or the use of, a patent, invention,
model, design, secret formula or process or trade
mark or similar property.
The know-how is intellectual property and
excluded clauses referred to above pertained to the
know-how of secret formula or process and the
imparting of any information concerning the working
thereof. The assessee, in our view, is right in
submitting that the things for the transfer of which
DCM agreed to pay to TL 81,55,000 as such squarely
fell within these two exclusionary clauses which do
not form part of the definition of the term „royalty‟
under Article XIII(3) of the double taxation avoidance
agreement. The Income Tax authorities in our view,
were not right in being influenced by the term
„payments of any kind‟ preceding the definition of
this term under the double taxation avoidance
agreement."
3.1 In view of the aforesaid observations, the Tribunal
came to the conclusion that the consideration paid by the
assessee for transfer of drawings, designs, etc., outside India
by Tate to the assessee did not constitute royalty "as
contemplated under Article XIII of the DTAA". It went on to
observe that the consideration received by Tate constituted
business profits of Tate, which could not be taxed through
assessee in India as Tate did not have a permanent
establishment in India.
ITA No. 87-89/1992 Page 7 of 18
4. Being aggrieved, the Department sought a reference to
this court. As noticed hereinabove, we are called upon to
decide the references in the light of the question of law
framed.
5. Mrs. Bansal, learned senior counsel appearing on behalf
of the revenue has confined her submissions to the
interpretation of the clauses of the agreement executed
between Tate and the assessee. Mrs. Bansal drew our
attention to various clauses of the agreement, and
consequently, contended that a reading of the provisions
would demonstrate that what had been obtained by the
assessee was a mere use of the know-how and the
technology owned by Tate. In other words, Mrs. Bansal
contended that there was no transfer of technology and / or
know-how by Tate to the assessee. Mrs. Bansal, however,
fairly conceded that the issue at hand would have to be
looked at only in the light of the definition of royalty
obtaining in Article XIII(3) of the DTAA, and also the fact that
it was no longer res integra that in case of a conflict between
the provisions of the I.T. Act and the DTAA, the provisions of
DTAA would override. In support of her submissions, the
learned senior counsel cited the following judgments :-
N.V. Philips Vs. CIT (1988) 172 ITR 521; Alembic
Chemical Works Co. Ltd. Vs. CIT (1989) 177 ITR 377;
Shriram Pistons and Rings Ltd. Vs. CIT(Del.) (2008) 307
ITA No. 87-89/1992 Page 8 of 18
ITR 363; and CIT Vs. J.K. Synthetics Ltd. (2009) 309 ITR
371.
6. Mr. Agarwal appearing for the assessee refuted the
contentions of the revenue. Mr. Aggarwal largely relied upon
the order of the Tribunal in support of his plea. A particular
emphasis was laid by Mr. Aggarwal on the terms of the
aforementioned agreement executed between Tate and the
assessee. It was Mr. Aggarwal‟s say that a reading of the
agreement would show that Tate had sold the technology
and / or know-how in issue (i.e., the „TALO‟ processes) albeit
based on certain conditions. The learned counsel submitted
that it was a case of conditional sale and not a mere use of
technology and know-how as was sought to be contended by
the learned senior counsel for the revenue. Mr. Aggarwal in
support of his contention relied upon the judgment in the
case of CIT Vs. Davy Ashmore India Ltd. (1991) 190 ITR 626.
7. We have heard learned counsel for the parties and also
perused the documents on record. In our view, the answer to
the question framed would largely depend upon our being
able to ascertain the intent of the parties based on the
language employed in the agreement. For this purpose, the
agreement in issue will have to be read as a whole and not in
a piecemeal fashion. The first recital i.e., recital „A‟ suggests
that Tate was in possession of the necessary expertise i.e.,
the technical know-how, which is, broadly referred to as the
„TALO‟ processes used in the sugar industry. Recital „B‟
ITA No. 87-89/1992 Page 9 of 18
indicates that the assessee was „desirous of acquiring‟
technical know-how offered by Tate for its existing sugar
factories in India.
7.1 Clause 1 specifies that the agreement envisages
transfer of „comprehensive technical know-how and also
supply of equipment‟ by Tate to the assessee in order to
enable it to adopt the „TALO‟ processes. The said clause
clearly provides that the term „know-how‟ used in the clause
(1) shall include the following:-
".... all trade secrets and technical information,
tangible and intangible, including documents,
process description, process flow diagrams,
specification of speciality chemicals and TL‟s
standards of purity and performance for these
chemicals, equipment specifications, equipment
layout, design, drawings, piping drawings, laboratory
testing methods, operation and use of analytical
instruments, and all other related technical
information as are or may be available from and used
by TL on the date hereof with regard to the TALO
processes."
