Income Tax Appellate Tribunal - Pune
Kirloskar Oil Engines Ltd. vs Dy. Cit on 20 March, 2001
Equivalent citations: (2002)76TTJ(PUNE)646
Order B.L. Chhibber, A.M. The vital issue raised in this appeal by the assessee is whether it is liable to deduct tax under section 195(2) on payments made on account of technical and consultancy services to a non-resident.
2. The assessee-company had entered into a collaboration agreement with SEMT PIELSTICK, France (SEMT for the sake of brevity) for the manufacture of SEMI PIELSTICK diesel engines in India. The agreement was entered into on 19-7-1977. Under the agreement, SEMT was to supply all the technical know-how including drawings and designs for the engines for which a production based royalty for a period of 10 years from commercial production was payable to them. The assessee had been manufacturing these engines based on the technical know-how provided by SEMT since last 12 years or so. The royalty payments also were being made accordingly. During the financial year 1990-91, the assessee received an order from M/s Garden Reach Shipbuilders & Engineers Ltd. (GRSE for the sake of brevity) for 2 PIELSTICK engines. These engines were to be fitted on naval ship landing ship tank that the GRSE was building for Indian Navy. The assessee had the necessary basic technology to manufacture these engines. However, since the engines were to be fitted on an Indian Navy vessel, the engines required certain critical performance criteria. Firstly, since these are high-powered engines, they cause heavy vibrations. Indian Navy required that there is no resonance and excessive vibrations of the engines, which in turn cause heavy vibrations to the ship itself. It was therefore, necessary to compute the natural frequencies of the entire system in order to ensure that there is no resonance and excessive vibrations. Secondly, the engines were required to be fitted on special type of elastic and special anti-vibration mounts to meet the requirements of the Indian Navy. When the engine is fitted on such elastic mounts, their position on the engine and around the centre of gravity needs to be calculated against weight distribution of the engine and their movement with the ship motion. Under this condition, it is necessary to calculate the end extensity movements at extreme connection points to the engine, in order to understand the desired flexibility at such connection points. Both these studies and calculations required simulation techniques to be carried out with the help of advanced computer softwares.
3. The assessee-company could carry out the entire application engineering study except the above areas, as the assessee did not have necessary expertise in those areas. It, therefore, approached M/s SEMT PIELSTICK in the matter as they had the necessary expertise. SEMT agreed to provide the necessary calculation report for a fee of FF 45,000. The assessee-company made an application to The Special Committee for the Technical Development. Department of Heavy Industries, Government of India, for necessary approvals. (page 2 of the paper book). SEMT provided the necessary calculation report (copy placed on record) and payment of FF 45,000 was to be made against their Invoice (page 1 of the paper book). It is noted that all the exercise was done by SEMT in France and no part was carried out in India. It is also to be noted that the required software was to be prepared on the basis of calculation reports furnished by SEMT, by the assessee only.
4. While the assessee-company argued before the assessing officer that these fees were purely in the nature of technical and consultancy services, as such no tax was required to be deducted from the payment as under Article XVI of the Double Tax Avoidance Agreement (hereinafter referred to as the DTAA) between India and France and these fees could, be taxed in France and not in India. The assessing officer however, held that these payments were in the nature of "royalties" and directed the assessee to deduct tax as per the provisions of section 195(2) of the Income Tax Act.
5. The assessee appealed to the Commissioner (Appeals) and advanced detailed arguments, The Commissioner (Appeals) held that the definition of the word "royalty" as given in Article VII(2) of the DTAA with France is more or less similar to the definition of 'royalty' as given in Explanation 2 to section 9(1)(vi) of the Act. He concurred with the assessing officer that the fees paid fell under the head "royalty" as given in Explanation 2 to section 9(1)(vi) and dismissed the appeal.
6. Shri S.N. Inamdar, the learned counsel for the assessee, submitted that the fees paid by the assessee-company are purely in the nature of technical and consultancy services and as such no tax was required to be deducted from the payments. He drew our attention to Article XVI of DTAA between India and France placed at pages 16 to 27 of the paper book and submitted that provision, of DTAA shall prevail over the provisions of the Act. In support of this contention, he placed reliance on the decision of the Tribunal, Calcutta Bench E in the case of ITO v. Voest Alpine Industrieanlagenbau GmBH, Austria (1998) 67 ITD 219 (Cal). He submitted that Article VII of the DTAA deals with royalties and Article XVI deals with the fees for professional services. He then drew our attention to the term 'royalty' as defined in Article VII(2) of the DTAA and submitted that the definition makes it clear that consideration for which the royalty is paid is of, or is likely to be of, an extended or perpetual use for the payee. He submitted that in the instant case, the assessee-company had all the know-how to manufacture the required engine. It was only the special type of application and conditions that forced the assessee-company to obtain the expertise from SEMT. This expertise, which was in the form of detailed calculations, was suitable and useful only for a given purpose and that too in given parameters and conditions. The report does not have any other use for the assessee-company, as it is next to impossible to have such parameters and applications existing in future. Thus, according to the learned counsel, this payment is nothing but fees for technical services and no other meaning can be imported into it. In support of his contentions, he placed reliance on the judgment of the Madhya Pradesh Court in the case of Hindustan Electrographites Ltd. v. Inspecting Assistant Commissioner (1984) 145 ITR 84 (MP).
7. Shri A.P. Srivastav, the learned Senior Departmental Representative strongly supported the orders of the authorities below. He drew our attention to the definition of 'royalty' given in Explanation 2 to section 9(1) of the Act and submitted that what the assessee had paid was in the form of royalties and accordingly, provisions of section 195(2) were clearly attracted. In support of his contentions, he relied upon the decision of the Cochin Bench in the case of ITO v. Hindustan Latex Ltd. (1992) 42 ITD 325 (Coch) and decision of Delhi Bench in ITO v. Munak Galva Sheets Ltd. (1990) 38 TTJ (Del) 569.
8. We have considered the rival submissions and perused the facts on record is a settled law that provisions of DTAA shall prevail over the provisions of the Act as held by the Tribunal E-Bench Calcutta in the case of Voest Alpina Industrieanl agenbau GMBH (supra). Article VII of the DTAA between India and France deals with royalties and sub-section (2) of Article VII defines 'royalties' as under :
"(2) In this Articles, the term 'royalties' means payment of any kind received as consideration for the use of; or for the right to use, any copyrights of literary artistic or scientific works, cinematographic films, patents, models, designs. plans, secret processes or formulae, trademarks or for the use of, or for the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience, but does not include any royalty or similar payments in respect of the operation of mines, quarries, or other places of extraction of natural resources."
From the above definition, it is evident that the term 'royalties' is to mean as consideration for the use of, or right to use any copyrights, patents, models, designs, plans, etc. or for the use of, or right to use information concerning industrial, commercial or scientific experience. The term 'fees for technical services' has not been defined in DTAA and hence, the definition in Explanation 2 to section 9(1)(vii) of the Act will prevail. The Act has defined the fees as consideration for rendering any managerial, technical or consultancy services. The definition of royalties, therefore, makes it clear that the consideration for which the royalty is paid is of, or is likely to be of, an extended or perpetual use for the payee. For example, the copyrights, designs or plans confer a time-spread advantage to the payee. Similarly information regarding an industrial 'experience', in the context, has to be interpreted as conferring similar perpetual or extended advantages, else there was no need to make a distinction between royalties and technical service fees. As against the royalties, technical services are relevant only for a one-time job and are useful for, and only for, the purpose and application for which they are rendered. Further they are related to rendering of services and not for exploitation of know-how with which the royalties are associated with. There may be some overlapping in the definitions of the two terms, but the distinction exists and must be recognized. Preparing calculation reports to meet a specific problem is essentially rendering of a technical service and cannot be equated to 'imparting' information for a consideration in the nature of royalty. In the case before us, the assessee-company had all the know-how to manufacture the required engine. It was only the special type of application and conditions that forced the assessee-company to obtain the expertise from SEMT. This expertise, which was in the form of detailed calculations, was suitable and useful only for a given purpose and that too in given parameters and conditions. The report does not have any other use for the assessee-company. Thus, this payment is noting but fees for technical services and no other meaning can be imported in toto.
9. The reliance placed by the learned counsel on the judgment of the Hon'ble Madhya Pradesh High Court in Hindusthan Electrographites Ltd. (supra) is valid one. In this case, the assessee had entered into a collaboration agreement with a French company for manufacturing graphite electrodes in the past against which royalties were being paid. The French company developed a technique for baking and graphitisation of electrodes. However, since the assessee's furnace was different, a detailed engineering study was carried out by the French company to make the new technique adaptable. Similarly, the electrodes manufactured by the assessee required extensive trials to be carried out by the French company so as to make them internationally acceptable. The Hon'ble Madhya Pradesh High Court held all these fees to be in the nature of technical services and not as royalties. In the case of the assessee, the issue is much simpler in the sense that the fees are paid for a particular task. The assessee-company already had a collaboration for manufacture of the basic engine for which royalties were paid separately. It was only in respect of a typical and one-time application that these fees were paid. We accordingly hold that the ratio of the Hon'ble Madhya Pradesh High Court squarely applies to the facts and circumstances of the case before us.
10. Coming to the two decisions of the Tribunal relied upon by the learned Departmental Representative, we find that the same are distinguishable on facts. The decision of the Cochin Bench in Hindustan Latex Ltd. (supra) relied upon by the learned Departmental Representative deals with an entirely different issue. In that case, specific definition of the term 'royalty' under the DTAA with Japan was not even considered and the entire discussion related to the definition in section 9(1)(vi) and (vii). In the case before us, there is no consideration paid for the right to acquire use of any patents, models, designs, secret processes or formulae so that they can be exploited on a regular basis. This is simply a case of referring a technical difficulty encountered in the course of business and obtaining advice and solution thereof.
11. In the second decision of the Delhi Bench in Munak Galva Sheets Ltd. (supra) relied upon by the learned Departmental Representative the decision of the Madhya Pradesh High Court referred to supra was distinguished because the facts obtaining in that case were closer to furnishing of know-how in the form of drawings and designs consideration for which may be described as royalty. In the case before us, the facts are closer to the High Court decision and in fact much stronger. Further, the drawings and designs in that case were relating to erection of a galvanising plant which could be termed as right to use models, plans or designs and the technical information or experiences related to such designs and documentation. On the contrary, the very same Delhi Bench considered a case much similar to that of the assessee in DCM Ltd. v. ITO (1988) 31 TTJ (Del) 171 where payment made to carry out certain study (as in the assessee's case also) was considered as payment for technical services and in the nature of technical fees.
12. In the light of above discussion, we reverse the findings of the authorities below and hold that the assessee is not liable to deduct tax as per the provisions of section 195(2) of the Act.
13. In the result, the appeal is allowed.