7.2 Moving further, in particular, clause 2.1 and 2.2 confer
on the assessee full rights in the form of non-transferable
licences to practice „TALO‟ processes at the assessee‟s
existing factories, with an added right to sub-licence the
rights conferred to another Indian party provided the terms
and conditions of sub-licence were previously agreed to by
both parties. This right was, however, subject to a caveat,
ITA No. 87-89/1992 Page 10 of 18
which was, to obtain necessary approval in that regard, of
the Government of India.
7.3 Under clause 3.2, the assessee was required to
maintain confidentiality of any drawings, specification or
technical information forming part of the know-how received
by it.
7.4 Clause 3.5 obliged Tate to send its engineer and
technologists, and also specialists, as and when the assessee
sought its assistance, in that regard.
7.5 Under clause 3.9, Tate was obliged to inform the
assessee of any research and development and, as such,
improvements in the „TALO‟ processes which became
available commercially, from time to time. The obligation,
however, was confined to a period of 5 years from the
effective date of the contract.
7.6 Under clause 4.1, Tate was required to supply the
necessary control equipment required for the „TALO‟
processes. The terms with respect to the supply of such
equipment were required to be contained in a separate
agreement.
7.7 The manner of payment of the once-for-all
consideration in the sum of £ 1,55,000 was contained in
clause 6 of the agreement.
7.8 Performance Guarantee was provided for in clause 7.
ITA No. 87-89/1992 Page 11 of 18
7.9 Similarly, warranties were required to be furnished by
Tate with respect to its know-how in terms of clause 8 of the
aforesaid agreement.
7.10 Under clause 12, parties were prohibited from assigning
or transferring rights under the agreement to any third party
directly or indirectly without the written consent of the other
party.
7.11 Clause 13 of the agreement provided for termination on
the grounds of insolvency. The right in this was conferred on
both the „Tate‟ and the assessee.
7.12. Clause 18 which dealt with the validity of the
agreement provided that the terms and conditions contained
in the agreement are conditional upon commissioning of the
„TALO‟ processes before 01.01.1987.
8. As is noticed above, we have only referred to what
according to us, were the essential clauses of the agreement.
A reading of the aforementioned clauses would show that
what was intended by the parties was as follows :-
(i) Tate would transfer to the assessee technical know-how
for a lumpsum consideration of £ 1,55,000 to be paid in the
manner provided in clause 6 of the agreement. The
agreement provided for transfer of "comprehensive technical
information" and know-how, which included all trade secrets
and technical information, designs and drawings, etc.;
ITA No. 87-89/1992 Page 12 of 18
(ii) The transfer of technical know-how was on a non-
exclusive basis, in order to enable the assessee to adopt
„TALO‟ processes, in respect of its existing factories in India.
(iii) In addition to the above, the assessee had also the
right to sub-licence the technology and/or the know-how
transferred to it, to another Indian party, subject to the terms
and conditions of sub-licence being agreed to by both „Tate‟
and the assessee.
8.1 In our view, it is quite clear by virtue of the
aforementioned agreement what the assessee obtained was
a complete transfer of technology and know-how albeit on a
non exclusive basis which was confined to its factories in
India with a conditional right to sub-licence it to third parties.
The sub-licencing of technology and/or know-how had to
have, however, the consent of Tate and also the approval of
the Government of India. The obligation of Tate to update
the technology and/or know-how transferred to assessee
based on research and development carried out by it, had
obviously to be restricted in point of time, bearing in mind
that it was a transaction which dealt with complete transfer
of technology. The time span provided was 5 years from the
effective date of the contract.
8.2. It was not, according to us, therefore, as contended by
the learned counsel for the revenue, a mere use of the
technology and/or know-how owned by Tate. Therefore, the
mere fact that Tate retained with it the right to transfer
ITA No. 87-89/1992 Page 13 of 18
technology and / or know-how to other parties did not in our
view reduce the right obtained by the assessee under the
agreement to one of a mere user of technology and know-
how. The transfer of technology is thus quite often, as in the
present case, brought about by executing agreements which
give rights far greater than a mere right to use albeit on a
non-exclusive basis. The argument made on behalf of the
revenue that the transaction does not constitute a sale,
misses the point that, for it to fall within the four corners of
the provisions of Article XIII(3), the right conferred should be
of usage; anything more than that, takes it out of ambit of
definition of royalty as provided in the DTAA. We, therefore,
agree with the conclusion arrived at by the Tribunal with
regard to the terms of the agreement. Having come to this
conclusion, it is quite obvious that the remittances made by
the assessee to Tate would not fall in the definition of Article
XIII(3) of the DTAA.
8.3 Another argument raised before us was that the
definition of the term of royalty was very wide as it brought
within its wings payments of any kind. To deal with this
submission it would be appropriate to extract the relevant
portion of Article XIII(3) of the DTAA.
"The term „royalties‟ as used in this Article means
payments of any kind including rental received as a
consideration for the use of, or the right to use:
(a). any patent, trademark, design or model, plan,
secret formula or process;
ITA No. 87-89/1992 Page 14 of 18
(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."
9. A bare perusal of Article XIII(3) would show that the
expression „payments of any kind‟ is circumscribed by the
latter part of the definition which speaks of consideration
received (including in the form of rentals) for "use of" or
"right to use" intellectual properties. The Tribunal, in our
view, rightly observed that the CIT(A) had erred in coming to
the conclusion that the expression „payments of any kind‟
was broad enough to include even an outright sale. To drive
home this point the Tribunal, once again, has correctly drawn
a distinction between the definition of royalty as appearing in
the DTAA and that which finds mention in explanation 2 to
section 9(1)(vi) of the I.T. Act. A perusal of the provisions of
the said explanation would show that it bring within the
ambit of royalty a wider range of transactions which would
include payments made for "transfer of all" or "any right" in
patents, inventions, model, design, etc. apart from payments
based for use of such right, patent, innovation, model,
design, secret formula or process or trade mark or similar
property. As a matter of fact, a perusal of clause (i) of
ITA No. 87-89/1992 Page 15 of 18
explanation 2 of section 9(1)(vi) of the I.T. Act would show
that "transfer of all" or "any right" could take place by
execution of licences as well, which was the methodology
adopted by Tate and the assessee in the present case. For
the sake of convenience and in order to draw a distinction
between the definition of royalty as appearing in Article XIII
(3) and that which obtains in the I.T. Act: the relevant portion
of explanation 2 of Section 9(1)(vi) of the I.T. Act is extracted
hereinbelow :-
Explanation 2. - For the purposes of this clause,
"royalty" means consideration (including any lump
sum consideration but excluding any consideration
which would be the income of the recipient
chargeable under the head "Capital gains") for -
(i). the transfer of all or any rights (including the
granting of a licence) in respect of a patent,
invention, model, design, secret formula or process
or trade mark or similar property;
(ii). The imparting of any information concerning
the working of, or the use of, a patent invention,
model, design, formula or process or trade mark or
similar property;
(iii). ....
(iv). ....
(v). ....
(vi). The rendering of any services in connection
with the activities referred to in sub-clauses (i) to
(v)."
10. As is obvious, what is contended by the revenue, if at
all falls within clause (i) of explanation 2 of section 9(1)(vi).
ITA No. 87-89/1992 Page 16 of 18
Since the definition of royalty in DTAA has a limited scope,
the remittances in issue cannot be construed as royalties,
therefore, as is correctly concluded by the Tribunal, against
the remittances in issue, tax at source could not have been
deducted. We are also in agreement with the Tribunal that
these payments could only constitute business profits of
Tate. Mrs. Bansal during the course of the arguments, has
fairly conceded that there is no permanent establishment of
Tate in India. She had, therefore, accordingly confined her
arguments to that aspect of the matter, which is discussed
hereinabove by us. Given the fact that Tate did not have a
permanent establishment in India, the remittances which
constitute business profits cannot also be taxed in India.
11. In so far as the judgments cited by Mrs. Bansal are
concerned, the same are distinguishable on facts. CIT Vs.
J.K. Synthetics Ltd. (supra), turned on its own facts.
Significantly it did not involve interpretation of the provisions
of the DTAA as is the situation in the present case. Similarly,
the Shri Ram case is also distinguishable. A reading of various
clauses would show that there was no transfer of technology
and know-how. In this regard, reference may be had to
clause 11 of the agreement which specifically prohibited the
right of the transferee to manufacture products based on the
transferors technology after its determination. No such
limitation exists in the present case. As a matter of fact, in
the instant case, the termination clause provides for such an
ITA No. 87-89/1992 Page 17 of 18
eventuality only on the grounds of insolvency of the parties.
There is no general right of termination obtaining in the
agreement in the present case. Likewise, the judgment in
the case of N.V. Philips Vs. CIT (1988) 172 ITR 521 is not
applicable since what was transferred was use of technology.
In this regard, specific reference may be made to clause (c)
appearing at page 524 which provided that any information
disclosed by the assessee to the Indian company under the
agreement would remain confidential and would not become
the property of the Indian company until such time and to the
extent that such information had "become public" by
application and user. The judgment of the Supreme Court in
the case of Alembic Chemical Works Co. Ltd. (supra) would
also not be applicable on a similar rationale.
12. For the aforementioned reasons, we are of the view
that the question of law framed, has to be answered in favour
of the assessee and against the revenue. Accordingly, the
captioned references are dismissed. However, in the given
circumstances, parties shall bear their own cost.
RAJIV SHAKDHER, J.
SANJAY KISHAN KAUL, J. MARCH 10, 2011 yg ITA No. 87-89/1992 Page 18 of 18